Challenges in the Field of Economic and Financial Crime in Europe and the US 9781509908035, 9781509908066, 9781509908042

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CHALLENGES IN THE FIELD OF ECONOMIC AND FINANCIAL CRIME IN EUROPE AND THE US In the past few years, criminal justice systems have faced important global challenges in the field of economic and financial crime. The 2008 financial crisis revealed how strongly financial markets and economies are interconnected and illustrated that misconduct in the economic and financial sectors is often of a systemic nature, with wide-spread consequences for a large number of victims. The prevention, control and punishment of such crimes is thus confronted with a strong globalisation. Moreover, continuous technological evolutions and socioeconomic developments make the distinction between socially desirable and undesirable behaviour more problematic. Besides, economic and financial misconduct is notoriously difficult to detect and investigate. In light of these challenges, legislators and law enforcers have been searching for adequate responses to combat economic and financial crime by adapting existing policies, norms and practices and by creating new enforcement mechanisms. The purpose of this volume is to analyse those challenges in the field of economic and financial crime from different perspectives, and to examine which particular solutions criminal justice systems across Europe give to those challenges. The volume has four parts. The first part focuses on a number of key questions with respect to substantive criminal law, whereas the second part will address issues affecting the administration of justice and criminal procedure. Part three then explores particular challenges concerning multiagency cooperation and multi-disciplinary investigations. Finally, part four will concentrate on issues regarding shared or integrated enforcement models. Volume 2 in the series Hart Studies in European Criminal Law

Hart Studies in European Criminal Law

Series Editors: Professor Katalin Ligeti, University of Luxembourg; Professor Valsamis Mitsilegas, Queen Mary University of London; Professor Anne Weyembergh, Brussels Free University Since the Lisbon Treaty, European criminal law has become an increasingly important field of research and debate. Working with the European Criminal Law Academic Network (ECLAN), the series will publish works of the highest intellectual rigour and cutting edge scholarship which will be required reading for all European criminal lawyers. The series is happy to consider both edited and single authored titles. The series defines ‘European’ and ‘criminal law’ in the broadest sense, so books on European criminal law, justice and policy will be considered. The series also welcomes books which offer different methodological approaches. Volume 1: EU Criminal Law after Lisbon: Rights, Trust and the Transformation of Justice in Europe by Valsamis Mitsilegas Volume 2: Challenges in the Field of Economic and Financial Crime in Europe and the US edited by Katalin Ligeti and Vanessa Franssen

Challenges in the Field of Economic and Financial Crime in Europe and the US

Edited by

Katalin Ligeti and Vanessa Franssen

OXFORD AND PORTLAND, OREGON 2017

Hart Publishing An imprint of Bloomsbury Publishing Plc Hart Publishing Ltd Kemp House Chawley Park Cumnor Hill Oxford OX2 9PH UK

Bloomsbury Publishing Plc 50 Bedford Square London WC1B 3DP UK www.hartpub.co.uk www.bloomsbury.com

Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA www.isbs.com HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published 2017 © The Editors and the Contributors 2017 The Editors and Contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/ doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2017. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: HB: 978-1-50990-803-5 ePDF: 978-1-50990-804-2 ePub: 978-1-50990-805-9 Library of Congress Cataloging-in-Publication Data Names: Ligeti, Katalin, author.  |  Franssen, Vanessa, author. Title: Challenges in the field of economic and financial crime in Europe and the US / Katalin Ligeti and Vanessa Franssen. Description: Oxford [UK] ; Portland, Oregon : Hart Publishing, 2017.  |  Series: Hart studies in European criminal law ; volume 2  |  Includes bibliographical references and index. Identifiers: LCCN 2016045795 (print)  |  LCCN 2016046242 (ebook)  |  ISBN 9781509908035 (hardback : alk. paper)  |  ISBN 9781509908059 (Epub) Subjects: LCSH: White collar crimes—European Union countries.  |  White collar crimes—United States.  |  Commercial crimes—European Union countries.  |  Commercial crimes—United States.  |  Double jeopardy— European Union countries.  |  Double jeopardy—United States.  |  Criminal justice, Administration of—European Union countries.  |  Criminal justice, Administration of—United States. Classification: LCC K5215 .L53 2017 (print)  |  LCC K5215 (ebook)  |  DDC 345.4/0268—dc23 LC record available at https://lccn.loc.gov/2016045795 Series: Hart Studies in European Criminal Law, volume 2 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters

Foreword Between Tradition and Innovation: Rule of Law Challenges in the Transatlantic Fight Against Financial Crime The fight against financial and economic crime has posed considerable challenges to law-makers, regulators, prosecutors, judges and legal practitioners. The sophistication of financial crime operations, their global and/or transnational nature, and the specificity of market considerations have for some rendered traditional criminal law tools and mechanisms inadequate to tackle financial crime effectively. This perception of the inadequacy of traditional criminal law to provide adequate tools to fight financial crime has led to the development of innovative, ‘outside the box’ legal and regulatory responses at national and transnational level. These responses—which depart considerably from the traditional model of a criminal law response focused primarily on prosecution and imprisonment—have challenged not only well-established criminal law principles, but also questioned fundamental perceptions of justice related to the aims and objectives of financial criminal law. What is the meaning of justice in the context of financial criminal law and how is justice best achieved in this context? Is the emphasis on prosecution and imprisonment relevant in today’s landscape of market globalisation, and are national criminal justice systems adequately equipped to address current challenges? These questions arise obviously at the national level, but also extend beyond national jurisdictions and frontiers and multiply in the face of globalisation: what is the potential of and what are the limits to cross-border cooperation and transnational financial criminal law? Is a global legal and regulatory levelplaying field in tackling economic and financial crime feasible and/or desirable in the light of increasing interdependence between national legal and financial systems? And finally, if traditional criminal law is inadequate, to what extent can it be supplemented by or replaced with innovative legal and regulatory tools without undermining the strong rule of law foundations and safeguards inherent in a number of national criminal justice systems? This excellent volume edited by Katalin Ligeti and Vanessa Franssen provides the ideal starting point of approaching and addressing these key questions for the present and future of economic and financial criminal law. The volume brings together a stellar combination of legal academics and practitioners from both sides of the Atlantic, addressing expertly and comprehensively a number of diverse but interrelated themes arising from the emergence of new legal responses to financial crime. There are four main themes which emerge in this context. The first theme is the welcome emphasis on the importance of comparative law and on adopting a comparative perspective in evaluating challenges in contemporary financial

vi  Foreword c­ riminal law. The book contains detailed contributions on developments in financial criminal law in a number of European jurisdictions, in the United States and in the European Union. A systematic reading of the contributions provides a number of important comparative law insights. The second—and central—theme in the volume is innovation in the legal regulation of financial crime. The contributions address a number of recent innovations on both sides of the Atlantic: authors analyse schemes of negotiated justice, whistleblowing, leniency programmes, preconviction preventive measures and compliance programmes and, along with providing a comprehensive legal analysis of these schemes, their critical contributions raise pertinent questions regarding the compatibility of these innovations with the rule of law and fundamental criminal law principles. Similar questions arise from contributions addressing the third major theme of the book, namely the relationship between criminal and non-criminal law responses to financial crime, in particular regarding the interaction between criminal law on the one hand, and competition and banking law on the other. Last, but not least, the book brings together a fourth and key theme in today’s interconnected financial world, namely the transformation of financial criminal law in an era of transnational co-operation and the exercise of extraterritorial jurisdiction. The interaction of national legal orders and their extraterritorial reach raise fundamental questions of the feasibility of transnational co-operation without the emergence of a global legal and regulatory level-playing field on financial crime. The book is an invaluable addition to the Hart Studies in European Criminal Law, which we are proud to have launched on behalf of the European Criminal Law Academic Network (ECLAN). The series aims to promote the academic discipline of European Criminal Law by developing and publishing books of the highest academic rigour and quality by both established and early career scholars. This volume edited by Katalin Ligeti and Vanessa Franssen more than meets this benchmark. Valsamis Mitsilegas London, July 2016

Contents Foreword���������������������������������������������������������������������������������������������������������������������v Notes on Contributors�����������������������������������������������������������������������������������������������xv

1. Current Challenges in Economic and Financial Criminal Law in Europe and the US�����������������������������������������������������������������������������������������1 Katalin Ligeti and Vanessa Franssen I. Defining the Problem������������������������������������������������������������������������������1 II. Preliminary Observation: Economic and Financial Criminal Law as an Ill-defined Branch of Criminal Law����������������������2 III. Challenges with Respect to Substantive Criminal Law��������������������������5 IV. Challenges with Respect to the Administration of Justice and Criminal Procedure����������������������������������������������������������6 V. Challenges with Respect to Multi-agency Cooperation and Multi-disciplinary Investigations�����������������������������������������������������8 VI. Challenges with Respect to Shared or Integrated Enforcement Models�����������������������������������������������������������������������������10 VII. Concluding Remarks�����������������������������������������������������������������������������15 Part I: Challenges with Respect to Substantive Criminal Law 2. Prosecutors and Judges as Corporate Monitors? The US Experience�����������19 Bruce Zagaris I. Introduction�������������������������������������������������������������������������������������������19 II. The History of Corporate Monitors in the US������������������������������������20 A. The Monitor’s Role in the Legal System���������������������������������������20 1. The Antecedents���������������������������������������������������������������������20 2. The Original Monitors�����������������������������������������������������������21 3. Corporate Compliance Monitors������������������������������������������21 4. Comparison Between Corporate Monitors and Various Other Compliance Actors���������������������������������23 B. The Morford Memorandum of 8 March 2008 on the Selection and Use of Monitors������������������������������������������28 C. Additional Guidance on the Use of Monitors: Role of the DOJ in Resolving Disputes����������������������������������������30 D. Trustees and Monitors in Forfeiture Cases����������������������������������31 III. Policy Goals and Factors Influencing the Government’s Decision to Require a Monitor�������������������������������������������������������������32

viii  Contents IV. The Operation of Monitorships�����������������������������������������������������������34 A. Duration of Monitorship��������������������������������������������������������������34 B. Choosing a Monitor����������������������������������������������������������������������35 C. The Authority of a Monitor����������������������������������������������������������36 D. Monitors Must Disclose Evidence of Credible and Significant Misconduct and Waive Attorney-Client Privilege�����������������������37 E. Conflict of Interest������������������������������������������������������������������������38 F. Submission of Reports������������������������������������������������������������������38 G. Disputes Between Monitors and Corporations���������������������������38 V. Evaluating the Efficacy of Monitorships����������������������������������������������39 A. Settlement Agreements�����������������������������������������������������������������39 B. Evaluating the Use of a Corporate Monitor as a Sanction����������39 C. Monitor’s Knowledge of the Business������������������������������������������40 D. The Importance of Detailed Work Plans�������������������������������������40 E. The Monitor’s Initial Report���������������������������������������������������������41 F. The Importance of Cooperation��������������������������������������������������41 G. The Problem of Monitor Becoming too Close to the Corporation������������������������������������������������������������������������42 H. Example of Monitor’s Prevention of Additional Wrongdoing: Standard Chartered Bank���������������������������������������43 VI. Proposals for Improving Monitorships������������������������������������������������46 A. Proposed Legislation/Reforms for Improving Monitorships���������������������������������������������������������������������������������46 B. Selection and Compensation of Independent Monitors����������������������������������������������������������������������������������������48 1. Selection of Monitors�������������������������������������������������������������49 2. Monitor Compensation and Billing��������������������������������������51 3. Public Disclosure of Fees and Expenses��������������������������������51 C. Access to Records, Persons and Information�������������������������������52 D. Restrictions Relating to Agreements��������������������������������������������52 E. Judicial Oversight of Agreements�������������������������������������������������53 F. Public Disclosure Relating to Reports of Monitors���������������������54 VII. Potential Application to the European Union��������������������������������������56 3. The Necessity of Compliance Programmes Under German Law­—‘Burden’ or ‘Blessing’?����������������������������������������������������������������������������57 Alexander Cappel I. Introduction�������������������������������������������������������������������������������������������57 II. Requirements to Implement a CMS�����������������������������������������������������58 A. Implementation of CMSs—A New Trend?����������������������������������58 B. Aggressive Extraterritorial Enforcement Actions by US Authorities Against European Companies�����������������������������������59 C. Growing Number of Broad Crime Definitions���������������������������62

Contents ix

III.

IV.

V. VI.

D. Overview of the Relevant Legal Provisions with Respect to CMS Under German Law���������������������������������������������������������64 1. Corporate Governance Codex�����������������������������������������������64 2. Corporate Law������������������������������������������������������������������������65 3. Administrative Law����������������������������������������������������������������66 4. Criminal Law��������������������������������������������������������������������������68 E. Future Legislative Initiatives���������������������������������������������������������69 1. Draft Law of North Rhine-Westphalia on Corporate Criminal Liability�������������������������������������������69 2. German Association of In-house Lawyers����������������������������70 3. German Institute of Compliance������������������������������������������71 F. Provisional Conclusion�����������������������������������������������������������������71 Challenges (Burden) of Implementing a CMS������������������������������������72 A. Corporate Structure����������������������������������������������������������������������72 B. Compliance Resources������������������������������������������������������������������72 C. Implementation of Guidelines�����������������������������������������������������73 D. Implementation of Sufficient Systems�����������������������������������������73 E. Implementation of Training���������������������������������������������������������73 F. Supervision������������������������������������������������������������������������������������73 G. Implementation of Sanctions for Non-compliance��������������������73 The ‘Blessing’ of Having a CMS������������������������������������������������������������74 A. Reduction of Risks for the Employees������������������������������������������74 B. Reduction of Risks for the Company�������������������������������������������75 Ways to Implement a Cost-efficient CMS��������������������������������������������76 Conclusion���������������������������������������������������������������������������������������������78 Part II: Challenges with Respect to the Administration of Justice and Criminal Procedure

4. Detecting Economic and Financial Crime: A Special Toolkit of Investigation Techniques in Luxembourg��������������������������������������83 Jeannot Nies I. Introduction�������������������������������������������������������������������������������������������83 II. Detecting Economic Crime�������������������������������������������������������������������84 III. Investigating Economic Crime��������������������������������������������������������������86 A. ‘Mini-instruction’��������������������������������������������������������������������������88 B. Access to Databases�����������������������������������������������������������������������89 C. Special Investigative Measures Related to Financial Information�������������������������������������������������������������������90 D. Direct Cooperation Between Administrative and Judicial Authorities����������������������������������������������������������������91 IV. Adjudicating Economic Crime and Executing the Sentence���������������92 V. Conclusion���������������������������������������������������������������������������������������������94

x  Contents 5. The Role of Whistleblowing and Leniency in Detecting and Preventing Economic and Financial Crime: A Game of Give and Take?�������������������������95 Christopher Harding I. Introduction�������������������������������������������������������������������������������������������95 II. Outside Looking In and Inside Looking Out: The Interest in the Internal Life of Organisations����������������������������������������������������96 III. Contexts�������������������������������������������������������������������������������������������������99 IV. Risk and the Emerging Framework of Regulation�����������������������������101 A. Legal Defence�������������������������������������������������������������������������������101 B. Legal Security and Witness Protection���������������������������������������102 C. Legal Reward��������������������������������������������������������������������������������103 D. Determining the Public Interest via Constitutional Debate������������������������������������������������������������������������������������������104 V. Economic Crime as the Domain of the Strategic Whistleblower and the Emergence of Leniency Programmes�����������105 VI. Profiling the Leniency Whistleblower�������������������������������������������������108 A. Outside the Public Gaze: The Low Profile of the Leniency Applicant��������������������������������������������������������������������������������������108 B. The Leniency Applicant as a Serial Cheat����������������������������������109 C. The Leniency Applicant as a Turncoat���������������������������������������110 D. The Leniency Applicant as a Business Opportunist������������������111 VII. Economic Delinquency, Whistleblowing and Leniency Applicants: The Road to Moral and Legal Ambiguity�����������������������112 A. Moral Character and Consequent Legal Entitlement����������������������������������������������������������������������������������113 B. Systemic Risks������������������������������������������������������������������������������114 6. Negotiated Justice—Balancing Efficiency and Procedural Safeguards�������������������������������������������������������������������������������������������������������117 Sabine Gless and Nadine Zurkinden I. Introduction�����������������������������������������������������������������������������������������117 II. Terminology�����������������������������������������������������������������������������������������118 A. What Is Justice?����������������������������������������������������������������������������118 B. What Is Negotiated Justice?���������������������������������������������������������119 C. What Is Efficiency?����������������������������������������������������������������������119 D. Endangered Procedural Safeguards��������������������������������������������120 III. Balancing a Shakedown System?���������������������������������������������������������121 A. Laying Out the Ground���������������������������������������������������������������121 B. Examples��������������������������������������������������������������������������������������123 1. Deferred Prosecution Agreements and Guilty Pleas in the US����������������������������������������������������������124 2. The German Examples: ‘Negotiated Agreement’ and ‘Provisional Terminations of Proceedings’�������������������������127 IV. Closing Remarks����������������������������������������������������������������������������������131

Contents xi Part III: Challenges with Respect to Multi-agency Cooperation and Multi-disciplinary Investigations 7. Cooperation Between Administrative Authorities in Transnational Multi-agency Investigations in the EU: Still a Long Road Ahead to Mutual Recognition?�����������������������������������������135 Lothar Kuhl I. Introduction�����������������������������������������������������������������������������������������135 II. Vertical Cooperation Between OLAF and National Authorities in the Fight against Fraud������������������������������������������������138 A. Cooperation in OLAF Investigations with the Competent Authorities���������������������������������������������������������������138 1. OLAF Investigations Under EU Law in a Comparative Perspective������������������������������������������������������138 2. Requests for Information and Assistance by OLAF in Its Investigations (Art 7 para 7)���������������������������143 3. Investigative Support by OLAF to National Criminal Investigation Authorities��������������������������������������149 4. Admissibility of Information Collected by OLAF in Evidence in National Criminal Proceedings�������������������150 B. Assistance and Coordination Support in Cooperation with National Authorities Outside OLAF Investigations����������151 1. Legal Basis Under the Treaty and Under ‘Third Pillar’ Legislation (Second Protocol)�����������������������151 2. Mutual Assistance and Exchange of Information Between OLAF and National Authorities���������������������������153 3. OLAF Support to the Performance of National Criminal Investigation and Enforcement���������������������������154 4. Status of OLAF and Status of the Commission in National Criminal Proceedings���������������������������������������155 III. Horizontal Transnational Cooperation Between Competent National Administrative Authorities�������������������������������156 A. Customs Cooperation Under the TFEU: Administrative (Art 33) and Enforcement (Art 87(2))�������������156 1. Mutual Administrative Assistance in the Field of Customs Under Regulation 515/97�����������������������156 2. Customs Cooperation in Criminal Matters Under the Naples II Convention�����������������������������������������159 B. Competent Authorities of the Member States for Anti-fraud Cooperation: Proposal for Multi-disciplinary Transnational Cooperation Instruments�����������������������������������160 1. Objectives of the Cooperation Between Competent Authorities Under the (Amended) Proposal����������������������160 2. General Concepts of the Proposal���������������������������������������162 IV. Conclusion and Outlook for the Future���������������������������������������������163

xii  Contents 8.

