When the Central Bank Calls - Managing Visits and Inspections
The powers of entry and search available to the Central Bank of Ireland (the "Bank") are considerable and capable of being exercised without notice. The increasingly active enforcement strategy of the Bank has made it exponentially more likely that investment firms will be subjected to visits, intense inspections and even, dawn raids. Thus, it has become a necessity that persons involved in managing such firms aware of the applicable regulatory enforcement framework.
Although, the prospect of a raid is a cause for concern, the routine visits by authorised officers of the Bank can present almost as many difficulties. This is due to the manner in which such a visit by an authorised officer can quickly evolve into an investigation, ultimately ending in sanctions. As a function of its day-to-day supervisory role in respect of investment firms, the Bank frequently carries out general or themed inspections to ensure compliance with various regulatory enactments, such as the European Communities (Markets in Financial Instruments) Regulations 2007 ("MiFID"). Such inspections, despite the fact of their having been commenced in the absence of any suspected wrongdoing, can quickly become highly invasive.
Investment firms must give due consideration to the proper management of a visit. Mishandling an inspection or a raid may have serious legal, commercial and reputational consequences from which a firm may not readily recover.
Investigations and/or inquiries which ultimately end in sanctions being imposed by the Bank tend to commence very differently to those of regulatory bodies in other disciplines. Investigations by the Revenue Commissioners or the Competition Authority are often launched with a dawn raid on the premises of the suspect individual or company. Investigations and/or sanctions by the Bank, however, are often the fruit borne of routine visits. Adding further complication, the Bank has evidenced a pattern in recent years, and since the advent of its present enforcement strategy, of offering the "carrot" of a settlement agreement as opposed to the "stick" of an intense inquiry, followed by heavy sanctions. This methodology is similar to that which has been adopted by the US Securities Exchange Commission and places heavy reliance on the reluctance of an investment firm to being subjected to an intensive inquiry and its corresponding willingness to enter into a pre-inquiry settlement in order to avoid it.
During 2012 a cross-divisional inspection team carried out an extensive series of visits to investment firms on behalf of the Bank to review their corporate governance practices. The relatively innocuous appearance of such routine visits by the Bank can, quite understandably, lead to them being treated with indifference by investment firms; however, such an attitude is likely to be adopted at risk to the firm concerned.
A general duty to cooperate with the authorised officers is imposed by the legislative enactments governing such visits and this, combined with the significant powers of search and seizure of authorised officers, may result in considerable difficulties for an investment firm. Caution must be exercised in respect of the initial exchange with the authorised officer; if the firm is resistant and obstructive from the outset, it is likely to find itself the subject of intense scrutiny. If, however, it is overly enthusiastic in its provision of information and/or assistance, it may inadvertently disclose sensitive or privileged information which may also lead to such enhanced scrutiny and which, by virtue of its having been disclosed, severely harms the ability of the firm to defend itself during the course of a subsequent inquiry or otherwise.
In the event that the Bank's authorised officers are put on notice of any matters of concern during the course of a visit, this will likely be unknown to the firm at that time. Shortly thereafter, however, the Bank is likely to raise queries in respect of the matters of concern by letter. Although a formal inquiry has not yet commenced, it is at this stage that the Bank may advise that it is in possession of sufficient information to warrant a full investigation but is prepared to enter into a settlement agreement. The firm is then between the proverbial “rock” and “hard place”; accepting the settlement agreement will likely lead to the imposition of a significant penalty, as well as the reputational damage which will inevitably flow from the agreement's publication. Alternatively, the suspect firm may choose to subject itself to a full-blown investigation; at the end of which, if it is found to have committed a prescribed contravention, it will face severe sanctions, including loss of its entitlement to continue trading.
This should demonstrate that a seemingly innocuous visit by the Bank can result in serious consequences and proper preparation for same is critical.
