Special report: legal risk
Top
ten legal risks | Keep
your company on side with the law | The
regulators: who's who | NatWest
Three: could you be next? | What's
my liability as a company director? | Get
ready to be raided | Defective
documentation | Survive
an FSA investigation | Employers
watch out
Companies Investigation Branch
An arm of the Department for Business, Enterprise and Regulatory Reform
(BERR), the former Department of Trade and Industry, the CIB has broad
powers under the Companies Acts to investigate suspected fraud, serious
misconduct or irregularity in a company’s affairs. It will likely start with
a warning letter to a company setting out its concerns and what action to
take. If that fails, it can bring criminal proceedings that could result in
a significant fine or imprisonment. The CIB can also wind up companies,
apply to court to disqualify individual directors, prosecute company
officials or refer evidence to other prosecutors such as the Serious Fraud
Office. Successful actions include the winding up a company that had
persuaded aspiring pub landlords to pay over £4,000 each for dubious
training, and the liquidation of a Swiss company that sold useless plots of
land in southern England at inflated prices. If you run into trouble with
the CIB, recommends Jagdeep Tiwana, a regulatory lawyer at Berwin Leighton
Paisner, seek legal advice as soon as possible.
Environment Agency
The Environment Agency is responsible for monitoring pollution control and
waste management. The agency is one of the first to admit that the penalties
it can impose for environmental offences are small in comparison with those
handed out for, say, breaches of competition law. To date, the largest fine
handed out to a single company was £191,000 in 2006; total fines that year
amounted to £3.5 million, an average of £11,800 per offender. It also
secured custodial sentences against two company directors for damage to the
environment. But the agency's preference, according to Jennifer Wallace, an
environment lawyer at Allen & Overy, is a collaborative approach. “The
EA will generally take a more favourable view of a situation if you are open
and co-operative and can show that you have a plan to solve the problem and
avoid future environmental impacts,” she says.
European Commission
One of the European Commission’s key roles is enforcing the antitrust rules of
the EU Treaty. Companies that engage in cartel activities do so at their
peril, says Richard Eccles, a partner at Bird & Bird. In the past month
alone, the Commission imposed fines for price fixing of €486.9 million on
producers of flat glass and €243.2 million on producers of chloroprene
rubber. Indeed, so effective has the Commission been in its crackdown on
cartels that participants frequently blow the whistle on their
co-conspirators in order to obtain lenient treatment. In addition to cartel
offences, the Commission also pursues companies it believes have abused a
dominant market position — witness the landmark €497 million fine against
Microsoft. The Commission has strong powers of investigation, including the
right to enter premises and seize documents; since 2004, it has also been
entitled to interrogate employees, search private premises and seal off
business premises. It can impose hefty fines of up to ten per cent of a
company’s total turnover.
Financial Services Authority
The FSA is responsible for regulating all financial services and markets in
the UK — amounting to some 29,000 firms and 165,000 individuals. It might
not be perfect, says Jonathan Herbst, a partner at Norton Rose who used to
work for the regulator, "but it does get a lot of very important things
right". The FSA's philosophy of "light touch" regulation has
met with success in the past, though the stain of this summer's "credit
crunch" — the regulator came under fire from the Chancellor for the
Northern Rock debacle — will be hard to erase. Even so, it would be a
mistake to take the FSA lightly: it has extensive powers of investigation
and enforcement, which can lead to public censure, fines or the revocation
of a firm's right to do business in the financial industry. Its largest
fines to date were £17 million against Shell and £13.9 million against
Citigroup Global Markets. Herbst’s advice? “Take them seriously.”
Food Services Agency
Tasked with setting standards for the production and supply of food and
overseeing local authorities’ enforcement of them, the Food Standards Agency
was established in April 2000 with the intention of restoring consumer
confidence after the BSE crisis. But as Hilary Ross, a partner at Berwin
Leighton Paisner, says, “in reality it was given very few powers to fulfil
its role”. The real muscle in enforcing food standards still belongs to
local authorities. The FSA has made progress in achieving voluntary
reductions in salt and sugar levels in processed food and in the uptake of
the traffic light labelling system. It has also sought to show more teeth in
recalling unsafe food products. The power of prosecution lies with local
authorities, but the FSA's sway in deciding what products to recalls has
increased. Ultimately, however, its effectiveness is hampered by the fact
that 90 per cent of the UK’s food laws originate in the EU.