Jurisdictional Issues in Transnational Multi-agency and Multi-disciplinary Investigations of Economic and Financial Crimes�����������������������������������������������������������������������������������������������������������167 John Vervaele I. Introduction�����������������������������������������������������������������������������������������167 II. Examples of Enforcement Practice�����������������������������������������������������169 A. Law Enforcement in Action��������������������������������������������������������169 1. Fortis Bank: Market Abuse��������������������������������������������������170 2. Libor/Euribor: Interest Rate Rigging Scandal���������������������171 3. BNP Paribas Bank: Violations of State Embargos������������������������������������������������������������������������������173 B. Evaluation of Law Enforcement in Action���������������������������������174 III. Approach to Challenges Within Regional Integration Frames: The Example of the EU�������������������������������������175 A. Challenges������������������������������������������������������������������������������������175 B. Solutions at EU Level������������������������������������������������������������������179 IV. Approach to Challenges at a Global Transnational Level������������������183 A. The External Dimension of the EU��������������������������������������������183 B. The US�����������������������������������������������������������������������������������������185 C. The International Community���������������������������������������������������187 V. Solutions����������������������������������������������������������������������������������������������188

9.

Transnational Multi-disciplinary Investigations and the Quest for Compatible Procedural Safeguards��������������������������������������������������������������191 Michiel Luchtman I. Introduction�����������������������������������������������������������������������������������������191 II. Procedural Safeguards: The Nation-state�������������������������������������������192 III. Procedural Safeguards: International (Criminal) Law����������������������196 IV. Procedural Safeguards: The European Union������������������������������������200 A. Procedural Safeguards in the European Union�������������������������201 B. A Series of Observations�������������������������������������������������������������204 V. Concluding Remarks���������������������������������������������������������������������������208

10. The Consecutive Application of Different Types of Sanctions and the Principle of Ne Bis in Idem: The EU and the US on Different Tracks?��������������������������������������������������������������������������������������211 Martin Böse I. Introduction�����������������������������������������������������������������������������������������211 II. The US: A Formal Approach���������������������������������������������������������������212 III. The Council of Europe: A Substantive Approach������������������������������215 IV. The EU: Maintaining Dual Sanctioning Schemes?����������������������������218 V. Conclusion�������������������������������������������������������������������������������������������221

Contents xiii Part IV: Challenges with Respect to Shared or Integrated Enforcement Models 11. Challenges in the Field of Economic and Financial Crime from a European Perspective���������������������������������������������������������������������������������225 Jeroen Blomsma I. Introduction�����������������������������������������������������������������������������������������225 II. Special Nature of Criminal Law����������������������������������������������������������226 A. Legal Bases�����������������������������������������������������������������������������������226 B. Legislating in the Field of Criminal Law������������������������������������227 C. Complementary Enforcement����������������������������������������������������228 D. What Are ‘Criminal’ Sanctions?��������������������������������������������������230 III. Outlook������������������������������������������������������������������������������������������������231 12. Enforcing Prudential Banking Regulations in the Eurozone: A Reading from the Viewpoint of Criminal Law����������������������������������������233 Silvia Allegrezza and Ioannis Rodopoulos I. Introduction�����������������������������������������������������������������������������������������233 II. The European Banking Union Enforcement Mechanisms: A Shared Enforcement Model for the Eurozone��������������������������������234 A. Investigatory Powers Within the SSM and the SRM������������������235 B. Sanctioning Powers Within the SSM and the SRM�������������������238 1. Direct Sanctioning Powers���������������������������������������������������239 2. Indirect Sanctioning Powers������������������������������������������������244 C. Judicial Protection Within the SSM and the SRM����������������������������������������������������������������������������������������245 III. The Interaction Between Administrative and Criminal Enforcement Systems Within the EBU Legal Framework�����������������246 A. Intersystemic Interactions: The—Cumulative and/or Alternative—Use of Administrative and Criminal Sanctions����������������������������������������������������������������������248 B. Intrasystemic Interactions: On the ‘Penal’ Nature of the Administrative Sanctions�������������������������������������������������249 1. Administrative Pecuniary Penalties and Fines��������������������250 2. Periodic Penalty Payments���������������������������������������������������251 C. Which Criminal Law Principles for Which Administrative Sanctions?����������������������������������������������������������253 1. Substantive Principles����������������������������������������������������������253 2. Procedural Principles�����������������������������������������������������������254 IV. Towards a Coherent Framework of Enforcement: Rethinking the Role of Criminal Law in the Enforcement of Prudential Banking Regulations�����������������������������������������������������256 A. What Criminal Law Can and Cannot Offer in Bank Prudential Regulation��������������������������������������������������������258

xiv  Contents B. The Self-limitation of Criminal Law as an Enforcement Tool: Reviewing the Principles of ‘Ultima Ratio’ and Proportionality����������������������������������������260 C. Criminal Law as a Normative and Epistemological Paradigm for ­Non-criminal Enforcement Policies��������������������262 13. Strategy of Integrated Enforcement: The UK Competition and Markets Authority���������������������������������������������������������������������������������265 Stephen Blake I. Introduction�����������������������������������������������������������������������������������������265 II. The Importance of Cartel Enforcement and the Role of the CMA��������������������������������������������������������������������265 III. The Cartel Enforcement Regime���������������������������������������������������������268 A. The Criminal Regime������������������������������������������������������������������268 B. The Civil Regime�������������������������������������������������������������������������269 C. Relationship Between the Criminal and Civil Regimes�������������271 IV. The Case for Specialist Enforcement Authorities: Meeting the Challenges of Cartel Enforcement���������������������������������272 A. Inclusion of Cartel Enforcement Within an Independent Specialist Competition Agency���������������������������������������������������273 B. Inclusion of Investigatory and Prosecution Functions Within the Same Agency�������������������������������������������275 1. The Roskill Model����������������������������������������������������������������275 2. Leniency��������������������������������������������������������������������������������276 C. A Dedicated Cartels Group With the Ability to Draw on Expertise from Elsewhere Within the Wider Competition Agency�������������������������������������������������������������������278 D. Strong Relationships and Joint Working Arrangements With Other National and International Enforcement Partners������������������������������������������279 1. Coordination with International Counterparts�����������������279 2. Building Relationships at Home������������������������������������������281 3. The Cartel Offence and Other Criminality: A Mutually Reinforcing System�������������������������������������������282 E. Political and Wider Public Support��������������������������������������������283 V. Conclusion�������������������������������������������������������������������������������������������286

Index�����������������������������������������������������������������������������������������������������������������������287

Notes on Contributors Silvia Allegrezza is Associate Professor of Criminal Law at the University of Luxembourg. Stephen Blake is Senior Director, Cartels and Criminal, UK Competition and Markets Authority. Jeroen Blomsma is a Policy Officer at the Directorate-General Migration and Home Affairs of the European Commission. Martin Böse is Professor of Criminal Law and Criminal Procedure, University of Bonn. Alexander Cappel is Senior Counsel, Clifford Chance LLP, Frankfurt. Vanessa Franssen is Associate Professor of Criminal Law at the University of Liège and Affiliated Senior Researcher at the KU Leuven. Sabine Gless is Professor of Criminal Law and Criminal Procedure at Basel University. Christopher Harding is Professor of Law, University of Aberystwyth. Lothar Kuhl is Head of Unit Investigations Selection and Review, European ­Anti-Fraud Office (OLAF). Michiel JJP Luchtman is Professor of Transnational Law Enforcement and ­Fundamental Rights, Willem Pompe Institute for Criminal Law and Criminology, and the Utrecht Centre for Regulation and Enforcement in Europe (RENFORCE), Utrecht University. Katalin Ligeti is Professor of European and International Criminal Law at the University of Luxembourg. Jeannot Nies is a Member of the Council of State, First Advocate General at the Office of the General Public Prosecutor of Luxembourg. Ioannis Rodopoulos is a Post-doctoral Researcher at the University of Luxembourg. John Vervaele is Professor of Economic and European Criminal Law (Utrecht University) and Professor in European Criminal Law (College of Europe). Bruce Zagaris is Partner, Berliner, Corcoran & Rowe LLP. Nadine Zurkinden is a Post-doctoral Researcher at Basel University.

xvi 

1 Current Challenges in Economic and Financial Criminal Law in Europe and the US KATALIN LIGETI AND VANESSA FRANSSEN

I.  DEFINING THE PROBLEM

I

N RECENT YEARS, criminal justice systems across the world have increasingly faced important global challenges in the field of economic and financial crime. The 2008 financial crisis and the subsequent economic downturn have made a number of these challenges painfully clear. The first issue revealed by the financial and economic crisis was to what great an extent financial markets and economies are interconnected. If something goes wrong in one market or economy (eg the bankruptcy of a bank due to excessive risk-taking), others will also almost immediately be confronted with problems. The prevention, control and punishment of economic and financial crime is thus confronted with a strong globalisation. Moreover, the second issue illustrated by the crisis is that misconduct in the economic and financial sectors is often of a systemic nature, with wide-spread consequences for a large number of (private, institutional and/or public) victims. In some cases, the misconduct may even affect an entire economic or financial system. Therefore, the call for prevention of harm becomes all the louder, and often results in the development of new regulatory and enforcement mechanisms. The question is, however, how these different mechanisms will interrelate. Third, this economic and financial entanglement is reinforced by the use of the internet, online network systems and social media. In the virtual world, money can be easily transferred from one place to another; financial assets can be shifted quickly from one legal entity to another. Information about investments or economic performances spreads quickly, including when it is purposely misleading or incorrect, and once dispersed, the consequences are hard to estimate and often irreversible. In addition, offenders have become much more mobile thanks to modern and easily accessible means of transport. All these factors complicate the localisation, control, investigation and prosecution of economic and financial

2  Katalin Ligeti and Vanessa Franssen crime. Moreover, it questions the appropriateness of existing investigative ­measures and sanctions, which are usually carried out and enforced within the boundaries of one single jurisdiction. Fourth, due to continuous technological evolutions and socio-economic developments, the distinction between socially desirable and undesirable behaviour has become less clear-cut and less stable. This raises questions as to how to define and prevent misconduct. A fifth challenge is that, for various reasons, economic and financial misconduct is particularly difficult to detect and to investigate. First, it should be noted that economic and financial offences tend to cause wide-spread, diffuse and longterm harm to private and public goods. For instance, environmental offences may injure the health of specific private persons and cause damage to plants and animals, but they are also harmful to public health and to the environment as a whole. Furthermore, in some cases of economic and financial crime (eg cartel offences) victims are simply not aware of being injured. For those reasons, public enforcement seems desirable.1 Second, offenders are usually highly-qualified and have specialised knowledge or confidential information, giving them a comparative advantage over law enforcers. Moreover, they frequently operate in the context of (large) organisational structures which are ‘black boxes’ for the outside world. Authorities often do not even know that something went wrong, and even if they do, it is extremely difficult for them to find out who or what caused the misconduct without the cooperation of insiders, whether they are witnesses or suspects. In light of these challenges, legislators and law enforcers are confronted with the substantive, procedural and jurisdictional boundaries of existing policies, norms and practices. In search of more adequate responses to combat economic and financial crime, they adapt existing policies, norms and practices, and create new enforcement mechanisms. This book is the first volume in a series of publications summarising the outcome of a comparative research conducted at the University of Luxembourg on how various national criminal justice systems across Europe and the US, as well as the EU, deal with the above challenges. The volume is based on the papers presented at the conference ‘Global Challenges in the Field of Economic and Financial Crime in Europe’, which took place on 2 and 3 December 2014 in Luxembourg. II.  PRELIMINARY OBSERVATION: ECONOMIC AND FINANCIAL CRIMINAL LAW AS AN ILL-DEFINED BRANCH OF CRIMINAL LAW

Although the term ‘economic and financial criminal law’ sounds quite straightforward, it is actually extremely difficult to give a precise definition of this branch of criminal law. Roughly speaking, one could describe economic and financial 1 R Bowles, M Faure and N Garoupa, ‘The Scope of Criminal Law and Criminal Sanctions: An ­Economic View and Policy Implications’ (2008) 35 Journal of Law and Society 389, 391–392 and 400–401.

Current Challenges in Economic and Financial Criminal Law 3 c­ riminal law as the whole of criminal law which relates to the criminal enforcement and sanctioning of violations of regulations in the economic and financial sphere. Obviously, the precise scope of this branch then depends on what is considered to belong to the ‘economic and financial sphere’ and thus on how extensively one interprets the protected economic and financial interests. Clearly, the above ‘working definition’ is broad and general, and therefore does not allow the exact outer boundaries of economic and financial criminal law to be determined. One may, for instance, question whether this branch of criminal law includes environmental criminal law as a whole, or only those parts which are of direct economic relevance. Moreover, should one also take into account traditional offences against property rights if committed in a business context, or should they be disregarded? What is more, the term economic and financial criminal law meets a diversity of corresponding terms at the national level. Each of these national terms has its own denotation and focus, and some of them may be specific for the legal system in point. For instance, the French concept droit pénal des affaires includes any type of offence that protects either the economy as a whole or particular financial interests of private or public victims, as well as all offences which take place in a corporate setting, including traditional property offences.2 By comparison, the German notion Wirtschaftsstrafrecht refers to offences relating to business activities and does not include traditional property offences.3 Comparable Anglo-Saxon (legal) terms are corporate criminal law,4 business criminal law5 and white-collar criminal law.6 These terms focus on the type of offender or the context in which offences tend to occur, and have criminological

2 

M Delmas-Marty and G Giudicelli-Delage, Droit pénal des affaires, 2nd edn (Paris, PUF, 2000) 13. Tiedemann, Wirtschaftsstrafrecht. Einführung und Allgemeiner Teil mit wichtigen Rechtstexten, 3rd edn (Köln, Carl Heymanns Verlag, 2010) 6–9 and 16. 4  Corporate criminal law can be defined as criminal law concerning criminal offences committed by a corporation or a representative of the corporation acting on its behalf. See eg BA Garner (ed), Black’s Law Dictionary, 9th edn (St Paul, West/Thomson Reuters, 2009). 5  Similar to corporate criminal law, the term business criminal law refers to the context in which offences are committed, but it also covers criminal liability of individuals. See eg H First, Business Crime: Cases and Materials (Westbury, The Foundation Press, 1990). 6  This term relates to white-collar crime, defined by Sutherland as ‘a crime committed by a person of respectability and high social status in the course of his [or her] occupation’. J Braithwaite, ‘Challenging Just Deserts: Punishing White-Collar Criminals’ (1982) 73 Journal of Criminal Law and Criminology 723, 723, with reference to E Sutherland (1949). However, due to its criminological basis, Sutherland’s concept of white collar crime has been described as ‘exceedingly broad’, because it includes ‘traditional non-violent crime categories, such as bribery, embezzlement, and tax fraud, but also certain tortious conduct which the law had never even considered criminal (…)’ and even ‘conduct which the law had never even considered tortious’. L Orland, ‘Reflections on Corporate Crime: Law in Search of Theory and Scholarship’ (1980) 17 American Criminal Law Review 501, 505. Actually, to be precise, the most frequently used terms are corporate crime, business crime and white collar crime. It seems, indeed, that authors prefer to focus on the behaviour rather than on the applicable rules when referring to a branch of criminal law. While this preference may, of course, have different explanations, one of them is perhaps that common law systems are less focused on categorising rules. 3  K

4  Katalin Ligeti and Vanessa Franssen foundations. In addition, the term ‘economic criminal law’ (or, rather, economic crime) will also be encountered. This term is based on ‘the nature of protected interest’ and encompasses economic regulations ‘which impose restrictions upon the conduct of business as part of a considered economic policy’, including antitrust offences, securities fraud and some tax laws.7 Such ‘economic regulatory offenses (…) seek to protect the economic order of the community against the harmful use by the individual of his property interest’.8 Traditional property offences9 are in principle not included, unless they were extended by courts and legislators to ‘newly developing ways of transacting business’, such as fraud or misappropriation.10 In many systems, one will also encounter a variety of (sub-)terms which can be classified under the heading of economic and financial criminal law. For instance, in Belgium, the French notion of droit pénal des affaires coexists with the English idea of witteboordencriminaliteit (white-collar crime) and more specific terms referring to subdivisions of economic and financial criminal law, such as droit pénal économique/economisch strafrecht (economic criminal law), droit pénal fiscal/ fiscaal strafrecht (tax criminal law)11 and droit pénal social/sociaal strafrecht (covering offences in the field of labour law and social security law). In the Dutch system, the term bijzonder strafrecht (special criminal law) serves as an umbrella term for all criminal law and criminal procedure outside the Criminal Code and the Code of Criminal Procedure, and includes, among others, the following two subdivisions: economic criminal law and tax criminal law.12 Together these two subdivisions are sometimes referred to as sociaal-economisch strafrecht (socio-economic criminal law).13 It is noteworthy that the Dutch term ‘economic criminal law’ is based on an organic criterion rather than on the underlying protected legal interests. Indeed, economic offences are all offences covered by the Economic Offences Act of 1950 (Wet op de economische delicten), which range from customs offences and banking law, through money laundering and financing of terrorism, to environmental offences, transport offences and violations of regulations concerning labour law, health care and product and food safety.14

7  SH Kadish, ‘Some Observations on the Use of Criminal Sanctions in Enforcing Economic Regulations’ (1963) 30 University of Chicago Law Review 423, 424. 8  The term ‘regulatory offences’ immediately reveals one of the main objectives of economic criminal law, namely the regulation of business activities. 9  Defined as offences which ‘protect private property interests against the acquisitive behaviors of others in the furtherance of free private decision’. See Kadish, ‘Some Observations’ (n 7). 10  Kadish (n 7) 425. 11  The more commonly used English term would be ‘tax offences’. 12  FGH Kristen, RMI Lamp, JMW Lindeman and MJJP Luchtman, ‘Inleiding’, in FGH Kristen, RMI Lamp, JMW Lindeman and MJJP Luchtman (eds), Bijzonder strafrecht: Strafrechtelijke handhaving van sociaal-economisch en fiscaal recht in Nederland (The Hague, Boom Lemma, 2011) 4. 13  ibid. At the same time, these authors also treat ‘tax criminal law’ as a separate subdivision that is to be distinguished from socio-economic criminal law (see eg title of the book). This only confirms how difficult it is to establish a consistent categorisation and sound definition. 14  Art 1 and 1a Economic Offences Act of 1950.