It is important to understand that although routine visits are separate from investigations owing to the fact that investigations will only ever arise in circumstances of suspected wrongdoing, the overlapping nature of the powers afforded to authorised officers and inspectors, which are considered in detail below, are such that the lines between visit and inspection are often blurred. It is at all times open to the Bank to pursue a line of inquiry where it has suspicions of misconduct through the avenue of the routine visit without ever having to initiate an inspection. Thus, visits should be treated with the same level of caution as would a formal inspection. In short, this means that all personnel with whom the authorised officers have indicated they wish to meet or with whom it is likely they will wish to meet, should be briefed in advance of same so that they are aware of:
- the purpose of the visit;
- the precise focus of the authorised officers on that particular visit;
- the information that will likely be sought by the authorised officers;
- their obligations to comply fully with the authorised officer;
- the need to have an additional member of staff present during all interactions with the authorised officers to ensure that a proper record is kept;
- the meaning and implications of legal privilege; and
- the importance of seeking the advice of a senior manager in the event that they are asked a question which they believe is outside the scope of the authorised officer's authority on that occasion or is otherwise improper.
Although, as noted above, the divide between visit and investigation is often not significant or even readily identifiable, there can be no doubt that once an investigation has commenced, extreme caution must be exercised by the subject investment firm. What follows is a brief consideration of the steps which, at a minimum, should be taken by all investment firms in preparation for such an eventuality.
The first step in the process of preparing for investigations is the nomination of a director, senior manager or compliance officer as the person-in-charge ("PIC") who will be the principal point of contact for authorised officers or inspectors. The PIC will be required to have a comprehensive understanding of the Bank's enforcement powers and, in particular, the regulations which determine the appointment, authority and powers of such authorised officers and inspectors. It will be the duty of the PIC to be present at any time an authorised officer or inspector calls to the firm. The PIC will also need to understand the distinction between privileged and non-privileged documents given that as noted above, untimely or unnecessary disclosure of same may have serious repercussions.
Various types of privilege may apply to documents created or held by an investment firm; however, in this context one is largely concerned with documents covered by legal professional privilege. Legal professional privilege arises where documents have been produced for the purpose of seeking or providing legal advice. Accidental disclosure of privileged information will in most cases operate as a waiver of privilege over the item of information and thus, has serious implications for firms who have committed prescribed contraventions. As a result, appropriate steps to safeguard privileged information are extremely important. As noted above, production of material subject to legal professional privilege is not compellable and, as a result, firms would likely minimise the risk of accidental disclosure by segregating all documents which were prepared for the purpose of seeking advice from their legal advisors and all documents received from the legal advisors containing such advice.
Privilege is given specific recognition in the majority of legislative enactments underpinning the Bank's powers in this area; for example, MiFID specifically recognises that nothing in the regulations can be relied upon to compel the disclosure by any person of any information which, in the opinion of the court, that person would be entitled to refuse to produce on the grounds of legal professional privilege; or to authorise the taking possession of any document containing such information which is in the person’s possession .
Preparing for Investigations
In concert with external legal advisors, the PIC and other relevant senior personnel should identify those staff members who will have additional responsibilities during the course of an investigation, which would ideally include:
- A member of the firm’s IT department to oversee all interactions between the investigating officers and the internal IT systems;
- All receptionists, as they will require training in dealing with the investigators on arrival, directing them to the PIC and ensuring that they do not obtain access to any personnel, documents or IT systems inappropriately before the PIC has arrived;
- A "shadow team" who will be given sufficient training as to the actions which the authorised officers or inspectors should and should not take during the course of a search so that they may document their actions and act to prevent the inappropriate removal and/or use of any material that is outside the scope of the investigation or which is privileged; and
- A member of the public relations or marketing team to manage any publicity arising as a result of the search, to draft an appropriate statement in order to mitigate any potential reputational damage and to deal with customer queries.
Upon the presentation of the authorised officer or inspector, the PIC should:
- Call the external legal advisor to place them on notice of the visit or search and so that general advices may be provided over the phone. In the event, that the visit develops into a more intensive investigation, the external legal advisor will be available to attend on-site to assist with the management of same;
- Review the search warrant and certificate of authorisation, if applicable, to ensure that the warrant is valid and to determine the scope of the search;
- Take a photocopy of the search warrant, certificate of authorisation, if applicable, and the identification of the lead investigating officer. In the event that the PIC has concerns in respect of the documentation provided, a copy should be faxed or emailed to the external legal advisor immediately who will be in a position to advise;
- Send an email to all employees of the firm advising them that they are:
- Not to obstruct the search of the investigative team;
- To keep the fact of the visit have taken place confidential;
- Not to provide any information informally or casually to the investigative team; and
- To alert the external legal advisor in the event that they are asked a question the answer to which might incriminate themselves, another employee or the firm itself.