Health & Safety Executive
The operational arm of the Health and Safety Commission, the Health and Safety
Executive works with local authorities to enforce workplace safety
regulations. It claims a success rate of 98 per cent in securing convictions
but that paints a false picture, says David Young, a partner in the
regulatory group at Eversheds, as “most health and safety duties are so
strict there are not too many defences available to employers who get it
wrong”. Unlike other branches of criminal law, the onus of proof in health
and safety cases is placed on the employer to prove that they have not
breached regulations. The biggest fine to date was £15 million against
Transco over the Larkhall gas explosion in Scotland in 2005, but the
agency’s biggest scalp was that of the Metropolitan Police over the killing
of Jean Charles de Menezes. The HSE can “play havoc with the ordinary
operation of a business,” Young says, but he adds: “They do a great deal of
good work, too, through guidance and consultation which should not be
overlooked.” He advises companies to be “constructively cooperative, polite
and flexible, but don’t roll over.”
Information Commissioner
All companies that keep information on customers or employees must comply with
data protection laws, which the Information Commissioner is charged with
enforcing. The Commissioner's inadequacy was thrust into the spotlight in
November after Revenue & Customs lost the details of 25 million people
in the post. Technology lawyers describe the office as “pretty toothless”
with few resources and an understaffed enforcement team, pointing out that
the heaviest fine for a breach of data protection rules this year was handed
out by the FSA when it fined Nationwide Building Society almost £1 million
for losing a laptop containing customer details. In fairness, however,
lawyers say that the problem is not so much with the Commissioner but the
laws he has to work with — and they may be about to get a lot tougher. In
the wake of the lost disc scandal, Richard Thomas, the Commissioner, asked
Parliament for, among other things, the careless use of personal information
to be made a criminal offence.
Ofcom
Ofcom, the broadcasting and communications regulator, is one of the most
visible in the UK. On its turf, it is unavoidable: broadcasters cannot
broadcast without an Ofcom licence; mobile phone operators cannot operate
without a spectrum granted by it. The regulator also throws its weight
around in most of the key policy developments in the industry, such as the
establishment of a new regulatory framework for UK telecoms in 2005 through
the settlement with BT. Ofcom has the power to enforce licence conditions through
court orders and to levy fines; it can also force businesses to change their
business practices and terminate agreements. In September, it imposed a £2
million fine, its highest ever, on GMTV over the TV phone-in scandal.
Theoretically it also has the right to conduct dawn raids under its
competition powers, though it has not yet done so. Howard Cartlidge, a
competition lawyer at Olswang, recommends “co-operation and dialogue”, but
says companies should not be afraid to make legal challenges “if the
regulator moves beyond its remit”.
Office of Fair Trading
The UK’s main competition enforcer, along with the Competition Commission, the
OFT investigates and punishes companies that abuse their market position or
collaborate with competitors to distort competition; it also deals with
merger control. The OFT has the power to enter and search premises for
evidence and its deterrents against competition law breaches are
significant: individual criminal sanctions in cartel cases and fines up to
10 per cent of worldwide turnover. This summer, it fined British Airways a
record £121.5 million for fixing ticket prices with Virgin. Despite racking
up fines in the millions, the OFT’s efficiency has been questioned, in part
because of the lengthy duration of its investigations. But according to
Catriona Munro, a competition partner at Maclay Murray & Spens, it
stacks up well internationally. “For each merger the regulators investigate,
another five potentially harmful mergers are abandoned or renegotiated,” she
says. Its ratio in relation to cartels is even higher.