Current Challenges in Economic and Financial Criminal Law 5 The extremely wide scope of this Act has been criticised because it covers many offences that have only a very tenuous link with the economy.15 National terms are not only diverse and numerous, but they also appear hard to define in a precise and univocal manner. It usually requires a combination of criteria to define those terms.16 Moreover, to the extent that some terms are defined on the basis of organic features (eg the existence of special investigative authorities or courts) or statutes, there is the inevitable risk of a circular reasoning (eg the Dutch example on economic offences). That being said, it is clear that most of those national terms have a common core, namely the protection of economic and financial interests, which largely corresponds to the earlier sketched working definition. Therefore, the contributions in this volume take that working definition as a general starting point and centre the analysis of special policies, rules and practices for economic and financial crime in the following four fields: —— substantive law, including the general and special part of criminal law as well as the sanctions (eg criteria for criminal liability, the adoption of new offences, special sanctions); —— criminal procedure (eg lower burden of proof, special investigative techniques, specific preventive measures); —— administration of justice (eg the establishment of specialised regulatory or investigative authorities); and —— cooperation between administrative and judicial authorities at the national and international levels (including jurisdictional issues).

III.  CHALLENGES WITH RESPECT TO SUBSTANTIVE CRIMINAL LAW

In light of the potentially wide-spread or systemic consequences of economic and financial crime, prevention and control are key concerns. To this effect l­egislators, administrative and judicial authorities increasingly rely on pre-conviction ­measures as substitutes for actual punishment. This is a clear tendency in the US where public prosecutors are given more extensive powers to impose certain pre-­conviction preventive or remedial measures upon suspects (mainly corporations). These include the requirements to put in place a corporate compliance programme to remove certain corporate officials or to conduct an internal audit, or the appointment of a corporate monitor. In the US, these measures are used quite frequently, especially with regard to large(r) corporations, and are sometimes more dreaded than the criminal sanctions that can be ultimately imposed 15  BF Keulen, ‘De Wet op de economische delicten’, in Kristen, Lamp, Lindeman and Luchtman (eds), Bijzonder strafrecht (n 12) 16–17. 16  See eg the definition of droit pénal des affaires in Delmas-Marty and Giudicelli-Delage (n 2) 8–13, in particular 11.

6  Katalin Ligeti and Vanessa Franssen by a criminal court. In Chapter 2, Bruce Zagaris discusses the plethora of such pre-conviction measures in the US legal system, and also questions whether these measure really respect the separation of powers and the rule of law: how much power should prosecutors have and what is the role of criminal courts? Similarly wide-spread practice on both sides of the Atlantic is the extensive use of compliance programmes. Compliance programmes are intended to identify and prevent possible unlawful conduct within the corporation.17 They promise to reduce crime and sustain the corporation’s good reputation, but as Alexander Cappel explains in Chapter 3, they are also gaining increasing legal relevance. They may reduce or exclude criminal liability of corporations, and in specific areas of law they might even be required. Compliance programmes, therefore, are considered as a new approach to tackle economic and financial crime.

IV.  CHALLENGES WITH RESPECT TO THE ADMINISTRATION OF JUSTICE AND CRIMINAL PROCEDURE

The main peculiarities of economic and financial criminal law nowadays concern the administration of justice on the one hand, and the cooperation between (national and supranational) administrative and judicial authorities on the other. The need for a more effective investigation and prosecution of economic and financial crime leads to the introduction of new investigative measures, the creation of specialised investigating and prosecuting authorities, the intensified use of negotiated justice techniques, and the increased importance of the suspect’s cooperation before, during and after the investigation. Globally, the number of prosecutions and convictions for economic and financial crimes are low.18 This may be due to the complexity of such crime, making the investigation time-consuming and burdensome. At the same time, many national criminal justice systems are already overburdened and therefore tend to dispose of cases out of court to avoid lengthy trials. Recourse to techniques of negotiated justice is indeed usually motivated by the objective of expediting proceedings and handling an increasing number of cases in an efficient manner. This makes such techniques particularly appealing in the area of economic and financial crime. Sabine Gless and Nadine Zurkinden point out in Chapter 6 that forms of negotiated justice are particularly attractive 17 U Sieber and M Engelhart, Compliance Programs for the Prevention of Economic Crimes. An Empirical Survey of German Companies (Max-Planck-Institut für ausländisches und internationals Strafrecht, Berlin, Dunker & Humblot, 2014) 1. 18  In Germany, see the 2014 Annual Report of the Federal Financial Supervisory Authority, available at https://www.bafin.de/SharedDocs/Downloads/EN/Jahresbericht/dl_jb_2014_en.pdf?__blob= publicationFile&v=2, accessed 2 July 2015, at 214; for the statistics on insider trading, ibid. at 218; see also F Saliger, Umweltstrafrecht, Köln 2012, para. 542. According to an empirical study, the vast majority (more than 60 per cent) of court proceedings were settled by plea bargaining, see K Altenhain, I Hagemeier, M Haimerl and K-H Stammen, Die Praxis der Ansprachen in Wirtschaftsstrafverfahren (Baden-Baden, Nomos, 2007) 79.

Current Challenges in Economic and Financial Criminal Law 7 in complex cases of economic and financial crime which raise legal and evidential problems and where the defendant is mostly assisted by a defence counsel with extensive expertise. In addition, the highly technical nature of economic and financial offences has called for greater specialisation of prosecuting authorities both in Europe and the US. By creating such specialised prosecuting authorities, criminal justice systems wish to ensure that the authorities are in the possession of the technical knowledge which is often needed in cases of economic and financial crime. A recent European example of such prosecutorial specialisation is the setting up of the National Financial Public Prosecutor (NFPP) in France. The NFPP is an independent public prosecutor having national jurisdiction over economic and financial crimes, working in parallel to the Paris office of the Public Prosecutor and the other regional Public Prosecutor’s offices.19 The NFPP has exclusive jurisdiction over stock market offences and shared jurisdiction for a number of listed offences based on the criterion of ‘the very large complexity’ of the case. In addition, in order to better equip investigators dealing with financial and economic offences, there is also a specialisation within the French police. As Jeannot Nies highlights in Chapter 4, such specialised investigation and prosecution services are the main beneficiaries and users of new investigative techniques designed to help the investigation of economic and financial crime. As indicated above, the intensive use of the internet, online network systems (eg for high frequency trading) and social media (eg diffusion of confidential or sensitive information) makes economic and financial crime more volatile and more difficult to detect and record than more traditional offences; it also renders offenders of such offences increasingly mobile in their actions. This situation complicates the localisation, investigation and prosecution of economic and financial crime. To address this challenge, criminal justice systems developed new, tailor-made investigative measures. Over the last decade, we have witnessed the introduction of investigative techniques that allow law enforcement authorities to obtain banking and financial information, in order to gather evidence of the criminal conduct on the one hand, and to trace crime proceeds in the view of confiscation on the other hand. These new measures enable investigating authorities to determine the origin of transferred funds and to analyse transactions of bank and financial accounts.20 Notwithstanding their sophistication, these special investigative measures alone are not sufficient to help the efficiency of criminal investigations of ­economic and financial crime. In addition, individuals and corporations are subject to far-­reaching duties to report misconduct and to disclose information to the authorities. The current practice both in the US and Europe demonstrates the overwhelming importance of reporting and disclosure duties in all areas of 19  F Stasiak, ‘Le procureur de la République financier: véritable innovation ou simple substitut?’ (2014) Revue Lamy Droit des Affaires, no 4955. 20 Moneyval, The Postponement of Financial Transactions and the Monitoring of Bank Accounts, Research report of the Council of Europe, April 2013, at 6.

8  Katalin Ligeti and Vanessa Franssen economic and financial criminal law. These reporting and disclosure duties are obviously very useful for the authorities, but they also put a strain on the suspect’s privilege against self-incrimination.21 Furthermore, investigative authorities often rely heavily on the input from whistleblowers and leniency applicants. As Christopher Harding shows in Chapter 5, in practice, leniency and whistleblower programmes put a huge pressure on corporations and individuals to cooperate with the authorities, and create serious tensions between the rights of individuals and corporations. For instance, the question arises who exercises the corporation’s privilege against self-incrimination (unless the corporation is not entitled to this privilege) and how ‘free’ corporate officials and lower-level employees are to exercise their own right to remain silent when the corporation decides to cooperate with the authorities and conducts an internal investigation.22

V.  CHALLENGES WITH RESPECT TO MULTI-AGENCY COOPERATION AND MULTI-DISCIPLINARY INVESTIGATIONS

An effective detection and investigation of economic and financial crime usually requires the intervention and cooperation of several administrative authorities. In Chapter 7 Lothar Kuhl uses the example of the protection of the financial interests of the EU, where clearly the cooperation of various national administrative authorities (eg customs and tax authorities) is required. In this volume the term ‘multi-agency investigations’ will be used to refer to investigations involving various (national and/or supranational) administrative authorities. Multi-agency investigations do not, however, always seem to function well on the ground. The information obtained by the different authorities involved is not always passed on to each other. This may be due to a lack of trust among the various authorities, but also due to the absence of a clear legal framework for the cooperation between those different administrative authorities. Even when there is a legal framework, the legislation is often fragmented, with diverging rules in different sectors.23 For instance, sectorial differences in data protection and/or procedural rights may create obstacles to effective multi-agency investigations. The situation becomes even more complicated when administrative authorities of one country (eg customs authorities) have to cooperate with foreign

21  CM Ferguson, ‘The Required Records Doctrine: The Fifth Amendment Privilege Under Attack’ (2011) Journal of Taxation 221; PS Diamond, Federal Grand Jury Practice and Procedure (Huntington, Juris Publishing, 2014) 6–22 et seq. 22  BL Garrett, ‘The Constitutional Standing of Corporations’ (2014) 163 University of Pennsylvania Law Review 128; JK Strader, Understanding White Collar Crime (Newark, Lexis Nexis, 2011) 368–369. 23  K Ligeti and M Simonato, ‘Multidisciplinary Investigations into Offences Against the Financial Interests of the EU: A Quest for an Integrated Enforcement Concept’, in F Galli and A Weyembergh (eds), Do Labels Still Matter? Blurring Boundaries Between Administrative and Criminal Law (IEE ­Brussels, 2014) 81–94.

Current Challenges in Economic and Financial Criminal Law 9 (or supranational) administrative authorities of a different kind (eg competition authorities or OLAF). Unlike mutual legal assistance, there is no coherent legal framework for mutual administrative assistance. Even if there are certain rules in place, they are usually limited to one sector (eg cooperation between customs authorities, or cooperation between competition authorities). This situation obviously hampers the detection, investigation and prosecution of economic and financial crime. In addition to the prominent role of (specialised) administrative authorities in the field of economic and financial crime, these administrative authorities often need to cooperate with the police and judicial authorities. In this volume the term ‘multi-disciplinary investigations’ will be used to refer to investigations involving different types of authorities, in particular the police, national (and potentially supranational) administrative authorities and national judicial authorities. As Kuhl explains in Chapter 7, multi-disciplinary investigations are the norm in the field of the protection of the financial interests of the EU, where national customs or tax authorities as well as national prosecution authorities need to cooperate with the European Commission’s anti-fraud service. Practice shows that this cooperation often does not run smoothly because the various authorities do not fully trust each other and/or because the legal framework insufficiently regulates such multi-disciplinary cooperation. Moreover, considering that economic and financial crime is often transnational, the investigation of such crime frequently involves the police, (one or more) administrative authorities as well as judicial authorities from different countries. Still, as John Vervaele points out in Chapter 8, there is no or very little coordinated transnational enforcement of economic and financial crimes. While Chapter 8 focuses on financial markets, one may also consider other examples. For instance, an investigation into illegal trade in fauna or flora may be triggered by inspections carried out by customs authorities, (air)port authorities or the road traffic police in one country. However, if the main suspects and/or evidence are located in another country, the environmental authorities or judicial authorities of that country may be in a better position to conduct the investigation. Of course, they will only be able to do so if the authorities which discovered the facts in the first country have experience in cooperating with authorities which specialise in the field of wildlife crime and if they are able to secure the evidence required, applying the same (or equivalent) standards as the ones required in the second country. Despite this reality, a comprehensive legal framework and practical experience in such multi-disciplinary cooperation are often lacking, which clearly undermines the combat against economic and financial crime. Finally, transnational multi-disciplinary investigations also raise delicate questions about the protection of procedural rights of both natural and legal persons. In Chapter 9, Michiel Luchtman therefore examines how procedural rights can be guaranteed when multiple national and European enforcement authorities come into play. These authorities may pursue similar objectives but do so in accordance with different legal rules, whether of a criminal, administrative or other nature.

10  Katalin Ligeti and Vanessa Franssen Hence, in such a multi-level constellation, the procedural safeguards that were developed in the context of the nation-state often fail to function adequately. The author therefore emphasises the need for ‘legal mechanisms that offer EU citizens an adequate indication of the content and scope of government power in a transnational legal area’, which ‘clearly “allocate” responsibilities for protecting defence rights over the many (EU and national) actors involved’. Ultimately, this also requires a ‘full and effective judicial control’. Yet, such allocation of responsibilities may prove to be even more challenging in post-Brexit times.

VI.  CHALLENGES WITH RESPECT TO SHARED OR INTEGRATED ENFORCEMENT MODELS

In order to avoid and combat the potentially wide-spread consequences of economic and financial crime, new regulatory and public enforcement mechanisms have been put in place in many countries. A diversification of enforcement tools is supposed to be more effective. Such diversification has, predominantly, three consequences. First, parallel administrative and criminal enforcement often leads to cumulative procedures and/or cumulative sanctions. Both in Europe and in the US, parallel action by administrative and criminal enforcement authorities is standing practice in several fields of economic and financial crime. Second, there is a tendency in Europe24 to label certain enforcement mechanisms ‘administrative’ even though the investigative powers and sanctions may be equally coercive and intrusive as the powers and sanctions under (formal) criminal law. For instance, the 2014 Regulation on market abuse25 grants national competent authorities a wide range of far-reaching supervisory and investigative administrative powers. Some of these powers are comparable to the investigative powers of judicial authorities (eg they may require existing recordings of telephone conversations, electronic communications or traffic data held by investment firms, credit institutions or financial institutions).26 Other administrative powers potentially require the intervention of judicial authorities (eg the search of premises and the seizure of documents).27 24  In contrast to US courts which do not examine and question the label used by Congress, in Europe Art 6–7 ECHR play an important recalibrating role ensuring that (national and supranational) legislators cannot simply use a different label to avoid the application of certain fundamental rights. 25  Regulation (EU) 596/2014 of the European Parliament and the Council on market abuse and repealing Directive 2003/6/EC of the European Parliament and the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, [2014] OJ L 173/1 (‘Market Abuse Regulation’). 26  Art 23(2), para 1(g) Market Abuse Regulation. 27  Art 23(2), para 1(e) and para 2 Market Abuse Regulation. For a further analysis of the distinguishing criteria for administrative and criminal enforcement in the area of market abuse, see V Franssen, ‘EU Criminal Law and Effet Utile—A Critical Examination of the Use of Criminal Law to Achieve Effective Enforcement’, in J Banach-Guttierez and C Harding (eds), EU Criminal Law and Crime Policy: Values, Principles and Methods (Abingdon, Routledge, 2016) 84, 93–99.

Current Challenges in Economic and Financial Criminal Law 11 Third, the shift to punitive administrative law does not only lead to quasi-crimi­ nal investigative powers of administrative agencies. It may also lead to the emergence of administrative agencies which do not respect the separation of powers. An example is the French Financial Market Authority, which is called in the French jargon the jurislateur. This authority combines the roles of a legislator (it defines the regulatory offences), an investigator (it conducts the administrative investigations) and a judge (it pronounces the penalty for regulatory offences). In addition, it also has controlling and sanctioning powers. These types of agencies very much resemble their American counter-parts, such as the Securities and Exchange Commission (SEC), which also fulfils both legislative and adjudicative functions. In contrast to Europe, however, given the specific constitutional framework in the US, uniting those two functions in one agency does not generate scholarly attention. Nevertheless, it should be mentioned that the SEC is endowed with administrative powers only. Criminal enforcement is the prerogative of the Department of Justice (DOJ). Such a clear-cut distinction between administrative and criminal powers does not always exist in Europe. Several European countries grant, in certain fields, both administrative and criminal law powers to the same authority. An example thereof is the UK Competition and Markets Authority, which was established in 2013, joining together the UK’s Competition Commission and parts of the Office of Fair Trading. As Stephen Blake explains in Chapter 13, the CMA has civil (‘administrative’) enforcement powers with respect to cartel offences committed by undertakings, as well as criminal enforcement powers with respect to cartel offences committed by individuals (and certain consumer protection offences). Major problems arise from this accumulation of merely administrative tasks and powers (covering the supervision and control of an economic activity, as well as the sanctioning and remedying of certain misconduct), and the punitive-repressive function into the very same authority. This ‘double-hat model’ allows for a more efficient handling of both administrative and criminal cases, but raises problems relating to procedural rights when a defendant is confronted with a Janus-faced authority with considerable powers under both administrative law and criminal law. The potential accumulation of sanctions of a different nature (administrative, civil and criminal) imposed by different national and/or supranational authorities is also problematic in light of the principles of ne bis in idem and proportionality. Following the landmark ruling of the Court of Justice in Åkerberg ­Fransson,28 courts in the EU have become more aware of this problem. For instance, in ­Sweden the Supreme Court overturned its previous jurisprudence in order to forbid the parallel imposition of tax surcharges and criminal charges for the same act of omitting or providing false information on tax returns. The Polish ­Constitutional Tribunal addressed the permissibility of imposing administrative and criminal sanctions for the same set of facts in several individual cases. In a 28 

Case C-617/10, Åklagaren v Åkerberg Fransson EU:C:2013:105, 26 February 2013.