- With the assistance of the external legal advisor, attempt to agree the procedure that will be followed by the investigative team. If a procedure can be agreed at this point, it may be possible to avoid a number of the issues which frequently arise in the context of such searches, namely, the seizure of computer systems unnecessarily and the removal of privileged and/or irrelevant documentation and records. In particular, a procedure for dealing with privileged material should be agreed; and
- Agree a timeframe with the investigative team to avoid unnecessary disruption to the firm’s business and to allow the PIC or external legal advisor time to brief the shadow team.
Even during a routine visit, it will be important that the PIC and one other member of staff accompany the lead authorised officer or inspector at all times. The function of the second staff member will be to take a complete note of the conversation had between the PIC and Bank official. In the event that the authorised officer or inspector is in need of information from an individual, he is entitled to question any member of staff but the PIC should request to be present during such interviews.
If a search or inspection of hard copy or electronic documents forms a component of the visit, each investigator should be supervised by at least one member of the shadow team who will keep a written note of all activities of the specific investigator and any comments which they make. The shadow team member should also ensure that any agreed procedures are followed and take a photocopy of all documents or records which the investigator intends to seize or copy. In the event that an investigator attempts to remove any irrelevant or privileged documentation, a note should be made and the PIC notified.
The preferable procedure for dealing with any disputed material should be to place in a separate, sealed container so that its privileged and/or irrelevant nature might be determined in an appropriate setting later. A formal objection should be made at the time in respect of the removal of the disputed item.
The PIC and external legal advisor should be kept updated continuously or the progress of the search and the activities of the investigators.
In the aftermath of a visit or search, a debriefing should be held with all employees and a full inventory of all material, documents and records removed and/or copied by the investigative team should be prepared and finalised. Any clients or customers who are likely to be concerned or affected by the search or the outcomes of the investigation should be contacted.
A consultation should then be held between senior management and the external legal advisor in order to determine the exposure of the firm and/or any of its personnel and to plan for any further investigation or inquiry which may follow.
Authorised Officers and Inspectors Powers
The vigilance and prior planning urged in the preceding paragraphs may seem excessive, particularly so in the context of a routine visit, but when one considers the extent of the powers wielded by the Bank's officers and inspectors, such caution and preparedness can readily be justified.
Under MiFID, the Bank has the power to appoint persons to be authorised officers or inspectors . In addition, where the Bank is of the opinion that it is either in the interest of the “properly and orderly regulation and supervision” of firms or “the protection of investors" it may apply to the court for an order authorising an investigation into the affairs of a firm or market operator .
It would seem relatively clear that routine visits will be carried out by authorised officers and only where there is a suspicion of an offence having been committed will inspectors likely become involved . This fact alone is one of which all PICs should be aware when determining how to deal with the arrival of an authorised officer as opposed to that of an inspector. One would most likely be well-advised to treat the visit of an inspector as a raid.
In general terms, an authorised officer has the power to enter premises if there are reasonable grounds to believe that investment services or related activities are or have been carried on therein; or that books, records or other documents, relating to such activities are kept there. The authorised officer may then search and inspect the premises and any books, records or other documents thereon. He is also entitled to secure for later inspection any part of the premises in which books, records or other documents are kept or in which there are reasonable grounds for believing that such materials are kept. The majority of the officer’s powers are exercisable without a warrant save as those expressly identified below.
The authorised officer can then proceed to inspect and take copies of, or extracts from, any books, records or other documents found during the course of the inspection. Further, he is entitled to remove such materials from the premises for further examination in the event that he produces a District Court judge. Owing to this provision, before any documents are removed from the premises by an authorised officer, the PIC should insist upon an opportunity to photocopy and examine the warrant to ensure that it is valid and to determine its scope. Even minor defects on the face of a search warrant may be sufficient to render it inoperative and no search should be allowed before it has been thoroughly perused.
The authorised officer may also require any person who carries on investment activities or who is employed in connection therewith to give the officer such information as he may require in relation to entries in the books, records or other documents. In addition, he may require any such person to give to him any information in relation to the investment activities carried on. Further, the authorised officer may demand the assistance of relevant personnel in accessing data storage systems.