Pensions Regulator
Established in 2005, the Pensions Regulator has wide-ranging powers, unlike
its predecessor, the Occupational Pensions Regulatory Authority. It monitors
pension funds, appoints independent trustees to boards and actively
encourages whistle-blowing, resulting in about 50 reports a month. Most
controversially, it can intervene to stop any activity that could be
detrimental to a company’s pension scheme, though it failed to exercise
these “anti-avoidance” powers in the first two years of its existence. In
June 2007, the Pensions Regulator issued its first “Financial Support
Directive”, demanding that passenger transport and marine container leasing
company Sea Containers to provide funding to cover a £90.5 million deficit
in two pension funds. The decision was welcomed by the industry as “an
example of the regulator’s willingness to intervene when appropriate to do
so,” says Katherine Dandy, a pensions litigator at Sacker & Co.
Serious Fraud Office
The Serious Fraud Office investigates alleged frauds that are worth more than
£1 million, have an international dimension or are deemed to be in the
public interest, usually referred by other organisations such as the police,
Revenue & Customs or the FSA. Under Section 2 of the Criminal Justice
Act 1987, it can require anyone to answer questions or deliver documents
with no right to silence. If you fail to comply, it can obtain a warrant and
search premises and seize documents, although information gathered during
these searches cannot be used as evidence during a trial. The SFO has been
heavily criticised over the years: there have yet to be any prosecutions
over the Langbar case, said to be the biggest fraud to occur on the London
Stock Exchange, and the decision to drop the inquiry into BAE System's Al
Yamamah arms deal still casts a pall over Lord Goldsmith’s tenure as
Attorney-General. On the other hand, as Louise Delahunty, a fraud expert at
Simmons & Simmons points out, in five years to July 2007, the SFO tried
166 defendants and secured convictions against 102 of them — a respectable
batting average of 61 per cent. Successful prosecutions against individuals
can result in long prison sentences, and confiscation orders can be made for
large sums. In October, three former directors of Independent Insurance were
convicted of conspiracy to defraud and sentenced for up to seven years.
US Department of Justice
Enron, Martha Stewart, Bernie Ebbers, Imclone — virtually any major corporate
scandal you can think of in America in the last five years has been
prosecuted by attorneys from the Department of Justice, resulting in
billions in dollars in fines, heavy prison sentences and the sort of
headlines that make executives around the world wake up in a cold sweat. The
DOJ is broadly responsible for prosecuting “white collar” criminal
violations, which, in effect, means there is virtually no limitation on the
type of corporate activity it can deal with. It investigates everything from
antitrust violations to environmental crimes to bank fraud. Investigations
typically originate with tips from whistleblowers, complaints from
competitors, news reports or referrals from the SEC, which does not have
criminal jurisdiction. “They are the gold standard for corporate criminal
prosecutions in the US, in terms of both experience and resources,” says one
leading British litigation lawyer. And as the NatWest Three found, its reach
extends far beyond US borders.
US Securities and Exchange Commission
The SEC was established by Congress in 1934 as an independent regulator to
protect investors, maintain the integrity of financial markets and to
facilitate capital formation. The primary legislation it enforces are the
Securities Exchange Act of 1934, the Securities Act of 1933, the Trust
Indenture Act of 1939, the Investment Company Act of 1940, the Investment
Advisers Act of 1940 and the Sarbanes-Oxley Act of 2002. The latter was
enacted in the wake of scandals such as Enron and WorldCom in order to
enhance corporate responsibility and protect investors from fraud, but has
since been criticised for saddling businesses with an excessive regulatory
burden. The SEC operates a disclosure-based system that ensures that all
investors, regardless of size, have access to all material information at
the time of and for the duration of an investment. To that end, public
companies must submit periodic, quarterly and annual reports to the SEC,
which are made available to the public through an online system. The major
offences it deals with are insider trading, accounting fraud and providing
false or misleading information about securities or their issuers. It has
the power to enforce legislation through civil action against companies or
individuals, and, although it has no powers of criminal enforcement of its
own, it can refer criminal prosecutions to other agencies such as the
Department of Justice.
Thanks to: Howard Cartlidge, Katherine Dandy, Louise Delahunty, Richard
Eccles, Owen Lomas, Catriona Munro, Callum Murphy, Hilary Ross, Jagdeep
Tiwana, Jennifer Wallace, Daniel Winterfeldt