12  Katalin Ligeti and Vanessa Franssen recent judgment the Court considers such parallel sanctioning not to be per se unconstitutional, but requires that the criminal court takes into account the penalty imposed in another proceeding (civil or administrative) when imposing the criminal sanction in order not to violate the overall proportionality of the sanction.29 The French Constitutional Council also handed down a landmark decision declaring the system of cumulative sanction for the offence and the administrative irregularity of insider misconduct unconstitutional.30 The Council emphasised that the penalties associated with the offence of insider dealing on the one hand and the administrative irregularity of insider misconduct on the other cannot be considered to differ in nature.31 As Martin Böse explains in Chapter 10, the accumulation of sanctions is not prohibited in the US federal system, even though the principle of proportionality does apply. The problem of the potential of different types of sanctions gains more relevance in the context of negotiated justice, for instance when a corporate defendant wishes to achieve a global settlement with the US Department of Justice in order to avoid further federal sanctions after the settlement. The above tensions could be resolved if the different enforcement mechanisms were part of a comprehensive and coherent enforcement policy or strategy. Such strategy could easily address the relationship of parallel enforcement systems and wipe out ambiguities. European countries generally rely on the ultima ratio of criminal enforcement and the subsidiary role of criminal sanctions vis-à-vis other types of sanctions. These principles do not, however, answer all the above dilemmas, neither do they point towards uniform solutions. Whereas some countries forbid parallel ­proceedings of an administrative and criminal nature,32 others adhere to the ­principle of independence between administrative and judicial enforcement

29  Judgment of the Constitutional Tribunal of 21 October 2014 P 50/13 OTK ZU 2014 no 9A Item 103. 30 French Constitutional Council, Decision No 2014-453/454 QPC and 2015-462 QPC of 18 March 2015—Mr John L and others. English version available at http://www.conseil-constitutionnel. fr/­conseil-constitutionnel/francais/les-decisions/acces-par-date/decisions-depuis-1959/2015/2014453/454-qpc-et-2015-462-qpc/version-en-anglais.143599.html, accessed 10 June 0216. 31  The Constitutional Council noted that ‘whilst only the criminal court may order that the perpetrator of an insider dealing offence be imprisoned if he or she is a natural person or be dissolved if it is a legal person, the fines imposed by the Enforcement Committee of the Financial Market Authority may be extremely severe and may, according to the contested provisions from Article L. 621-15, amount to more than six times those that may be imposed by the criminal court for insider dealing offences’. In addition, ‘according to paragraph III of Article L. 621-15, the amount of the sanction for insider misconduct must be commensurate with the seriousness of the violations and any advantages or profits gained from said violations and, according to Article 132-24 of the Criminal Code, the penalty imposed following a conviction for the offence of insider dealing must be commensurate with the circumstances of the offence and the personal circumstances of the perpetrator’. It follows from the above that the conduct covered by Art. L465-1 and L621-15 ‘must be deemed to be liable to attract penalties that may not differ in nature’. 32  See for instance the decision of the Swedish Supreme Court, NJA 2013 S. 502.

Current Challenges in Economic and Financial Criminal Law 13 mechanisms.33 In countries following the latter path, parallel proceedings and sanctions have been the norm until recently. On the other side of the Atlantic, there seems to be a much more conscious effort to create partnerships between regulatory authorities and the DOJ. A good example is the enforcement of securities fraud, where the competent authorities have developed over time a sort of ‘natural’ division of labour. On the one hand, the criminal justice authorities (DOJ) have investigative tools which are not available to the SEC, including the ability to obtain search warrants and wiretaps, and to conduct undercover investigations, which may prove critical to an investigation. On the other hand, the SEC may take the lead in document review and the analysis of records, and witness interviews may be jointly conducted. The SEC also has the ability to freeze assets and obtain temporary injunctions based on suspicious trading so that illegal profits are not dissipated during an investigation.34 Similarly, US antitrust law shows that, although the Foreign Trading Commission and the DOJ have certain overlapping powers, they have developed expertise and special competency in different commercial fields. This specialisation helps determine which agency will exercise oversight over certain mergers. Nevertheless, there still remain occasions where both agencies have a claim to jurisdiction over the same transaction. In contrast, most European legal systems demonstrate considerable difficulties to design and implement a coherent enforcement policy. The answer of policy makers and practitioners to the shortcomings of cumulative proceedings and sanctions depends on the country and the sector. While there are a number of positive examples of an integrated enforcement policy (eg the UK Competition and Markets Authority discussed by Blake in Chapter 13), the overall picture shows that European countries still need to work towards a coherent enforcement policy in most fields of economic and financial crime. Furthermore, the development of economic and financial criminal law in ­European countries is also strongly influenced by the evolutions taking place at the EU level (eg in the area of cartel law, market abuse and environmental law). In this respect, one could expect some guidance from EU law. Indeed, the L ­ isbon Treaty gives the EU legislator broad powers to approximate national rules in respect of economic and financial criminal law. The EU may require its Member States to adopt minimum rules on criminal offences and sanctions in all areas in which harmonisation measures have been adopted (Art 83(2) TFEU). These areas may include offences in areas such as unfair market practices, VAT fraud, accounting fraud, market abuse, environmental law, health and consumer law and transport law.

33  See for instance Art L171-7 Env C: ‘irrespective of criminal prosecutions, (…) the administrative authority serves official notice…’. 34  MJ White, Chairwoman, Sec and Exch Comm’n, All-Encompassing Enforcement: The Robust Use of Civil and Criminal Actions to Police the Markets, 31 March 2014, available at https://www.sec.gov/News/ Speech/Detail/Speech/1370541342996, accessed 10 June 2016.

14  Katalin Ligeti and Vanessa Franssen What is more, on the basis of Art 325 TFEU, the EU and the Member States have shared competence to ‘counter fraud and any other illegal activities affecting the financial interests of the Union’ through deterrent and effective measures. Under this umbrella, one will encounter offences such as active and passive corruption, subsidy fraud, money laundering and misappropriation. Finally, Art 83(1) TFEU contains a list of particularly serious crimes with a cross-border dimension for which the EU may establish minimum rules. This list also includes certain economic and financial offences, such as money laundering, corruption, counterfeiting of means of payment and computer (or cyber) crime. Hence, one may conclude there is a true plethora of competences at the EU level which concern the broad field of economic and financial criminal law.35 In view of the new EU competences it is to be expected that not only the descriptions of offences, but also the level and type of applicable sanctions will be largely approximated throughout the EU in the coming years. It is crucial to highlight that the criminal policy choices made by the EU are founded on a predominantly economic logic, in line with the Union’s original ambition of developing a single internal market. As Jeroen Blomsma demonstrates in Chapter 11, many legislative initiatives in the field of criminal law build upon the Union’s pre-existing practice of administrative regulation in that respect. As a consequence, EU criminal law pursues an explicit effectiveness logic. Criminal law is regarded as a stronger, more effective enforcement tool, which exerts more powerful deterrent effects and helps better ensure the effet utile of EU law.36 However, as the example of the enforcement of the European Banking Union described by Silvia Allegrezza and Ioannis Rodopoulos in Chapter 12 shows, in several EU policy fields the EU has only partially addressed the aspects of enforcement. Much emphasis is placed by the new Banking Union Regulation on the new role of supervision and enforcement given to the European Central Bank, together with the ESMA and the EBA. But EU law37 establishes only a system of administrative supervision and enforcement and does not include, for instance, provisions concerning criminal law or judicial enforcement. As a result, the substantive law on financial markets is to a large extent harmonised in the EU, but the enforcement regime is still left to the Member States. While the effectiveness of this administrative enforcement needs to be carefully assessed and tested as to its potential, there is a lack of a general overall framework of enforcement that would take into account the different types of enforcement (self-regulation or private external review, administrative controls and criminal law enforcement) and the different enforcement levels (internal, national, European). This EU instrumental approach to criminal enforcement seems to be at variance with a more traditional approach to criminal law, which is less governed by 35  That being said, the outer boundaries of the EU’s criminalisation powers are actually not so clear. See Franssen, ‘EU Criminal Law and Effet Utile’ (n 27) 86–92. 36  Franssen (n 27) 84–110. 37  Regulation 2013/1024/EU.

Current Challenges in Economic and Financial Criminal Law 15 concerns of efficiency and effectiveness and focuses primarily on the protection of certain moral values and classical civil rights (such as the right to life, the right to physical and sexual integrity and the right to property). Furthermore, the criminal law policy at the EU level seems to lack a coherent legal and, more importantly, theoretical framework on criminal liability, criminal procedure and punishment.38

VII.  CONCLUDING REMARKS

As the above overview suggests, the present volume offers the reader a rich collection of contributions. Each chapter addresses one or more of the aforementioned challenges in the field of economic and financial criminal law in Europe and the US. Certain authors focus on their own national system, others take an EU and/ or trans-systemic approach. The primary ambition of this volume is, of course, to communicate the findings of the conference that was organised on 2 and 3 December 2014 at the University of Luxembourg. However, in doing so, it also aims to contribute to a better understanding of current tendencies and features of economic and financial crime, in the hope this may stimulate further research by other scholars and inspire future legislative and policy decisions in this important field of criminal law, in Europe and beyond. As the outcome of the 2016 Brexit referendum shows in a much more general way, national and EU legislators and policy-makers have to be flexible and inventive in order to cope with changing circumstances. Yet, at the same time, they should not lose sight of precious, wellestablished fundamental rights.

38 C Harding, ‘Tasks for Criminology in the Field of EU Criminal Law and Crime Policy’, in J Banach-Guttierez and C Harding (eds), EU Criminal Law and Crime Policy: Values, Principles and Methods (Abingdon, Routledge, 2016) 111 et seq.

16 

Part I

Challenges with Respect to Substantive Criminal Law

18 

2 Prosecutors and Judges as Corporate Monitors? The US Experience BRUCE ZAGARIS

I. INTRODUCTION

W

HILE THE DEBATE and controversy ensues about whether and how to punish corporations and organisations for unlawful conduct and how to deter such conduct in the future and improve corporate compliance, US federal prosecutors are increasingly employing Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs). Arguably, the legal basis for such agreements is Rule 11 of the Federal Rules of Criminal Procedure, giving the prosecutor and defendant the right to enter into a plea agreement. NPAs and DPAs enable prosecutors, who have limited resources, to punish corporate wrongdoers, including by significant fines and financial penalties, including forfeiture in some cases, as well as by requiring independent monitors and self-reporting arrangements to ensure that corporate defendants strengthen compliance measures. NPAs and DPAs are being used in an increasing variety of circumstances. Traditionally, the Fraud Section of the Department of Justice’s (DOJ) Criminal Division has been a principal user of these agreements at the federal level. However, recently other DOJ units have also started using them, including the Consumer Protection Branch of DOJ’s Civil Division and the DOJ Tax Division. In addition, whereas the US District Attorney for the Southern District of New York has been a party to approximately 12 per cent of the total, increasingly different US attorney’s offices around the country are starting to conclude these agreements.1 As part of the NPAs and DPAs, state prosecutors too have started using monitors. For instance, New York State Superintendent of Financial Services, New York State Department of Financial Services (NYDFS) Benjamin M Lawsky imposed two-year monitorships for cases involving BNP Paribas and Standard Chartered Bank. 1 J Warin, ‘2014 Mid-Year Update on Corporate Non-Prosecution and Deferred Prosecution ­Agreements’, https://corpgov.law.harvard.edu/2014/07/16/2014-mid-year-update-on-corporate-nonprosecution-and-deferred-prosecution-agreements/ 16 July 2014, accessed 27 February 2015.

20  Bruce Zagaris In the framework of this chapter it will be discussed whether compliance ­ rograms and other measures in the pre-conviction stage are used as a substitute p for traditional, court-imposed punishment or whether they are truly and merely ‘preventive’. In this regard, a corporate monitorship serves both as a substitute for traditional punishment and to prevent future wrongdoing by the defendant corporation. The policy goal of a corporate monitorship is to punish a corporation or organisation for its wrongdoing, especially when the traditional punishments— such as monetary fines, forfeiture, suspension or debarment from eligibility for public procurement—are not sufficient or may have adverse collateral consequences on other interested stakeholders. Corporations view monitorships as preferable to the alternatives, which are normally conviction including heavier fines and suspension and/or debarment from undertaking economic activities. However, corporations have complained about the inconsistency and arbitrariness of the use and terms of monitorships, their conditions and duration, and the compensation of monitors. This chapter discusses the history of the use of corporate monitors in the US, including the monitor’s role in the legal system compared to roles of similar mechanisms in the US legal system. It starts by explaining the initial guidelines issued in 2008 and 2010 governing the selection and use of monitors in DPAs and NPAs with corporations, and resolving disputes with monitors. The policy goals and factors which influence the government’s decision to require a monitor are addressed. The chapter then focuses on the structure and common terms of monitorships. It explores the evaluation of the efficacy of monitorships, which also responds to one of the main questions raised here. Monitorships can indeed be a substitute for punishment. The penultimate section of this chapter looks at some of the proposals for improving monitorships. It also discusses the negative views of corporations and how the various branches of the US government have responded to their complaints and those of other interested persons. The final section looks at the potential application of monitorships to the EU.

II.  THE HISTORY OF CORPORATE MONITORS IN THE US

A.  The Monitor’s Role in the Legal System 1.  The Antecedents Today’s corporate monitor has its antecedents in the ‘special masters’ of the past. Special masters originated in the use of adjuncts to the judiciary in English Chancery practices in the early sixteenth century. The evolution of the corporate monitor results from a court’s use of ‘outside’ resources to strengthen its own supervisory role. The authority to appoint monitors comes from the court’s inherent powers and Rule 53 of the Federal Rules of Civil Procedure, which specifically authorises

Prosecutors and Judges as Corporate Monitors? The US Experience 21 s­ pecial masters, unless a statute provides otherwise, to conduct duties to which the parties have consented, hold trial proceedings, make or recommend findings of fact on issues in certain circumstances, and address pre-trial and post-trial matters which cannot be done effectively and in a timely way by an available district judge or magistrate judge. In the US, while the authority of a federal court to appoint an agent to supervise the implementation of its decrees has been long established, such court-appointed agents have been given a variety of names, including receiver, master, special master, master hearing officer, monitor, human rights committee, Ombudsman and others.2 In criminal cases, corporate monitors are appointed as a critical element of a negotiated settlement before judgment between a business entity and a government enforcement agency.3 2.  The Original Monitors Between 1982 and 2004, the closest recent ancestors of the modern corporate monitor emerged with the implementation of the Racketeer Influenced and Corrupt Organizations Act (RICO), when the DOJ brought at least 20 cases asserting RICO violations. These cases resulted in the appointment of a trustee monitor, or other forms of court-appointed overseer. The appointees had continuing oversight responsibilities for a corporation as a result of a post-judgment action. In contrast, today’s corporate monitor results from a pre-judgment settlement between a business entity and prosecutor as set forth in an NPA or DPA.4 3.  Corporate Compliance Monitors In 1994, the Prudential Securities case saw the first modern appointment of an independent monitor whose responsibility was to monitor compliance of the company pursuant to a DPA. The Prudential monitorship was reached as a result of a series of letters from the company’s counsel to the US Attorney for the Southern District of New York, a response from the DOJ, and a complaint which charged Prudential. Prudential gave reasons why the prosecution of Prudential Securities Incorporated, the subsidiary implicated in the complaint, would be inappropriate. The prosecutors adopted the following reasoning to justify the selection of a deferral of prosecution: 2  V Root, ‘The Monitor-“Client” Relationship’ (2014) Virginia Law Review 523, 529, citing Ruiz v Estelle, 679 F 2d 1115, 1161 (5th Cir 1982), quoting RE Buckholz Jr and others, ‘Special Project, The Remedial Process in Institutional Reform Litigation’ (1978) 78 Columbia Law Review 784, 826. 3  V Khanna and TL Dickinson, ‘The Corporate Monitor: The New Corporate Czar’ (2007) 105 Michigan Law Review 1713, 1716, citing LJ Silberman, ‘Masters and Magistrates Part II: The American Analogue’ (1975) 50 New York University Law Review 1297, 1321–22. 4  ibid 1716–17, citing JB Jacobs and others, ‘The RICO Trusteeships after Twenty Years: A Progress Report’ (2004) 19 Labor Law 419, 452.

22  Bruce Zagaris (1) the misconduct had occurred during the tenure of prior management; (2) the length of time that had passed from the alleged conduct to the prosecution; (3) the expenditure by private-sector involvement (PSI) of over $1 billion to fund and administer claims of investors; (4) the acceptance by PSI of responsibility for all valid investor claims, including $330 million in its settlement with the European Community (EC), $41 million to state and federal regulators, $490 million in settlements with investors and $195 million in expenses and legal fees; and (5) extensive cooperation by PSI with government investigators and the development by PSI of a strengthened compliance program.5 In 1999, Eric Holder, the former US Attorney General and at the time the Deputy Attorney General, issued a memorandum, which became known as the ‘Holder memo’. It provided eight factors for prosecutors to consider in deciding whether a criminal case should be brought for corporate malfeasance and encouraged companies to act to strengthen compliance programs in order to increase their chances for a lesser sanction or to avoid prosecution completely: (1) (2) (3) (4) (5) (6) (7) (8)

the nature and seriousness of the offence; the pervasiveness of the wrongdoing; the prior conduct of the company; whether the company voluntarily disclosed the wrongdoing and its willingness to cooperate in the investigation of its agents; the adequacy of the company’s compliance program; the remedial actions of the target business entity to correct the wrongdoing; the impact of a prosecution on innocent third parties; and the alternative mechanisms available to prosecutors to punish the company.6

The Holder memo gave guidance to prosecutors about when to use a NPA or DPA and when to bring criminal charges against a corporation. In 2003, Larry Thompson, the then Deputy Attorney General, issued a memorandum, the ‘Thompson Memo’, which discussed a ninth factor, the cooperation of the company, as an important element which has resulted in the appointment of a monitor/independent expert.7 This additional factor responds to the goal of obtaining the cooperation of the company both to prevent future wrongdoing by the company and in determining which persons, if any, should be sanctioned. 5  ibid 1717–18, citing Deferred Prosecution Agreement, United States v Prudential Sec, Inc, No. 94-2189 (SDNY 27 October 1994), available at http://www.corporatecrimereporter.com/documents/ prudential.pdf, accessed 27 February 2015; see also SEC v Prudential Sec, Inc, No 93 Civ 2164, 1993 WL 473189, at *2–3 (DDC 21 October 1993). 6  Memorandum for E Holder, Jr, Deputy Attorney General, US Department of Justice, to All Component Heads and US Attorneys (16 June 1999), available at http://www.usdoj.gov/criminal/fraud/ policy/chargingcorps.html, accessed 27 February 2015. 7  Memorandum of L Thompson, Deputy Attorney General, US Department of Justice, to Heads of Components and US Attorneys, regarding Principles of Federal Prosecution of Business Organizations (20 January 2003), available at http://www.americanbar.org/content/dam/aba/migrated/poladv/priorities/privilegewaiver/2003jan20_privwaiv_dojthomp.authcheckdam.pdf, accessed 27 February 2015.

