Global Investigations Review: Basic Anatomy of Enforcement Investigations in Europe

Securities laws across France, Germany and the United Kingdom are widely comparable. Each country recognises the importance of maintaining a strong procedural framework of regulation and enforcement. The EU Market Abuse Regulation (MAR) and, following Brexit, the UK MAR have meant that each country is following the same legislative principles relating to market abuse. Although there is an element of commonality in this respect, the enforcement of these provisions is conducted by local regulators in each Member State. Naturally, this has created some procedural similarities and differences, which are explored in this chapter.

Enforcement agencies

In the United Kingdom, the Financial Conduct Authority (FCA) regulates the conduct of all firms authorised under the Financial Services and Markets Act 2000 (FSMA) and maintains the integrity of the financial markets in the UK. The FCA mainly investigates breaches of its rules or its Principles of Business (as set out in the FCA Handbook) and breaches of the FSMA by authorised firms and approved individuals. It also has criminal prosecution powers, enabling it to investigate criminal offences.

By contrast, France and Germany have separate agencies that prosecute administrative and criminal offences respectively. In France, market abuse may be subject to administrative sanctions by the French Financial Markets Authority (AMF) or to criminal sanctions by the National Financial Prosecutor. In Germany, criminal offences are prosecuted by the local public prosecutor's office. Generally, the public prosecutor's office must initiate an investigation if there is an initial suspicion and bring charges if a conviction appears likely. As there is no discretionary power, the principle of legality applies. The public prosecutor's office may take all measures that clarify the facts of the case. The Federal Financial Supervisory Authority (BaFin) is responsible for prosecuting administrative offences. If BaFin has an initial suspicion of a criminal offence while investigating, it refers the case to the local public prosecutor's office. Likewise, to avoid a person being sanctioned for the same facts by the AMF and the National Financial Prosecutor, French law provides for a system of case referral. For example, if the AMF or the National Financial Prosecutor intends to issue a statement of complaint or bring public proceedings against a person for facts qualifying as market abuse, it must inform the other authority of this intention and secure its approval within two months. If a disagreement arises on the appropriate punishment channel (i.e., if both parties wish to prosecute), the decision is made by a third party, the Public Prosecutor of the Paris Court of Appeal, which must issue its decision within one month. This decision cannot be appealed. As cases are referred when statements of complaint are issued, the AMF's investigating powers remain the same for all forms of market abuse and will continue to be exercised under similar conditions, in agreement and in cooperation with the financial prosecution service.

Areas investigated by enforcement agencies

The FCA investigates many substantive areas. These include misconduct resulting from a lack of integrity, serious failings in firm systems and controls, mis-selling of unsuitable products to consumers, financial crime, failure to make proper disclosure in primary markets and anticompetitive behaviour. Similarly, the AMF regulates the French financial market venues, its participants and the investment products distributed via the markets. It also ensures that investors are properly informed and is a force behind regulatory change at both European and international levels. As an independent public authority, it has regulatory powers and a substantial level of financial and managerial independence.

The process of investigating

In France, AMF investigators, who work closely with other French and foreign authorities that supervise the banking and finance industries, conduct investigations. The Board of the AMF, as prosecuting authority, may decide to initiate sanctions or settlement proceedings based on the reports relating to investigations. Investigations are unannounced and the AMF Secretary General decides whether to open an investigation based on observations gathered during market supervision, the monitoring of listed companies and information sent to the AMF, or does so at the request of foreign authorities. Equally, BaFin has the discretion of whether to investigate administrative offences. This means the enforcement agency can decide whether proceedings should be started, completed or dropped.

In the United Kingdom, the FCA has several significant powers that assist it in its evidence gathering and conduct of investigations. Under the FSMA, the FCA has the power to appoint third-party investigators. These include general and specific investigators. Specific investigators carry out investigations in a number of specified circumstances – including offences or breaches that are committed by anyone no matter whether they act within the regulated sector. On the other hand, general investigators conduct investigations into the general nature, conduct or state of business of authorised firms. This ability to appoint investigators is not shared by the enforcement agencies in each country.

From a procedural perspective, BaFin will collect and review data on all securities transactions, monitor all ad hoc notifications by listed companies and look into information provided by whistleblowers. In the United Kingdom, the investigative process is more prescribed. The FCA can request specified information or specified documents that are 'reasonably required' in connection with the exercise of its statutory powers. The FCA is able to use its powers against a third party where there is reason to believe that the third party is in possession of a specific document or information. The FCA also has the power to require authorised firms to provide it with information or produce documents on any matter. Under this power, the FCA may require the firm to either provide a report on that matter or appoint a 'skilled person' to provide the report. A skilled person must be considered by the FCA to have the requisite skills to make such a report and must either be nominated by the FCA or approved by it.

Enforcement procedure

In France, the AMF Enforcement Committee may issue sanctions against (1) professionals under AMF supervision who breach their professional obligations, (2) individuals under the authority of these professionals or acting on their behalf and (3) any other person who commits market abuse or any other breach that could impair investor protection or interfere with orderly markets. The enforcement procedure is opened by the AMF Board. After reviewing reports, the AMF Board will decide whether to open a sanction proceeding. The chairman informs the person concerned of the allegations against him or her by sending him or her the statement of objections. The respondent may be assisted or represented by a counsel. The respondent and the counsel will have two months to submit their observations to the chairman of the Enforcement Committee.