The authorised officer also enjoys a power to summon any other person employed in connection with an investment activity to give the officer any information in relation to such activity which may be required by the officer or to produce book and records or prepare a report on specified aspects of the business or to explain entries in any documents or materials furnished.
Finally, the authorised officer has authority to communicate with any client of a firm for the purpose of confirming the investment services which were provided to the client.
The authorised officer is arguably the least entitled of the three types of investigator but nonetheless, as can be seen from the above, he enjoys significant powers.
Court Appointed Inspectors
The fundamental difference between an inspector appointed by the court and an authorised officer or inspector appointed by the Bank is that a court-appointed inspector ("CAI") is directed the court and his primary obligation, on the completion of the investigation is to produce a report for the court. Such an inspector, where, during the course of investigation, he takes the view that, in order to conclude same it is necessary to investigate the affairs of other investment firms or related undertakings, may apply to the court for approval to so do. This affords the CAI a degree of subjective control over the scope of his investigation, which enables him to quickly expand same.
Additionally, a CAI enjoys powers which are somewhat enlarged relative to those of the authorised officer. He may require any person in possession of relevant information to produce all books, accounts, deeds, records or other documents of, or relating to, the business of an investment firm in their control, possession or procurement, attend before the inspector; and give him all assistance which they are reasonably able to give.
Furthermore, the CAI may examine any officer, employee, shareholder or agent of the investment firm on oath or by written interrogatories on oath. He may also, where there are reasonable grounds for believing that a director, employee, shareholder or agent, past or present, maintains or has maintained an account into which any money has been transferred arising from the activities of the investment firm, require that person to produce all documents in their possession or control relating to such account.
The final significant feature of the CAI is his report. MiFID provides that the CAI may, and shall, if required by the court, produce a final report upon the conclusion of the investigation, which will inform the court of matters coming to his attention as a result of the investigation tending to show that an offence has been committed. Consideration the report, the court may then make such orders as it thinks fit, including an order of its own motion for the winding-up, dissolution or bankruptcy of an investment firm; and an order for the purpose of remedying a disability suffered by a person whose interests were adversely affected by the conduct of the affairs of the investment firm .
Finally, it is important to note that the report produced by the inspector is admissible in any civil proceedings as evidence of the facts set out in the document without further proof, unless the contrary can be shown. Furthermore, it may be adduced as evidence of the opinion of the inspector in relation to any matter contained therein.
In the context of such extensive powers of search and seizure, it is important to note that the Constitutional guarantee of the inviolability of the dwelling provided by Article 40.5 of the Constitution does not extend to business premises .
Bank Appointed Inspector
An inspector appointed by the Bank enjoys almost identical powers to those of the CAI with some subtle distinctions and obviously he does not provide the court with a report upon the conclusion of the investigation but rather provides it to the Bank. The report enjoys the same admissibility in civil proceedings as does the report of the CAI.
Notably, MiFID provides that where District Court judge is satisfied on the basis of the sworn information of an authorised officer or Bank-appointed inspector ("BAI") that there are reasonable grounds for suspecting that there are, on any premises, any books, records, or other documents of which production has been required pursuant to MiFID and which have not been produced in compliance therewith, the judge may issue a warrant authorising any member of An Garda Síochana, together with any person named in the warrant, to enter the premises specified in the information using reasonable force and to search those premises . Further, the warrant entitles the individuals so-named to take possession of any documents corresponding to the warrant and to take any steps which they consider necessary to preserve the documents. Such documents seized may then be retained for a period of six months or for the duration of any investigation or criminal proceeding initiated by An Garda Síochana.
Clearly, the entitlement of authorised officers and inspectors to enter premises, inspect documents and other material and to compel testimony, coupled with the far reaching consequences of their visits and inspections, is cause for concern. Moreover, the fact that regulated firms may find themselves, in the immediacy of a visit, left with the unenviable choice of a settlement agreement followed by penalties and reputational damage versus an intensive investigation and inquiry, potentially followed by greater penalties and repercussions makes maintaining of thorough awareness of the Bank's enforcement powers and policies critical to the well-being of any such firm.