Prosecutors and Judges as Corporate Monitors? The US Experience 23 Shortly after the Thompson Memo, US attorneys and the DOJ in general started appointing monitors in a wide range of cases, including securities fraud, tax fraud and at least six cases involving the Foreign Corrupt Practices Act.8 Today, the use of monitors is not limited to one particular area of regulation. Instead, monitors are used with increasing frequency in a number of areas. The SEC, the DOJ, the IRS and other regulators have all used monitors.9 The World Bank is considering how to impose this feature in its projects and disciplinary actions.10 4. Comparison Between Corporate Monitors and Various Other Compliance Actors This section compares corporate monitors and other types of compliance actors in the US criminal justice system, in order to better highlight the roles of the former. a. Gatekeepers ‘Gatekeepers’ include lawyers, notaries, independent legal professionals and accountants, and trust and company service providers. A corporate compliance monitor is akin to a corporate attorney, compliance personnel or even a financial auditor, since the monitor provides legal, regulatory and business advice. The settlement agreements providing for the appointment of a monitor normally require the selected monitor to have expertise in the relevant legal and regulatory area. The main difference between a corporate monitor and gatekeeper is that a gatekeeper normally has many different roles apart from identifying and reporting wrongdoing, whereas a corporate monitor’s primarily function is to watch for and prevent wrongdoing. Although a corporate monitor is similar to in-house and outside counsel, inhouse counsel can more easily observe the business activities that could result in legal or regulatory violations than outside counsel since they are actively involved in the day-to-day decisions at the corporation. However, in-house counsel are likely to resist in alerting others to wrongdoing because such alerts may have adverse repercussions for their own work environment. Outside counsel have more distance than in-house counsel and can more easily identify and alert wrongdoing to others. Both in-house and outside counsel must carefully balance their obligations to report misconduct with their obligations to their clients. The tension between their obligations to report misconduct and their obligations to their clients may create a situation where private attorneys decide to not report. An auditor-­gatekeeper can both actively observe and report problems without the 8 

Khanna and Dickinson, ‘The Corporate Monitor’ (n 3) 1719–20, especially nn 28 to 30. ibid 1721–33. Department of Institutional Integrity, World Bank, Voluntary Disclosure Program (VDP) Guidelines for Participants 12-13 (2006), available at http://siteresources.worldbank.org/INTVOLDISPRO/Resources/VDPGuidelinesforParticipants.pdf, accessed 27 February 2015. 9 

10  The

24  Bruce Zagaris conflicts that lawyers may experience because auditors are considered to be independent from the corporation. A monitor does not have a gatekeeper’s limitations. Since a corporate compliance monitor is hired because of the occurrence of serious wrongdoing, the goal of the monitor is not finding additional wrongdoing, but providing counsel to the corporation with advice on how to avoid future wrongdoing. As such, a monitor is not concerned about the possibility of being fired as a result of reporting a violation. In addition, the monitorship is arranged so that the monitor has full access to the corporation for the duration of the monitorship term. Hence, a monitor has the benefit of constant interaction with key parts of the corporation. However, a monitor remains subject to some of the limitations associated with auditorgatekeepers since corporate personnel may hesitate to volunteer information to a monitor who does not owe confidentiality obligations to the corporation and does not operate under the attorney-client privilege.11 b.  Internal Investigators An internal investigation is normally organised by a corporation when it learns that wrongdoing may have occurred. A team of in-house and outside counsel usually lead such an investigation. The purpose of the investigation team is to advise the corporation and such advice is subject to the attorney-client privilege. Assuring future compliance with the law is a secondary goal. In contrast, a monitor is obtained after an internal investigation and a settlement between the business entity and prosecution. A monitor does not need to advise concerning the prior violation and how to deal with it. Instead, a monitor advises the corporation on how to ensure that its future business conduct complies with legal and regulatory requirements. In contrast to lawyers conducting an internal investigation, a monitor advises outside of the traditional attorney-client relationship and under the control of a government mandate and control.12 c.  Court-ordered Corporate Probation The US Sentencing Commission’s Organizational Guidelines (Organizational Guidelines) authorise a court to impose probation on a corporation that pleads guilty to legal violations.13 The purpose of such sanctions is to ensure ‘just

11  Root, ‘The Monitor-“Client” Relationship’ (n 2) 534–36, citing SH Kim, ‘Gatekeepers Inside Out’ (2008) 21 Georgetown Journal of Legal Ethics 411, 416; SH Kim, ‘Naked Self-Interest? Why the Legal Professional Resists Gatekeeping?’ (2011) Florida Law Review 129, 132–33. 12 Root (n 2) 537–38, citing BA Green and ES Podgor, ‘Unregulated Internal Investigations: ­Achieving Fairness for Corporate Constituents’ (2013) College Law Review 73, 75–77. 13  US Sentencing Guidelines Manual, (2012), §8D1.1, available at http://www.ussc.gov/guidelinesmanual/2012/2012-ussc-guidelines-manual, accessed 22 February 2016.

Prosecutors and Judges as Corporate Monitors? The US Experience 25 ­ unishment, adequate deterrence, and incentives for organisations to maintain p ­internal mechanisms for preventing, detecting, and reporting criminal conduct’.14 The guidelines explain that probation is appropriate when it is required in order to ensure that another sanction will be fully implemented, or to ensure that steps will occur within the organisation to reduce the likelihood of future conduct.15 Normally, the probation term is typically one to five years and has the condition that the organisation does not commit another crime during the probation term.16 The sanction also includes either restitution or community service and may include other conditions that the court believes ‘are reasonably related to the nature and circumstances of the offence or the history and characteristics of the organisation’.17 While corporate probation and a monitorship are both concerned with ensuring the corporation’s long-term legal and regulatory compliance, the major difference is the court’s involvement. A corporate probation program requires court involvement and functions on behalf of the court. In contrast, the court appoints the monitor.18 A corporate compliance monitor usually has little to no interaction with the court and serves as an agent of the government. In addition, while probation only places the corporation on watch to see if it complies with legal and regulatory requirements, a corporate compliance monitor helps the corporation in these efforts. Part of a monitor’s role is a partner to the corporation in its efforts to ensure long-term compliance.19 The main reason that a corporate monitor is preferred to court-ordered probation is that the corporation avoids the stain of a conviction on its reputation, and it does not have deal with a court. d.  Trustee in Bankruptcy A trustee in bankruptcy is appointed to oversee the bankruptcy process and protect creditors. Unlike a monitor, a court usually appoints a trustee and is highly engaged throughout the court proceedings. A trustee has a duty to the estate and is engaged in a supervisory role until the company is no longer in bankruptcy. However, like a monitor, a trustee has broad powers, essentially operating the company to enable it to survive.20 The duration of the trusteeship is until the entity is no longer in bankruptcy.21

14 

ibid introductory comment. ibid introductory comment. 16  ibid §§8D1.2(a), 8D1.3(a). 17  ibid § 8D13(c). 18  Khanna and Dickinson (n 3) 1726. 19  Root (n 2) 539–40. 20  CE Nelson, ‘Corporate Compliance Monitors Are Not Super Heroes with Unrestrained Power: A Call for Increased Oversight and Ethical Reform’ (2014) 27 Georgetown Journal of Legal Ethics 723, 733; Khanna and Dickinson (n 3) 1726. 21  Khanna and Dickinson (n 3) 1726. 15 

26  Bruce Zagaris e.  Independent Private Sector Inspector General Government agencies have used monitors to undertake many tasks along an ‘intervention continuum’, ranging from passive information receiving, to more active inspecting, through to aggressive implementation of organisational reform. The Independent Private Sector Inspector General (IPSIG) is a proactive organisational change agent as well as a proactive investigator.22 The concept was inspired by the federal Inspector General Act of 1978.23 The law centralised audit and investigative activities in a single ‘independent and objective’ office within each of the major federal departments and agencies. It authorised each Inspector General (IG) to report to the agency head and to Congress on the magnitude of waste, abuse and fraud within its jurisdiction, to propose remedial action and to deter future transgressions. The law required the Inspectors General to promote economy, efficiency and effectiveness of the host department and its programs.24 The IG’s top priority is to discover past and present wrongdoing and prevent future wrongdoing. The agency head may decide to reject the IG’s warning or recommendation, but that does not occur often or lightly, as a result of the career consequences of a corruption scandal and the inevitable questioning by the relevant oversight committee once the IG, as the law requires, notifies Congress of that rejection.25 The New York State Organized Crime Task Force (OCTF) pioneered the initial use of IPSIGs. The OCTF in some cases mandated companies involved in violations to employ an IPSIG as one condition of a cooperation agreement. Under the agreements the IPSIG had to thoroughly review the cooperating firm’s books and records, interview its employees and investigate its operations. The IPSIG worked with the corporation’s officers to design and implement internal controls, compliance procedures and an ethics code. The IPSIG regularly filed reports with the OCTF on the monitored-company’s cooperation and progress. The IPSIG had to report any evidence of company wrongdoing and, if the company’s wrongdoing had caused losses to third parties, the IPSIG had to determine the extent of the loss and ensure appropriate restitution.26 In the early 1990s, the US DOJ embraced the IPSIG concept and issued comprehensive standards covering (1) the contractor’s responsibility for cooperating with an IPSIG and (2) the IPSIG’s role as investigator and implementer of corruption prevention initiatives.27 22  JB Jacobs and R Goldstock, ‘Monitors & IPSIGs: Emergence of a New Criminal Justice Role’ (2007) 43 Criminal Law Bulletin 217, 217. 23  (PL 95-452), codified in 5. United States Code app § 1 et seq. 24  R Goldstock, ‘On the Origins of the Independent Private Sector Inspector General Program’ (2003), available at http://www.iaipsig.org/media/article_11.htm, accessed 27 February 2015. 25  Jacobs and Goldstock, ‘Monitors & IPSIGs’ (n 22) 218. 26  ibid 223, explaining that these cooperation agreements were confidential when signed and mostly remain under seal. 27  ibid 224, citing Department of Justice, ‘Monitoring Agreement’ and City Bar for Continuing Legal Education ‘What Every Criminal and Corporate Lawyer Needs to Know about Monitors’, 6 December 2005, 45–63.

Prosecutors and Judges as Corporate Monitors? The US Experience 27 An IPSIG is an independent, private sector firm with legal, auditing, investigative and loss prevention skills, employed by an organisation (voluntarily or by compulsory process) to ensure compliance with relevant law and regulations and to deter, prevent, uncover and report unethical and illegal conduct by, within and against the organisation.28 To ensure the IPSIG’s integrity and credibility as an independent agent, it must have dual reporting responsibilities—to the highest levels of the host organisation and to an independent body (generally, a government agency)—and be free to report violations of the law as appropriate. In some cases, the DOJ has imposed IPSIGs as part of plea agreements. Plea agreements and IPSIGs help prevent future wrongdoing in and by the corporation by means of a multi-year monitor authorised to conduct investigations and make recommendations for organisational reform. The DOJ retains the right to return to court (ie criminal prosecution, contempt, other remedies) if the IPSIG reports a lack of cooperation or continued violations by the corporation.29 Prosecutors have employed IPSIGs against, for example, airlines in the wake of serious drug trafficking prosecutions involving employees of airlines, an international accounting firm in the wake of marketing abusive and illegal tax shelters, and a non-profit association franchised by New York State to conduct horse racing and pari-mutuel betting at the state’s three major thoroughbred race tracks.30 IPSIGs can be employed to determine the appropriate restitution or forfeiture in cases where guilt or liability has been proven, but the amount of loss by the victim(s) or gain by the perpetrator is not known or is in dispute. In many cases, the government has neither the specific skills nor resources to determine such amounts accurately and objectively, or may be inappropriately partisan.31 IPSIGs can be useful in the international arena. IPSIGs not only protect the host organisation from illegalities by their employees or other corporations, and from extortive demands by corrupt public officials, but also reassure the government of the country in which they operate that the organisation is real, that it is free from organised crime ownership and influence, and that it has proper safeguards to ensure that its operation will be in conformity with local laws and regulations.32 Normally, an IPSIG is appointed by the corporation or organisation during pre-judgment and sometimes before criminal charges are even brought. The IPSIG is responsible to the corporation and its mission may last until the sentence is passed or until the internal controls and compliance regime have been properly reformed. 28  LA Skillen, R Goldstock, B DeFoe and W Hess, The Independent Private Sector Inspector General, Report of the New York State Bar Association Commercial and Federal Litigation Section (1994), available at http://getnicklaw.com/1994/12/report-of-the-civil-prosecution-committee-of-the-new-york-statebar-association-commercial-and-federal-litigation-section-1994/, accessed 27 February 2015. 29  Jacobs and Goldstock (n 22) 230–31. 30  ibid 231–35. 31  Skillen, Goldstock, DeFoe and Hess, The Independent Private Sector (n 28). 32 ibid.

28  Bruce Zagaris B. The Morford Memorandum of 8 March 2008 on the Selection and Use of Monitors On 10 March 2008, the DOJ, in response to substantial criticism over alleged cronyism and excessive compensation about how monitors were selected and compensated, and on the eve of the congressional hearing at which former Attorney General John Ashcroft was scheduled to testify regarding his own appointment as a monitor (discussed below),33 released new internal guidelines governing the selection and use of monitors in DPAs and NPAs with corporations. It explains that: A monitor’s primary responsibility is to assess and monitor a corporation’s compliance with the terms of the agreement specifically designed to address and reduce the risk of recurrence of the corporation’s misconduct, and not to further punitive goals. A monitor should only be used where appropriate given the facts and circumstances of a particular matter. For example, it may be appropriate to use a monitor where a company does not have an effective internal compliance program, or where it needs to establish necessary internal controls.34

The Morford memorandum sets forth nine principles in selecting a monitor: (1) Before starting the process of selecting a monitor in connection with DPAs and NPAs, the corporation and the government should discuss the necessary qualifications for a monitor, based on the facts and circumstances of the case. The selection of the monitor must be based on the merits. The selection process must at least be designed to: (a) select a highly qualified and respected person or entity based on suitability for the assignment and all of the circumstances; (b) avoid potential and actual conflicts of interest; and (c) instil public confidence by implementing the steps set forth in the principle, including creating a standing or ad hoc committee in the DOJ component or office where the case originated to consider monitor candidates. The government must obtain a commitment from the corporation that it will not employ or be affiliated with the monitor for a period of not less than one year from the date the monitorship is ended. (2) A monitor is an independent third party, not an employee or agent of the corporation or of the government. While a monitor is independent both 33 Washington Legal Foundation, ‘Deferred Prosecution and Non-Prosecution Agreements’, 17 March 2007, 6–8, available at http://www.wlf.org/upload/chapter6DPAs.pdf, accessed 17 February 2015; see P Shenon, ‘Ashcroft Deal Brings Scrutiny in Justice Department’, New York Times (New York, 10 January 2008) A1; C Johnson, ‘Ex-Officials Benefit From Corporate Cleanup’, Washington Post (Washington, 15 January 2008) A1; Editor, ‘Mukasey Says He Has No Timetable for Federal Monitor Review’, PolitckerNY.com, 8 February 2008, available at http://politickernj.com/mukasey-says-he-hasno-timetable-federal-monitor-review-16285, accessed 27 February 2015. 34  Memorandum from CS Morford, Acting Deputy Attorney General, for Heads of Department Components and United States Attorneys on the Selection and Use for Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations (7 March 2008), Criminal Resource Manual (2010) 163.

Prosecutors and Judges as Corporate Monitors? The US Experience 29

(3)

(4)

(5)

(6)

(7)

(8)

(9)

from the corporation and the government, an open dialogue should take place between the corporation, the government and the monitor throughout the duration of the agreement. A monitor’s primary responsibility should be to assess and monitor a corporation’s compliance with those terms of the agreement that are specifically designed to address and reduce the risk of recurrence of the corporation’s wrongdoing, including, in most cases, evaluating (and where appropriate proposing) internal controls and corporate ethics and compliance programs. In executing their duties, monitors will often need to understand the full scope of the corporation’s misconduct covered by the agreement, but the monitor’s responsibilities should be no broader than necessary to address and reduce the risks of recurrence of the corporation’s wrongdoing. Communication among the government, the corporation and the monitor is in the interest of all the parties. Depending on the facts and circumstances, it may be appropriate for the monitor to make periodic written reports to both the government and the corporation. The reports may concern, inter alia: (a) the monitor’s activities; (b) whether the corporation is complying with the terms of the agreement; and (c) any changes required to facilitate the corporation’s compliance with the terms of the agreement. If the corporation chooses not to adopt recommendations of the monitor within a reasonable time, either the monitor or the corporation, or both, should report that fact to the government, along with the corporation’s reasons. The government may consider this conduct when evaluating whether the corporation has fulfilled its obligations under the agreement. The agreement should clearly identify any types of previously undisclosed or new wrongdoing that the monitor will be required to report directly to the government. The agreement should also provide that, if there is evidence of other such misconduct, the monitor will have the discretion to report this misconduct to the government, or the corporation, or both. The duration of the agreement should be tailored to the problems that have been found to exist and the types of remedial measures required for the monitor to satisfy the mandate. The following criteria should be considered when negotiating the duration of the agreement: (a) the nature and seriousness of the underlying misconduct; (b) the pervasiveness and duration of wrongdoing within the corporation, including the complicity or involvement of senior management; (c) the corporation’s history of similar wrongdoing; (d) the nature of the corporate culture; (e) the scale and complexity of any remedial measures contemplated by the agreement, including the size of the entity or business unit at issue; and (f) the stage of design and implementation of remedial measures when the monitorship starts. In most cases, an agreement should provide for an extension of the monitor provision(s) at the discretion of the government, in the event that the corporation has not successfully satisfied its obligations under the agreement. Conversely, in most cases, an agreement should provide for early t­ ermination

30  Bruce Zagaris if the corporation can show to the government that there exists a change in circumstances sufficient to eliminate the need for a monitor. In sum, as the above overview shows, the Morford memorandum helped develop guidelines on the section and use of monitors.

C. Additional Guidance on the Use of Monitors: Role of the DOJ in Resolving Disputes In November 2009, a Government Accountability Office report noted that a few companies that previously had engaged a monitor would have liked additional information regarding the role the DOJ could play in addressing questions regarding a monitor’s cost and the scope and amount of work the monitor should perform. For that reason, the Government Accountability Office recommended that the DOJ explain what role it could play in resolving such disputes. On 25 May 2010, in response to a report by the US Government Accountability Office criticising the DOJ’s inadequate communication about its role in resolving conflicts between monitors and corporations,35 Acting Deputy Attorney General Gary G Grindler issued a memorandum to provide additional guidance to prosecutors regarding the use of corporate monitors in any deferred or non-prosecution agreement. The Grindler memorandum adds a tenth basic principle: namely, that a DPA or NPA which involves the use of a corporate monitor ‘should explain what role the Department could play in resolving any disputes between the monitor and the corporation, given the facts and circumstances of the case’. The DOJ concurred in the recommendation and the Grinder memorandum focuses on this issue. In particular, the new guidance recommends that the Department and company representatives meet at least annually to discuss the monitorship and issues relating to the scope and cost of the monitorship, if necessary. The memorandum explains: Clearly communicating to companies the role of the Department in addressing companies’ disputes with monitors should better position the Department to be notified of potential issues relating to monitorships and monitor performance. Moreover, providing clarity as to the Department’s role should help to instill public confidence in the Department’s use of monitors, including the Department’s mindfulness of the costs of a monitor and their impact on a corporation’s operations, as well as the accountability of monitors in performing their duties.36 35  US Government Accountability Office, Testimony of ER Larence, Director of Homeland Security and Justice, ‘Prosecutors Adhered to Guidance in Selecting Monitors for Deferred Prosecution and Non-Prosecution Agreements, but DOJ Could Better Communicate Its Role in Resolving Conflicts’, GAO-10-260T, Testimony Before the Subcommittee on Commercial and Administrative Law, Committee on the Judiciary, House of Representatives, 19 November 2009. 36  Memorandum from GG Grindler, Acting Deputy Attorney General for Heads of Department Components and United States Attorneys on the Use for Corporate Monitors in Deferred or NonProsecution Agreements (1 June 2010).