After the receipt of the respondent's observations, the chairman of the Enforcement Committee appoints a committee member to act as rapporteur for the case. The rapporteur may interview the respondent, the Board representative or any other person that may be considered necessary. Upon finishing his or her examination of the case, the rapporteur drafts a report. The report is sent to the respondent as well as the representative of the Board who may make their observations. The respondent is then ordered to appear before the Enforcement Committee. Hearings of the Enforcement Committee are adversarial. After the rapporteur presents his or her report, the board representative explains the objections served and proposes a financial penalty or a disciplinary sanction, or both. At the end of the hearing, the respondent, and if necessary the counsel, presents his or her defence. The hearings take place on the AMF's premises and are announced in advance on the AMF website. Enforcement Committee hearings are held in public unless the chairman decides otherwise.

When the hearings are over, the Enforcement Committee rules on the case. Only its members, except for the rapporteur, take part in the deliberations. Decisions are taken by majority vote. The AMF pronounces administrative sanctions (financial and disciplinary (fine, warning, reprimand, withdrawal of authorisation, etc.)) rather than criminal sanctions pronounced by the courts. Decisions of the Enforcement Committee are made public and may be appealed.

By contrast, in Germany, accused persons are asked by the public prosecutor's office or the administrative authority to comment on the allegations. As in criminal investigations, defendants do not have to contribute to administrative investigations; they have the right to remain silent. If individuals or entities decide to cooperate with the enforcement agencies, this will usually be considered as a mitigating factor. Institutions and individuals can be represented by a lawyer in both criminal and administrative offence proceedings. Legal privilege only applies to the written communications between an individual or a company subject to a criminal or administrative investigation.

Criminal investigations may end with either the discontinuation of the proceedings or an indictment before the competent court. The proceedings can be discontinued subject to a condition, usually a payment, if this condition is suitable to eliminate the public interest in the prosecution. In the event of a criminal conviction by the court, the court must confiscate the benefits derived from the offence. Confiscation generally follows the gross principle, which means the offender cannot claim any expenses from the benefits obtained. Confiscations can also be made from third parties (e.g., legal persons).

An administrative offence procedure can end with the imposition of a fine or the discontinuation of the proceedings. The fine should at least exceed the economic advantage gained by the offender from the administrative offence. As a result, fines in a particular case may be higher than the maximum amount of the penalty referred to in the Administrative Offences Act.

Multinational cooperation

As financial misconduct is often cross-border, multinational coordination with overseas regulators is an important aspect of each agency's enforcement investigations. Reflective of this, the FCA, BaFin and the AMF are active members of the International Organization of Securities Commissions and the European Securities and Markets Agency. Both of these global committees encourage jurisdictions to sign up to cooperation and information sharing in the field.

The cooperation of overseas counterparts is an essential part of each agency's regulatory functions. Under the FSMA, the FCA has a duty to take the steps it considers appropriate to cooperate with regulators that exercise similar functions to its own. Cooperation can vary from the gathering of information and documents, to interviews of witnesses and subjects under investigation. Similarly, each agency will often require assistance from other overseas regulators in its own investigations. Assistance typically takes the form of interviewing subjects of investigations or witnesses and obtaining documentation or information located outside each Member State.

Resolution

The FCA can pursue disciplinary actions, such as sanctions against a firm or an individual, or criminal and civil proceedings through the courts. When the FCA assumed the powers of the Financial Services Authority in 2013, it also took on the 'credible deterrence' strategy of its predecessor. Under this strategy, the FCA aims to use its sanctions to deter the firm or individual from reoffending and to deter others from offending.

Accordingly, the FCA has a wide range of disciplinary and enforcement measures available to it under the FSMA, with formal sanctions ranging from a public censure without a fine, to the cancellation of an authorised firm's permission or withdrawal of an approved person's approval to carry out regulated activities. The most common sanction is imposing financial penalties. In 2020, the total amount of fines issued by the FCA was £192,570,018.

Similarly, in Germany, fines will be imposed for failure to disclose insider information and market manipulation. For market manipulation offences, fines can be up to €5 million. Higher fines can be imposed against legal persons or associations of persons. If a listed company fails to disclose insider information, the fine can be up to €1 million; in the case of legal persons or associations of persons, higher fines can be imposed. Over and above the set amounts, this offence is punishable by a fine of up to three times the economic benefit derived from the infringement. In France, the amount imposed may be as follows: up to €100 million for professionals regulated by the AMF; 10 times the amount of the benefit derived from the breach, if it can be determined; or 15 per cent of the total annual turnover. The amount of the benefit derived from the breach is far higher than in Germany. For natural persons placed under the authority of or acting on behalf of regulated professionals, the ceiling is €15 million or 10 times the amount of the benefit derived from the breach, if this can be determined.

Alternatively, the FCA can also opt to pursue remedial measures against an offending firm or person together with, or instead of, sanctions. Remedial measures are used by the FCA as part of its remit to secure the appropriate degree of protection for consumers. Examples include consumer redress schemes and, in relation to individuals, requiring their replacement, altering their reporting lines or adding an individual with experience to a firm's board. In certain circumstances, the FCA can issue a private warning instead of formal disciplinary proceedings. In these circumstances (typically where rules have been breached but the FCA considers that formal disciplinary action is not justified), a private warning may be used to convey the required remedial action.

The whole publication is available at Global Investigations Review - The Guide to International Enforcement of the Securities Laws. Reproduced with permission from Law Business Research Ltd.

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