Prosecutors and Judges as Corporate Monitors? The US Experience 31 D.  Trustees and Monitors in Forfeiture Cases In May 2010, the DOJ issued a memo on trustees and monitors in forfeiture cases. The purpose of the trustee and monitor policy is to provide guidance for the appointment of trustees and monitors in DOJ federal forfeiture cases involving complex assets or business enterprises. The key distinction between a monitor and a trustee is that only a trustee has the authority to manage an enterprise. A monitor observes and reports. A receiver is a fiduciary who is responsible only to the court, and a custodian takes actual custody of the assets and may be recommended where a number of assets are located in a foreign country. A trustee or monitor should be appointed only when it is absolutely necessary, all other alternatives have been considered and rejected, and there is clearly sufficient net equity in the asset to cover the total estimated cost of the trustee or monitor and necessary staff. The government generally should not seize or forfeit businesses which require such aggressive action, additional capital investment to remain competitive or the assumption of considerable risk. In some cases, compelling law enforcement or policy considerations may warrant appointing a trustee or monitor even though there is insufficient equity in the enterprise to cover the cost. The US Attorney’s Office (USAO) must consult with the DOJ’s Asset Forfeiture and Money Laundering Section before seeking the appointment of a trustee or monitor. The United States Marshals Service (USMS) field office must notify the USMS headquarters when it becomes aware that a trustee or monitor may be appointed. The USAO or the USMS must notify the Section when it learns that a business is losing money, has insufficient equity or will be sold at a loss.37 The selection and appointment of a trustee or monitor is a joint decision of the USAO and USMS, regardless of the stage of the case. Before entry of the final order of forfeiture, the USMS has final decision-making authority on these matters. Before the entry of a final order of forfeiture, the DOJ Assets Forfeiture Fund (AFF) is authorised under certain circumstances to pay trustee and monitor fees in cases where the DOJ agency is the lead law enforcement agency.38 After entry of an order of forfeiture, fees charged by a trustee or monitor ordinarily will be paid from the proceeds of the business unless compelling law enforcement or policy considerations warrant payment from the AFF. Charges to the AFF for trustees and monitors must be recovered, as a cost, from the proceeds of sale before payment of restitution and equitable sharing.

37  US Attorneys Manual 9-111.125 Trustees and Monitors in Forfeiture Cases. For additional information on this topic, see Chapter 11 of the Asset Forfeiture Policy Manual (‘Appointment of Trustees and Monitors’). 38  See 28 U.S.C. § 524(c).

32  Bruce Zagaris III.  POLICY GOALS AND FACTORS INFLUENCING THE GOVERNMENT’S DECISION TO REQUIRE A MONITOR

According to DOJ policy, as set forth in the Morford memo, a monitor should only be used when warranted by the facts and circumstances. In particular, a monitor may be appropriate where a company does not have an effective internal compliance program, or where it needs to establish necessary internal controls. If a company has ceased operating in the area where the criminal misconduct occurred (eg, a casino, offshore gambling or loan sharking), then a monitor may not be necessary. Similarly, if, in anticipation of a sentence, an entity has made substantial reforms to its internal controls and compliance programs due to an IPSIG’s recommendations, the prosecutor may determine that the entity needs a much more modest monitorship or possibly none at all. Since the collapse of Arthur Andersen in 2002 and after its indictment, DPAs generally include undertakings to make significant structural and procedural reforms. The common ones are changes to the composition of the board of directors; terminating specific officers and employees; improving compliance and ethics procedures; exiting specific lines of business; and establishing business oversight and review committees.39 To the extent that a corporate defendant has identified and already started making the reforms prior to the settlement agreement, prosecutors may believe that a monitorship is not required. Alternatively, they may consider that the duration and/or scope need not be so comprehensive. In some cases, the goals of a monitorship may include changing the corporate defendant’s cultural environment and reducing waste, abuse and fraud, as well as increasing the corporate defendant’s economy, efficiency and effectiveness.40 A study of appointments of monitors in Foreign Corrupt Practices Act (FCPA) cases indicates that two factors are most important in whether the settlement will include a monitorship: (1) the extent of pervasive corruption at the corporation; and (2) the existence of an effective corporate compliance program prior to the offence.41 These two factors are consistent with the Morford memo. An example of pervasive or ingrained corrupt activity within a corporation is the Siemens prosecution.42 ‘At least 4,283 of those payments, totaling approximately $ 1.4 billion, were used to bribe government officials in return for business to Siemens around the world.’43 Even though investigations in various countries had alerted Siemens’ top management well in advance to corruption 39  CE Golumbic and AD Lichy, ‘The “Too Big to Jail” Effect and the Impact on the Justice ­Department’s Corporate Charging Policy’ (2014) 65 Hastings Law Journal 1293, 1311–12. 40  American Bar Association, Criminal Justice Section, Monitor Standards, (April 2015), Introduction. These standards are available at http://www.americanbar.org/groups/criminal_justice/standards/ MonitorsStandards.html, accessed 22 February 2016. 41  FJ Warin, MS Diamont and VS Root, ‘Somebody’s Watching Me: FCPA Monitorships and How They Can Work Better’ (2011) 13 University of Pennsylvania Journal of Business Law 321, 337. 42  ibid 328. 43  SEC v Siemens Aktiegngessellschaft, (DDC Sec 12, 2008) (No 1:08-cv-02167), available at http:// www.siemens. com/press/pool/de/events/2008-12-PK/SEC.pdf, at 2, accessed 27 February 2015.

Prosecutors and Judges as Corporate Monitors? The US Experience 33 charges, ­prosecutors allege nothing was done to strengthen the company’s internal ­compliance program.44 The existence of a compliance program is not by itself sufficient to prevent the imposition of a monitor. The United States Sentencing Guidelines enumerate the requirements of an effective compliance and ethics program. Organisations must: (1) establish standards and procedures to prevent and detect criminal conduct; (2) make the content and operation of the program known to the governing authority and exercise reasonable oversight with respect to the implementation and effectiveness of the program; (3) act reasonably to exclude from supervising the compliance program any individual whom the organisation knew or should have known through the exercise of due diligence to have engaged in illegal activities or improper conduct; (4) conduct effective training programs and disseminate information appropriate to such individuals’ respective roles and responsibilities; (5) monitor and audit the compliance and ethics program and periodically evaluate its effectiveness; (6) promote and enforce the program consistently throughout the organisations through appropriate incentives and disciplinary measures; and (7) after criminal conduct is detected, take reasonable steps to respond appropriately to the criminal conduct and prevent further similar criminal conduct, including making any necessary modifications to the organisation’s compliance and ethics program.45 Prosecutors will normally look under the hood and request training records, scrutinising who was trained, how often they were trained, whether the training materials were effective and whether there was monitoring and auditing of the training. The Sentencing Guidelines say that the formality and scope of the actions that an organisation should take to meet the requirements of the guideline depend on the size of the organisation.46 One study of FCPA monitorships looked at the nature of the underlying improper payments, whether the company voluntarily discloses the FCPA violations, the amount of bribes paid and the amount of business gained by the bribes and found that none of these seem to have much predictable effect on whether a company must hire a monitor.47 Additionally, a company’s willingness to report its misconduct voluntarily or to cooperate with prosecutors does not seem to affect whether the government requires the appointment of a monitor.48 44 ibid.

45  See generally US Sentencing Guidelines Manual, (2013), § 8B2.1(b), available at http://www.ussc. gov/sites/default/files/pdf/guidelines-manual/2013/manual-pdf/Chapter_8.pdf, accessed 27 February 2015. 46  ibid Commentary (2). 47  Warin, Diamont and Root, ‘Somebody’s Watching Me’ (n 41) 343–44. 48  ibid 345.

34  Bruce Zagaris An example of when a corporation does not need a monitor is when the corporation disposes of the division responsible for the wrongdoing. The disposition of the division responsible for the wrongdoing may be a reason not to appoint a monitor if there exists some evidence that the wrongdoing was in fact isolated to that division.49 Insofar as US criminal justice participants decide to have corporate monitors, they do not clearly enunciate whether the purpose is to punish or prevent wrongful conduct. The monitor’s functions most clearly seek to prevent future wrongdoing.

IV.  THE OPERATION OF MONITORSHIPS

This section will give an overview of how corporate monitorships operate, including the duration of monitorships, the authority of a monitor, the requirement for a monitor to disclose evidence of significant misconduct to the government, the need to avoid conflicts of interest, the monitor’s need to submit reports and disputes between monitors and the defendant corporations. This overview will include examples of monitorships imposed in the context of NPAs and DPAs, as well as part of plea agreements.

A.  Duration of Monitorship The duration of a corporate monitorship is 12 to 36 months as the norm, with 60 months as the upper end.50 Since 2000, the average term has been approximately 29 months.51 Some NPAs and DPAs have a clause permitting the length of the monitorship to be decreased or increased depending on the results of periodic reports to the government. For instance, the Siemens plea agreement contained language permitting the monitorship’s timeframe to be decreased or increased if needed. This flexibility gives the company the opportunity to correct its problems and exit the monitorship as soon as possible. Decreasing the duration of the monitorship allows the company to realise large cost savings. However, if the government determines that the monitor has not yet fulfilled its obligations sufficiently, the government can extend the monitorship to the disadvantage of the corporation in terms of the costs and burdens of dealing with the monitor.52 Some of the new monitorships, in contrast to the ones that have existed since 2000, require hybrid monitorships, in which the agreement provides for an independent monitor to serve for the first half of the agreement (18 months in 49 

Memorandum from CS Morford (n 34). Khanna and Dickinson (n 3), 1723; V Khanna, ‘Reforming the Corporate Monitor’, in AS Barkow and E Barkow (eds), Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct (NYU Press, 2011) 229. 51  Warin, ‘2014 Mid-Year Update’ (n 1). 52  Warin, Diamont and Root (n 41) 347–48. 50 

Prosecutors and Judges as Corporate Monitors? The US Experience 35 a three-year deferral period, for instance) and the possibility of the corporation self-reporting on its compliance program for the remainder of the agreement’s term. The hybrid monitorship agreement is starting to become more in vogue.53

B.  Choosing a Monitor As mentioned above, the Morford memorandum states that the selection of a monitor requires cooperation between the government and the company. Between 2004 and 2010, only four FCPA settlement agreements detailed who the monitor would be. If the agreement does not provide the identity of the monitor, it will require the company to obtain government approval of the company’s chosen candidates, usually within 60 days of the completion of the agreement.54 The appointment of the monitor has varied significantly. Sometimes the corporation has suggested names from which the DOJ selected, or vice versa.55 The preparation of lists was not formalised, although the government seemed to determine ultimately whom the monitor would be.56 Notwithstanding the flexibility in appointing a monitor, their backgrounds were quite uniform, often being former government enforcement officials or former judges.57 Once the monitor was selected, the process was as follows. Compensation was determined on an ad hoc basis by individual negotiation between the monitor and the firm with some government oversight.58 The monitor has strong leverage in negotiating his or her fees. In March 2010, US District Court Judge Ellen Segal Huvelle criticised the practice of allowing the selection of the monitor to be determined by the corporation and government, and the failure to specify the monitor in the agreement. While the judge ultimately accepted the plea, she informed the government that she insisted on reviewing the person selected as a monitor, as well as the monitor’s work plan.59 On 20 December 2012, eight days after the DPA was filed in the HSBC case,60 US District Judge John Gleeson, in approving61 the HSBC DPA, called a status ­conference about his authority to approve or disapprove the DPA, constituting the 53  It appeared in 2004 and then 2008. It has been required in 41 of 166 DOJ agreements concluded since 2009. See Warin, ‘2014 Mid-Year Update’ (n 1). 54  Warin, Diamont and Root (n 41) 348–49. 55  Khanna and Dickinson (n 3) 1722–23; Khanna, ‘Reforming the Corporate Monitor’ (n 50) 229. 56  Khanna and Dickinson (n 3) 1722–23; Khanna (n 50) 229. 57  Id. (Khanna, at 229). Khanna (n 50) 58  Khanna (n 50) 229. 59  Khanna (n 50) 229; CM Matthews, ‘Judge Blasts Compliance Monitors at Innospec Plea Hearing’ (18 March 2010), available at http://globalinvestigationsreview.com/article/1019218/judge-blastscompliance-monitors-innospec-plea-hearing, accessed 27 February 2015. 60  US Department of Justice, ‘HSBC Holdings Plc and HSBC Bank USA NA Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement’ (11 December 2012), available at https://www.justice.gov/opa/pr/hsbc-holdings-plc-and-hsbc-bankusa-na-admit-anti-money-laundering-and-sanctions-violations, accessed 27 February 2015. 61  For some further reflections on the issue of judicial oversight, see section VI.E.

36  Bruce Zagaris first time a judge decided to review the terms of a DPA. On 1 July 2013, almost seven months later, Judge Gleeson approved the HSBC DPA. Gleeson explained that the federal court had supervisory power, which ‘permits federal courts to supervise the administration of criminal justice among the parties before the bar’62 and ‘protect[s] the integrity of judicial proceedings’.63 Judge Gleeson reasoned that the parties had chosen to implicate the court by agreeing on a DPA.64 Judge Gleeson examined the DPA provision-by-provision, explaining the extent to which it required HSBC to implement remedial measures that addressed its systemic compliance failures.65 The fact that Judge Gleeson waited six months before approving the DPA, did not rubber-stamp the DOJ’s decision to defer prosecution, and introduced a new standard for district courts to apply in their review of a DPA’s content, also opens the door in the future to review of the terms of the monitorship by district courts.66 Typically, the government has permitted companies to identify and propose monitorship candidates. Some agreements require the company to submit a pool of acceptable candidates, thereafter allowing the government to select the monitor from that pool or request additional candidates.67 A complication has been monitorships of non-US offenders. These monitorships have raised various conflict of laws and international law issues. For instance, some of the cases provide for foreign monitors,68 whereas in other cases, US-based monitors have been appointed.69 Because the government has enormous bargaining power due to the threat of potential criminal penalties and imprisonment for the executives, the government, in effect, chooses the monitor even though it is the corporation that pays for the services of the monitor.70

C.  The Authority of a Monitor Settlement agreement provisions describing the role of the monitor have evolved from simple, short descriptions setting forth unspecified powers to detailed, lengthy descriptions, giving broad powers but limiting the tools and means 62  HSBC Bank USA, NA, 2013 WL 3306161, at *4, citing United States v Payner, 447 US 727, 735 n 7 (1980). 63  HSBC Bank USA, NA (n 62) at *4, citing United States v Payner, 447 US 727, 735 n 7 (1980). See also HJ Gleeson, ‘Supervising Criminal Investigations: The Proper Scope of the Supervisory Power of Federal Judges’ (1997) 5 Journal of Law and Policy 423. 64  HSBC Bank USA, NA (n 62) at *3, citing United States v Payner, 447 US 727, 735 n 7 (1980). 65  HSBC Bank USA, NA (n 62), at *10, citing United States v Payner, 447 US 727, 735 n 7 (1980). 66  Golumbic and Lichy, ‘The “Too Big to Jail” Effect’ (n 39) 1330–31. 67  Warin, Diamont and Root (n 41) 350, citing the Plea Agreement, United States v Kellogg Brown & Root, LLC, No H-09-071, (SD Tex 11 February 2009), available at https://www.justice.gov/sites/default/ files/criminal-fraud/legacy/2011/02/16/02-11-09kbr-plea-agree.pdf. 68  ibid 351–52, citing the Alcatel-Lucent, Technip and Siemens cases. 69  ibid, citing the Daimler and Statoil ASA cases. 70  Khanna and Dickinson (n 3) 1723.

Prosecutors and Judges as Corporate Monitors? The US Experience 37 by which the monitor can exercise those powers. The more recent settlement ­agreements emphasise cooperation while incorporating the attorney-client privilege waiver and detailed work plan language from earlier settlement agreements.71 If the alleged misconduct was limited in scope, the corporation may be able to negotiate an agreement where the monitor only oversees the rogue business unit(s), or at the very least, for the monitor to concentrate primarily on the main area or areas that caused the underlying violations.72 The monitor’s authorities vary considerably, from being limited to a compliance adviser to having a large right to participate in the day-to-day operations of the firm across multiple divisions. In some cases, the authority is spelled out in the agreement, while in others it is determined by negotiation. The monitor often determines the more day-to-day operational matters after the start of the monitoring process.73

D. Monitors Must Disclose Evidence of Credible and Significant Misconduct and Waive Attorney-Client Privilege In the mid-2000s, settlement agreements anticipated a privileged attorney-client relationship between the monitor and the corporation. As a result, the agreements required the corporation to waive the privilege.74 The waiver permitted communications to be shared with the government but did not apply to third parties wanting to access the communications and corporate documents.75 The vast majority of monitor agreements state that there is no attorney-client privilege between the monitor and corporation.76 The express language may prevent companies from asserting the attorney-client privilege if an outside party tries to obtain information communication by the company to the monitor. The potential that a third party, especially one that may be adverse to the corporation or may want to uncover and publicise developments harmful to the corporation may make the corporation reluctant to engage with the monitor freely as it would if the information is protected by the attorney-client privilege. Since the monitor is independent, actively reviews the company’s practices, and reports to the government, the monitor might discover and reveal previously 71 

Nelson, ‘Corporate Compliance Monitors Are Not Super Heroes’ (n 20) 734–35. Warin, Diamont and Root (n 41) 368. 73  Khanna (n 50) 229. 74  Nelson (n 20) 733, citing Deferred Prosecution Agreement at 8, United States v Statoil, ASA, No 06-CR-960 (SDN 11October 2006), available at https://www.justice.gov/sites/default/files/criminalfraud/legacy/2011/02/16/10-09-06statoil-agree.pdf, accessed 27 February 2015. 75  Nelson (n 20) 733. 76  Warin, Diamont and Root (n 41) 353, citing Kellogg Brown & Root, LLC Plea Agreement No H-09-071 (SD Tex 11 February 2009), available at https://www.justice.gov/sites/default/files/criminalfraud/legacy/2011/02/16/02-11-09kbr-plea-agree.pdf accessed 27 February 2015. Plea Agreement, United States v Control Components, Inc, SA, CR No 09-162 (CD Cal 24 July 2009), available at http:// www.justice.gov/criminal/fraud/fcpa/cases/control-components.html, accessed 27 February 2015. 72 

38  Bruce Zagaris undisclosed wrongdoing. Such reports may lead to additional scrutiny by the government and additional penalties.77

E.  Conflict of Interest A fundamental principle in the appointment and work of a monitor is that it ‘is an independent third-party, not an employee or agent of the corporation or of the Government’. As a result, the corporation may not seek to obtain legal advice from the monitor.78 Hence, the Morford memo states that the government should decline to accept a monitor if the monitor has an interest in, or relationship with, the corporation or its employees, officers or directors that would cause a reasonable person to question the monitor’s impartiality. Furthermore, the Morford memorandum instructs that the government should obtain a commitment from the corporation that it will not employ or be affiliated with the monitor for a period of not less than one year from the date the monitorship is ended. Notwithstanding its independence, a monitor is influenced by the court, which has the power to approve a settlement and can involve itself in disputes between the monitors and the corporation.

F.  Submission of Reports Most settlement agreements require the monitor to provide to the government an initial report during the first year of the monitorship and annual follow-up reports. Indeed, the fifth principle of the Morford memorandum requires communication between the government, the corporation and the monitor. It states that depending on the facts and circumstances, it may be appropriate for the monitor to make periodic written reports to both the government and the corporation.79 Some settlement agreements have required biannual reports to the government. In many cases the number of reports will be linked to the length of the monitorship.80

G.  Disputes Between Monitors and Corporations On 19 November 2009, Eileen R Larence, Director, Homeland Security and Justice, US Government Accountability Office (GAO), testified before the US Subcommittee on Commerce and Administrative Law, Committee on the Judiciary, House of Representatives. She testified that representatives for more than half of the 77 

ibid 354, citing the Willbros Group, Inc FCPA settlement agreements with the DOJ and SEC. Memorandum from CS Morford (n 34). 79 ibid. 80  Warin, Diamont and Root (n 41) 348. 78 

Prosecutors and Judges as Corporate Monitors? The US Experience 39 13 companies with which GAO spoke raised concerns about the monitor’s cost, scope and amount of work completed, including the completion of compliance reports required in the DPA or NPA, and that they were not clear as to the extent the DOJ could be involved in resolving such disputes. The DOJ has not clearly communicated to companies its role in resolving such concerns. According to the testimony, companies and the DOJ have different perceptions about the extent to which the DOJ can help to resolve monitor disputes. Some company officials were not aware that they could raise monitor concerns to the DOJ or were reluctant to do so. Internal control standards state that agency management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. GAO recommends that the DOJ clearly communicate its role in resolving conflicts between companies and monitors.81

V.  EVALUATING THE EFFICACY OF MONITORSHIPS

A.  Settlement Agreements Settlement agreements, whether NPAs, DPAs or guilty pleas, require monitors to develop a work plan and then issue recommendations to the corporation through the course of executing the plan. The provisions of the agreement vary only slightly from agreement to agreement. The agreements may require that the monitor act in a way that is ‘reasonably designed’ to achieve compliance goals. Other agreements state the monitor will ‘ensure’ that activities meet the purposes, whereas others require the monitor to act in a way which is ‘necessary and appropriate’ to achieve compliance goals. Other agreements require the monitor to act as ‘appropriately designed and implemented to ensure’ compliance goals. In other agreements, the monitor must act as ‘appropriately designed to accomplish compliance’.82

B.  Evaluating the Use of a Corporate Monitor as a Sanction The use of a monitor as a sanction may be useful when the deterrent effects of monetary fines are no longer sufficient and law enforcement requires more deterrence. When the defendant organisation has no further assets to pay or when the size or effect of the proposed monetary penalty has become so large that it is not politically or socially acceptable, the monitor sanction may be useful, especially 81  Statement of ER Larence, Director of Homeland Security and Justice, US Government Accountability Office, Testimony Before the Subcommittee on Commercial and Administrative Law, Committee on the Judiciary, House of Representatives, GAO-10-260T, 19 November 2009. 82  Warin, Diamont and Root (n 41) 355.

40  Bruce Zagaris if the incremental gain in deterrence is greater than the incremental costs of appointing a monitor.83 The incremental gain in deterrence may exceed the incremental costs of appointing a monitor when, as the amount of harm caused by the wrongdoing increases, it becomes more likely that the total monetary penalty required to deter the conduct will surpass the assets of the wrongdoer or pass the unacceptable threshold due to the impact on shareholders or collateral consequences (eg potential bankruptcy and death of a corporation, such as Arthur Andersen, and the impact on the economic sector). In addition, sometimes repeat offender organisations might merit the imposition of a monitor to improve its internal controls and compliance program.84 Another reason to impose a monitor is to save prosecutorial and law enforcement resources which would be required in the absence of a settlement and the use of a monitor.85 The imposition of monitors also helps to ensure the organisation from its repeat misconduct.86

C.  Monitor’s Knowledge of the Business For a monitor to succeed, he or she must have good knowledge of the business. Such knowledge is important if the monitor is going to develop an initial risk profile for the company. The monitor’s work should take into account the risks that are part of the business. Without understanding the business, developing the focus is not possible. The monitor needs to know the business in order to effectively evaluate the corporation’s internal controls and in order to develop workable recommendations for the corporation.87 At times, when the monitor works with a business with which the monitor does not have much knowledge or experience, the monitor may hire someone outside his or her firm who is experienced with respect to the business.

D.  The Importance of Detailed Work Plans An early task for a monitor is to develop a work plan. A detailed work plan enables the company to know what to expect and simultaneously provides US regulators with a road map of what the monitor will do. The work plan will discuss the core activities that the monitor anticipates in that year. It will typically discuss the following: an overview of the monitor’s role and goals, as contained in the provisions of the settlement agreements, to ensure that all parties understand how the monitor will carry out his or her mandate; a proposed timeline for the monitorship based on the settlement agreement, including the date on which the monitor will submit 83 

Khanna (n 50) 231. ibid 231. 85  ibid 231–32. 86  ibid 231–32. 87  ibid 361–62. 84 

Prosecutors and Judges as Corporate Monitors? The US Experience 41 a final report to the government and company; a description of relevant compliance policies and procedures to evaluate; a list of relevant documents to review; a list of persons the monitor proposes to interview; a list of proposed site visits with proposed dates, if possible; and a list of tests, studies and analyses to conduct and how they will be conducted, including whether external or internal audit resources will be used. The work plan will also discuss the proposed dates for completion of fieldwork and submission of reports to the corporation and the government. The corporation and regulators may then react to the work plan.88

E.  The Monitor’s Initial Report The initial written report should discuss the scope of the review, provide an assessment of the corporation’s compliance program, and any recommendations for improving the compliance program. If the monitor believes that an external auditor or other team of professionals who may have more expertise in a particular area of the corporation should be engaged, then the initial report may want to recommend retaining an outside expert and give the rationale for such retention. The initial report should also document its activities until the time of the report. In this regard, it will provide the number of corporate records it has reviewed, the number of interviewees, the site visits, a list of tests it has undertaken, and so forth. The more detailed the work, the easier the process will be for the corporation, and the more useful it will be for the monitor. The initial report may want to set forth the proposed dates for completion of fieldwork and submission of reports to the corporation and the US government.89

F.  The Importance of Cooperation To succeed in enabling a corporation to improve its compliance, the monitor must have a cooperative relationship with the company. In this regard, the monitor must ensure that the company, including the board of directors and management, supports the work of the monitor. The monitor should try to identify an individual or committee with intimate knowledge of the corporation’s compliance policies and procedures to serve as the monitor’s primary point of contact and help with each review. Hopefully, if communication is good, no surprises will occur for the monitor or the corporation.90 However, in a number of cases corporations have loathed the tactics and fees of monitors.91 88 

ibid 363. ibid 362–63. 90  ibid 364. 91  James W Markham, A Financial History of the United States: From Enron-Era Scandals to the Great Recession (2006–2009) (2015) 333 (the appointment of James Cole as the AIG monitor when it went into the subprime business allegedly destroyed the company). 89 

42  Bruce Zagaris G.  The Problem of Monitor Becoming too Close to the Corporation The problem of the independent monitor becoming too close to the corporation is illustrated by a recent case involving the New York State Department of Financial Services (NYDFS) and PricewaterhouseCoopers (PwC). On 19 August 2014, Benjamin M Lawsky, Superintendent, announced that PwC Regulatory Advisory Services would be suspended for 24 months from accepting consulting engagements at financial institutions regulated by the NYDFS; that it must make a $25 million payment to the State of New York; and that it must implement a series of reforms after improperly changing a report submitted to regulators regarding sanctions and anti-money laundering compliance at the Bank of Tokyo Mitsubishi (BTMU). PwC removed a warning in an ostensibly ‘objective’ report to regulators surrounding the Bank’s scheme to falsify wire transfer information for Iran, Sudan and other sanctioned entities.92 A lengthy Department of Financial Services investigation found that PwC, after pressure from BTMU executives, improperly revised an ‘historical transaction review’ (HTR) report submitted to regulators on wire transfers that the Bank performed on behalf of sanctioned countries and entities. During the 11th month (May 2008) of a 12-month engagement (June 2007 to June 2008), PwC found that BTMU had issued special instructions to Bank employees to strip wire messages of information that would have triggered sanctions compliance alerts. Only weeks before, in a meeting with regulators, BTMU denied having such a policy. PwC understood that this improper data manipulation could significantly compromise the HTR’s integrity. PwC inserted into an earlier draft of the report an express acknowledgment informing regulators that ‘had PwC know[n] about these special instructions at the initial Phase of the HTR then we would have used a different approach in completing this project. In particular, PwC would have done a more in-depth, forensic investigation into BTMU’s scheme instead of a more rote, mechanical review of the transactions provided to it by BTMU’. In other words, the discovery of BTMU’s scheme to falsify wire transfer information, among other issues, cast doubts on whether PwC had a complete set of data to review.93 At BTMU’s request, PwC removed the original warning language from the final HTR Report the Bank delivered to regulators. In fact, it inserted a passage stating the opposite conclusion: ‘[W]e have concluded that the written instructions would not have impacted the completeness of the data available for the HTR and our methodology to process and search the HTR data was appropriate.’ Additionally, at BTMU’s request, PwC removed other critical information from drafts of the HTR Report, such as deleting the English translation of BTMU’s w ­ ire-­stripping 92  New York Department of Financial Services, ‘NYDFS Announces PriceWaterhouseCoopers Regulatory Advisory Services Will Face 24-Month Consulting Suspension; Pay $25 Million; Implement Reforms After Misconduct During Work at Bank of Tokyo Mitsubishi’, 19 August 2014. ‘NYSDFS In the Matter of PricewaterhouseCoopers LLP, Settlement Agreements’, available at www.dfs.ny.gov, accessed 27 February 2015. 93  ‘NYSDFS In the Matter of PricewaterhouseCoopers LLP’ ibid.

Prosecutors and Judges as Corporate Monitors? The US Experience 43 instructions; deleting a regulatory term of art that PwC used throughout the report in describing BTMU’s wire-stripping instructions and replacing it with a nondescript reference that lacked regulatory significance; deleting most of PwC’s discussion of BTMU’s wire-stripping activities; and deleting information concerning BTMU’s potential misuse of OFAC screening software in connection with its wire-stripping activities. According to the Superintendent of Financial Services, a PwC Director who led the firm’s technology and data collection team, and presently a PwC partner, sent emails to PwC partners and employees, expressing his apparent concern for client satisfaction over the need for objective inquiry. NYDFS states that no one at PwC reprimanded or even told the Director that his comments were inappropriate, which incidentally compromised the firm’s objectivity.94 During its suspension, PwC will work to implement a series of reforms to help address conflicts of interest in the consulting industry. These reforms are modelled on a similar agreement NYDFS reached with Deloitte Financial Advisory Services in 2013 when NYDFS suspended that company for 12 months from accepting consulting engagements at NYDFS-regulated institutions.95 Among other things, PwC must develop a comprehensive training program regarding the requirements of New York Banking Law (in particular, Article 26 para 10) governing confidential supervisory information, and must provide such training to all of its partners, principals and employees assigned to engagements in which it is expected that PwC will have access to materials covered by New York Banking Law §36(10). PwC Regulatory Advisory Services must draft, in consultation with NYDFS, a handbook providing guidance as to what materials are covered by the New York Bank Law Art. 36 para 10 governing confidential supervisory information and how such materials should be handled. NYDFS must approve the final version of the handbook.96 The Washington Post reported that the PwC settlement was part of a broader investigation into the consulting industry’s relationship with Wall Street. Consultants are obligated to work at the behest of government regulators to provide objective assessment of a firm’s problems. The NYDFS is allegedly also investigating the Washington consulting firm Promonotory, which worked for Standard Chartered Bank with respect to the money illicitly funnelled to Iran.97

H. Example of Monitor’s Prevention of Additional Wrongdoing: Standard Chartered Bank The utility of a corporate monitor is shown when a monitor identifies the continuation of misconduct and reports the same to regulatory authorities. An example of 94 ibid. 95 

ibid Exhibit B to NYDFS In the Matter of PricewaterhouseCoopers LLP, Settlement Agreements. ibid Exhibit B. 97  D Douglas, ‘Pricewaterhouse to Pay $25 Million Fine’, Washington Post (9 August 2014) A9. 96 

44  Bruce Zagaris an independent monitor discovering and reporting to the regulator information adverse to the corporation involves StanChart. On 19 August 2014, Benjamin M Lawsky, Superintendent of Financial Services (SFS), announced an order concerning StanChart’s failures to remedy anti-money laundering compliance problems as required in the Bank’s 2012 consent order with the New York State Department of Financial Services (NYDFS). The order requires StanChart to suspend dollar clearing through its New York Branch for high-risk retail business clients at its StanChart Hong Kong subsidiary; exit high-risk client relationships within certain business lines at its branches in the United Arab Emirates; not accept new dollar-clearing clients or accounts across its operations without prior approval from DFS; pay a $300 million penalty; and take other remedial steps.98 DFS’ independent monitor, installed by the SFS as part of the 2012 agreement with StanChart, detected StanChart’s compliance remediation failures. The DFS monitor’s review of Standard Chartered’s transaction monitoring systems found that the Bank failed to detect a significant amount of potentially high-risk transactions for further review. A large number of the potentially high-risk transactions the system has failed to detect came from its Hong Kong subsidiary (StanChart Hong Kong) and StanChart’s branches in the United Arab Emirates (StanChart UAE), among others. With respect to the implementation of its transaction monitoring system, StanChart NY had created a rulebook (the StanChart Rulebook) with procedures to aid it in detecting high-risk transactions. The StanChart Monitor gathered information and tried to test the StanChart Rulebook. After that review, the Monitor determined that the SCB Rulebook contained numerous errors and other problems, resulting in StanChart’s failure to identify high-risk transactions for further review. StanChart SCB failed to detect these problems because of a lack of adequate testing both before and after implementation of the transaction monitoring system, and failed to adequately audit the transaction monitoring system.99 The order requires Standard Chartered to take a number of steps, including the following: StanChart NY will suspend its dollar-clearing operations for highrisk retail business clients of StanChart Hong Kong. Additionally, StanChart has started a process of exiting high-risk small and medium business clients (SME) at StanChart UAE. If exiting of the SME clients at StanChart UAE is not completed within 90 days, SCB will suspend US Dollar clearing through StanChart NY for those clients. StanChart NY must not, without the prior approval of DFS—in consultation with the monitor—open a US Dollar demand deposit account for any customer who does not already have such an account with StanChart NY. SCB must pay a $300 million penalty. StanChart must provide a comprehensive remediation action plan with appropriate deadlines and benchmarks. It must appoint a 98 

New York Department of Financial Services, ‘NYDFS Announces’ (n 92).

99 ibid.

Prosecutors and Judges as Corporate Monitors? The US Experience 45 competent and responsible StanChart executive who will report directly to the StanChart CEO to oversee the remediation, and it must extend the engagement of the Monitor for two additional years. StanChart must also implement a series of enhanced due diligence and know-your-customer requirements—such as demanding greater information regarding the originators and beneficiaries of transactions—for its dollar-clearing operations.100 On 19 August, StanChart said it ‘accepts responsibility for and regrets the deficiencies in the anti-money-laundering transaction surveillance system at its New York branch’. It also said that it had ‘already begun extensive remediation efforts and is committed to completing these with utmost urgency’. SCB privately assured investors that the dollar-clearing suspension would not materially affect its financial performance.101 Meanwhile, on 21 August 2014, the Central Bank of the United Arab Emirates (UAE) warned StanChart that it may encounter litigation from thousands of its customers in the UAE, which it is being forced to ‘exit’ under the provisions of the order. In this regard, the Central Bank explained that StanChart would be liable to legal action by the account holders due to ‘the material and moral damage which is falling on them’. StanChart has only 90 days to sell or close the accounts of its small business clients in the UAE. The Central Bank of the UAE said 1,400 to 8,000 accounts could be affected. StanChart said it has noted the announcement and always works with its regulators to achieve the right outcomes.102 The Hong Kong Monetary Authority (HKMA) reacted to the order prohibiting SCB from clearing US dollar payments for some clients in Hong Kong by defending its own ‘robust’ anti-money laundering regime. According to the HKMA, it had monitored StanChart’s AML controls and, although it had identified some areas for improvement, it believed they were not issues that caused significant supervisory concerns.103 Already, StanChart’s share price has fallen 17 per cent during 2015. The settlement with DFS is likely to add to investor concern about StanChart’s SCB’s profitability.104 The settlement and order illustrate the reason for, and role of, monitors appointed by courts in AML and financial regulatory settlements. In this case, the monitor is Ellen Zimiles, a former federal prosecutor who is the head of consulting firm Navigant’s global investigations and compliance practice.105 The settlement

100 ibid.

101  B Protess and C Bray, ‘Caught Backsliding, Standard Chartered Is Fined $300 Million’, New York Times (20 August 2014) B1. 102  M Arnold and S Kerr, ‘StanChart’s NY Anti-Money Laundering Settlement Draws UAE Ire’, Financial Times (21 August 2014), available at http://www.ft.com/intl/cms/s/0/2c1fa566-2949-11e4baec-00144feabdc0.html, accessed 27 February 2015. 103  Arnold and Kerr, ‘StanChart’s NY Anti-Money Laundering Settlement’ (n 102). 104  G Hay, ‘Standard Chartered Fine Should Raise Concern Among Its Investors (20 August 2014), available at http:/www.dealbook/NYTimes, accessed 27 February 2015. 105  Protess and Bray, ‘Caught Backsliding’ (n 101) B1.

46  Bruce Zagaris and order show that the monitor was truly independent and diligent in identifying and reporting misconduct by StanChart.

VI.  PROPOSALS FOR IMPROVING MONITORSHIPS

Several commentators on independent monitors have suggested gaps in the system and proposed improvements. In particular, the gaps include when monitors should be appointed, the selection criteria, their terms and conditions of service. The proposals deal with the relative informal process of appointing monitors and the delineation of their powers and duties. A need exists for greater consistency, predictability and accountability in monitorships. To this end, a group in the American Bar Association’s Criminal Justice Section has produced a report on ‘Monitor Standards’.106 This section will present some of the proposals for reform and the excellent work of the American Bar Association’s Criminal Justice Section.

A.  Proposed Legislation/Reforms for Improving Monitorships On 1 May 2014, US Representative Bill Pascrell (Democrat-New Jersey) introduced a bill,107 the Accountability in Deferred Prosecution Act of 2014 (ADPA).108 It was referred to the House Judiciary Committee the same day. On 21 July 2014, it was referred to the Subcommittee on Crime, Terrorism, Homeland Security, and Investigations. It has three cosponsors. While the sponsors champion the legislation as establishing greater consistency, predictability and accountability in NPAs and DPAs and other advantages, the bill has yet to garner much attention.109 According to an online source that monitors Congressional bills, it has a chance of passage of only 4 per cent.110 Similar legislation has gone nowhere in recent Congresses. For instance, on 17 December 2007, Representative Pascrell, Jr introduced similar legislation, calling for a Statement of Principles that the DOJ should use in proposing DPAs. On 22 January 2008, Representative Frank Pallone, Jr (Democrat-New Jersey), proposed legislation111 to require the Attorney General 106  American Bar Association, Monitor Standards, available at http://www.americanbar.org/groups/ criminal_justice/standards/MonitorsStandards.html, accessed 22 February 2016. 107  HR (House of Representatives) 4540. 108  For the text of HR 4540, ‘Accountability in Deferred Prosecution Act of 2014’ (ADPA), 113th Congress, see https://www.congress.gov/bill/113th-congress/house-bill/4540/text, accessed 27 February 2015. 109  Legislation would require Attorney General to issue public written guidelines for deferred prosecution agreements and non-prosecution agreements (1 May 2014), http://pascrell.house.gov/mediacenter/press-releases/pascrell-introduces-accountability-in-deferred-prosecution-act, accessed 27 February 2015. 110  https://www.govtrack.us/congress/bills/113/hr4540, accessed 27 February 2015. 111  HR 5086.

Prosecutors and Judges as Corporate Monitors? The US Experience 47 to issue guidelines delineating when to enter into DPAs; to require judicial sanction of DPAs; and to provide for federal monitors to oversee DPAs would require the Attorney General to issue guidelines with respect to DPAs, thereby limiting the discretion of prosecutors. Hence, the call for and shape of proposed reforms has been building for seven years.112 Still, the introduction of the bill brings attention to the gaps and issues concerning the current state of NPAs and DPAs, their terms and the processes by which companies and the government conclude them (Administrative Guidelines on Agreements). A problem has been that the intensity of the use of monitors and the wide scope of their authority contrasts to the relatively informal process of their appointment and the delineation of their powers and duties.113 The fact that many of the elements of the monitorship were determined in a case-by-case manner before the assignment started, during the assignment, or sometimes not at all, raised concerns about the uniformity of the practice and whether the lack of uniformity and consistency undermined the efficacy of the settlement agreements and the monitorships.114 To promote uniformity and help prosecutors and corporations as they negotiate and implement DPAs and NPAs, the Attorney General must, not later than 90 days after the enactment of the DPA, issue public written guidelines for DPAs and NPAs. The guidelines must provide direction in the following areas: (1) the circumstances in which an independent monitor is warranted for the agreement, the duties and authority of such monitor, and to whom the monitor owes those duties; (2) what terms and conditions are appropriate in the agreement, including when, whether and the extent to which federal prosecutors should seek monetary penalties, restitution, civil settlements, and post-monitoring conditions; (3) whether the agreement should include some or all of the requirements of section 8B2.1 of the US Sentencing Guidelines for compliance and ethics programs; (4) the process by which the DOJ decides that the corporation has successfully fulfilled the terms of the agreement; (5) the extent of joint involvement of regulatory agencies in connection with the agreement and the division of responsibilities with those agencies; (6) the period during which the agreement should remain in effect; (7) what constitutes the cooperation, if any, required by the agreement from the organisation and its employees with respect to any ongoing criminal investigations, including the length of the obligation to cooperate; and (8) when and why it would be appropriate for federal prosecutors to enter into a NPA rather than a DPA.115 112 

Washington Legal Foundation, ‘Deferred Prosecution and Non-Prosecution Agreements’ (n 33). Khanna (n 50) 228–29. 114  ibid 229. 115  See n 108 above. 113 

48  Bruce Zagaris The guidelines could make NPAs and DPAs more consistent and standard while limiting prosecutorial discretion in preparing and enforcing such agreements. The standardisation is already occurring, but in a less stringent way than the legislation would require.116 It is possible and perhaps advisable that eventually the DOJ may be able to promulgate industry-specific or wrongdoing-specific guidelines on a monitor’s tasks. However, one commentator believes that such guidelines may cause tension with the need to subject monitors to fiduciary duties to the corporation or its shareholders.117 The American Bar Association Criminal Justice Section’s Monitor Standards state that: the court order or the Agreement and the Engagement Letter should clearly define the responsibilities and authority of the monitor, corporate defendant, and the government, and the goals and scope of the monitorship. The court order or the Agreement should contain a length of time and projected resources required for the monitorship, which should be sufficient to achieve its goals. The government, the corporate defendant, and monitor should commit, for the duration of the monitorship, the time and resources required by the monitorship.118

The standards suggest that a court order may modify, extend or terminate a monitorship to the extent allowed by the court, after hearing from the government, the corporate defendant and the monitor.119 In addition, ‘[w]here the Monitor has been appointed subject to a court order, only the court should be able to remove the Monitor, on its own motion or pursuant to an application by the government’ or the corporate defendant.120 The issue of removing a monitor should be determined on the merits of whether the monitor is conducting the monitorship effectively and is complying with the court order and engagement letter.121

B.  Selection and Compensation of Independent Monitors The problems with the selection and compensation of monitors became a focus of criticism in September 2007 when the US Attorney in Newark, New Jersey, Christopher Christie, entered into four related DPAs and one NPA with five medical supply companies charged with anti-competitive practices. Mr Christie selected five monitors. One of the monitors he selected to oversee the Zimmer Holdings DPA was his former boss, Attorney General John Ashcroft, and the latter’s consulting firm. As mentioned above, under the agreement Zimmer paid as much as $52 million in fees to Ashcroft’s firm over a period of 18 months. The selection 116 

Khanna (n 50). ibid, 241. 118  American Bar Association, Monitor Standards, Standard 24-3.1. 119  ibid Standard 24-3.2. 120  ibid Standard 24-4.7.2. 121  ibid Standard 24-4.7.1. 117 

Prosecutors and Judges as Corporate Monitors? The US Experience 49 of his former boss and the amount of compensation he recieved raised issues of cronyism and excessive compensation.122 1.  Selection of Monitors ‘The Monitor selection process must ensure that the monitor is a highly competent person or entity for the specific assignment.’123 In particular, the monitor should possess the qualifications mentioned below. Absent extraordinary circumstances, both the defendant corporation and the government should be permitted to have a significant role in the selection process.124 The selection process should encourage consideration of a broad range of monitor candidates. The selection should not be artificially limited by demographic, professional and geographic factors. When possible, announcing in advance the decision to select a monitor should allow appropriate persons or entities to submit indications of interest.125 The government may want to establish, and update regularly a pre-qualified pool of monitors who are capable of handling an expected monitor role where: (1) the government expects the Monitors to have substantially similar assignments; (2) the government expects that the timely selection of a Monitor will be of significant importance; or (3) the government determines that there exists a need to be able to provide names of potential Monitors to corporate defendants when requested.126

The ADPA requires the Attorney General to establish rules for the selection of independent monitors in connection with DPAs. Such rules must provide for the creation of a national list of organisations and individuals who have the expertise and specialised skills required to serve as independent monitors. The Attorney General will place the list on the public website of the DOJ.127 The rules promulgated by the Attorney General must provide for an open, public and competitive process for the selection of such monitors. The DOJ must, subject to the approval of the court, appoint the independent monitor from the national list. It remains to be seen whether creating an official government list would solve the type of allegations of cronyism that have been made with respect to some appointments.128 The selection of a monitor should consider the following qualification and cost factors: (1) the integrity, credibility and professionalism of the monitor; (2) the expertise or experience in the industry or specific subject matter of the monitorship; (3) the relevant 122 

Washington Legal Foundation (n 33). American Bar Association, Monitor Standards, Standard 24-2.1. 124  ibid Standard 24-2.1. 125  ibid Standard 24-2.2. 126  ibid Standard 24-2.3. 127  See n 108 above. 128  Warin, ‘2014 Mid-Year Update’ (n 1). 123 

50  Bruce Zagaris skills and experience necessary to discharge the duties of the monitor as described in the Court Order or the agreement; (4) the expected structure of the monitorship Team and the ability of the monitor to access and deploy resources as necessary to discharge the duties of the monitor as described in the Court Order or the Agreement; and (5) the commitment to serving as the monitor for the entire monitorship term.129

The following cost factors should be considered: (1) the monitor’s cost structure for the monitorship Team; (2) the monitor’s projected costs to discharge the duties of the monitor as set forth in the Court Order or the Agreement, and (3) any other costs expected to be imposed on the corporate defendant by reason of a particular monitor’s selection.130

The selection rules should mandate that the following persons not be allowed to serve as monitors: (1) former government employees who, while employed by the government, were involved in the matter or case giving rise to the monitorship; (2) any person who was involved in, supervised persons involved in, or otherwise had responsibility over the activity giving rise to the monitorship; (3) any person who was involved in structuring, reviewing, supervising, or advising regarding the Compliance Program or the internal controls related to the wrongdoing and in place at the time of the wrongdoing, where a neutral review of that Compliance Program or system of internal controls pursuant to the Monitor’s mandate might reasonably call into question the efficacy and value of that work or the implementation thereof; (4) any person who provided non-monitoring legal or other professional services to the corporate defendant relating to the activity giving rise to the monitorship; and (5) any person with a financial interest related to the corporate defendant.131

The selection requirements may also potentially exclude persons with severe potential conflicts of interest mentioned below and the extent to which each could impair, or be perceived to impair, the Monitor’s judgment or independence, as balanced against the qualifications of that Monitor. In particular, the selection process should consider the following: (1) prior, non-Monitor work with the corporate defendant that was unrelated to the activity, or the investigation of the activity, giving rise to the monitorship, with appropriate consideration given to the significance and nature of the work, and the time period during which the work occurred; (2) prior Monitor work for the corporate defendant, including independent monitoring work initiated by the corporate defendant in response to the discovery of the wrongful acts that gave rise to the monitorship or work as a private sector inspector general; (3) prior affiliation with a firm that provided legal or other professional services to the corporate defendant during the time of that affiliation; and (4) any other factor that could bias or impair, or be perceived to bias or impair, the monitor’s judgment, objectivity or independence.132 129 

American Bar Association, Monitor Standards, Standard 24-2.4.1. ibid Standard 24-2.4.2. 131  ibid Standard 24-2.4.3. 132  ibid Standard 24-2.4.4. 130 

Prosecutors and Judges as Corporate Monitors? The US Experience 51 The monitor should, prior to his or her appointment, disclose any potential ­conflicts of interest it or its members may have.133 2.  Monitor Compensation and Billing During the selection and approval process, prospective monitors should estimate their prospective fees and expenses, including the use of third party resources. The monitor should incur only costs that are required to perform the monitorship,134 and should maintain records that accurately reflect the work performed and the fees and expenses incurred.135 The ADPA requires the Attorney General to establish a fee schedule for the compensation of independent monitors and their support staff, and place that fee schedule on the public website of the DOJ. Before a DPA that entails monitoring is concluded, this schedule must also be provided to each organisation that is to be monitored pursuant to the agreement. ‘Where appropriate, the Court Order, Agreement, or the Engagement Letter may provide for the creation of a replenishing fund that would cover expected periodic fees and expenses of the Monitorship Team.’136 To address the arguments that some of the fees charged are unreasonable and unpredictable, the ADPA requires a fee schedule. Such a schedule would address the concerns that monitors are extremely costly and unpredictable and enable them to estimate more easily the potential costs of monitorships before they agree to NPAs or DPAs. Having a pay schedule may limit the pool of available monitors to those for whom the government’s pay schedule is consistent with their normal fee arrangements, thereby limiting the options.137 A potential problem with a fee schedule is that, if the schedule requires flat and fixed fees, it may undermine the development of a market for monitor services. A better way to protect against excessive compensation while still attracting the best monitor candidates would allow monitors, firms and the government to negotiate an hourly fee, disclosed publicly. However, if the fee proposed exceeds some threshold amount, then a court would be required to approve the rate before the start of the monitoring assignment, where the monitor and firm bear the ­burden of showing why this rate is appropriate.138 3.  Public Disclosure of Fees and Expenses Controversy has concerned the issue of whether the fees and expenses of the monitor should be disclosed. Advocates of transparency argue that such d ­ isclosure 133 

ibid Standard 24-2.5. ibid Standard 24-3.4.2. 135  ibid Standard 24-3.4.3. 136  ibid Standard 24-3.4.5. 137  ibid Standard 24-3.4.4. 138  Khanna (n 50) 240. 134 

52  Bruce Zagaris is part of good governance and transparency principles. Opponents argue that disclosure of such costs may put the corporate defendant at a competitive disadvantage and embarrass such entities, making it more difficult for corporations to agree to monitorships in the future. The ABA Criminal Justice Task Force has recommended that unless otherwise required by law, the corporate defendant should have discretion not to disclose to the public the Monitor’s fees and expenses incurred during the monitorship.139

C.  Access to Records, Persons and Information One issue that sometimes arises is whether the monitor should have access to all of the corporate defendant’s information, especially since some information may be proprietary and confidential. In addition, it takes substantial resources of the corporate defendant to provide access to records, persons and information. ‘The Monitor should have access to all information that is reasonably required to perform the duties of the court or the Agreement, as determined by the Monitor.’140 ‘The Court Order or the Agreement should clearly state the types of information and records to be made available to the Monitor, and how and under what circumstances the [corporate defendant] must give access to certain individuals for interviews with the monitor.’141 Monitors should respect the corporate defendant’s ‘proprietary and confidential information and act to protect that information’ and should not use such ‘propriety and confidential information for any purpose beyond the scope of the monitorship’.142 The court order should ‘specify that the court will resolve any dispute as to the Monitor’s access to information’.143 The court order or the engagement letter should address issues of employee rights, give the monitor sufficient authority to collect information confidentially, and inform employees of the level of confidentiality afforded them, if any, when they provide information to the monitor.144

D.  Restrictions Relating to Agreements A DPA must not require an organisation to pay money to a third party, other than a monitor or the monitor’s staff, if the payment is unrelated to the harm caused by the defendant’s conduct which is the basis for the agreement. 139 

American Bar Association, Monitor Standards, Standard 24-3.5. ibid Standard 24-4.2.1.a. 141  ibid Standard 24-4.2.1.b. 142  ibid Standard 24-4.2.2.b. 143  ibid Standard 24-4.2.3. 144  ibid Standard 24-4.2.4. 140 

Prosecutors and Judges as Corporate Monitors? The US Experience 53 Attorneys who are or might participate in the prosecution of the case against a corporation to be monitored must have no role in the selection of the independent monitor, other than suggesting qualifications for the monitor. The Attorney General must take appropriate steps to treat a violation of the restrictions relating to agreements as a conflict of interest and to remedy any such conflicts of interest.145

E.  Judicial Oversight of Agreements The lack of judicial oversight is a major problem, especially with respect to DPAs and NPAs. In introducing the ADPA, the sponsors cited some appointments and agreements which had apparent implications of cronyism. For example the case in 2007, when then-US Attorney Chris Christie concluded DPAs with five orthopedic devices makers found to have paid kickbacks to doctors who used their products, had attributes of cronyism. Among the independent monitors selected by Mr Christie’s offices was former State Attorney General David Samson, whom Mr Christie later appointed to the Port Authority. In addition as previously mentioned, Mr Christie also chose as a monitor John Ashcroft, his former boss and former US Attorney General. The fees paid to Mr Ashcroft’s firm under the agreement were an estimated $28– 52 million for 18 months of work.146 In still another separate agreement, Mr Christie’s office required Bristol-Myers Squibb to donate $5 million as part of a settlement of a securities fraud case in order to endow a new ethics chair at Seton Hall Law School, Mr Christie’s alma mater.147,148 The ADPA would require that the US District Court in the district in which the NPA or DPA is concluded must approve the agreement to determine if the agreement is consistent with the guidelines for such agreements and is in the interests of justice. The agreement will take effect on the approval of the court. Each party to the agreement and any independent monitor must file quarterly reports with the court on the progress made towards the completion of the agreement, describing any concern the filer has about the implementation of the a­ greement. In the final quarterly report, the independent monitor must include a full and ­itemised statement of the work done and the compensation earned for that work. On the motion of any party or the independent monitor, the court must review the implementation or termination of the agreement, and take any appropriate 145 

See n 108 above. See n 109 above. 147  Anthony S. Barkow and Rachel E. Barkow, ‘Introduction’, in Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct (Anthony S. Barkow and Rachel E. Barkow, eds) 1, 4 (2011); See Bristol-Myers Squibb Deferred Prosecution Agreement, para 20 (requirement to endow ethics chair at Seton Hall), reprinted in Lawrence A. Cunningham, ‘Deferred Prosecutions and Corporate Governance: An Integrated Approach to Investigation and Reform’, 66 Fla L Rev 1, 33, 35. 148  See n 109 above. 146 

54  Bruce Zagaris action, to assure that the implementation or termination is consistent with the interests of justice.149 As mentioned above, Judge Gleeson in the HSBC DPA has already decided to exercise review of the settlement agreements. A recent Second Circuit decision addresses Judge Rakoff ’s rejection of a civil settlement between CitiGroup and the SEC, in which Judge Rakoff asked penetrating questions about whether the settlement was ‘fair, reasonable, adequate and in the public interest’.150 Judicial approval or oversight may be useful before an NPA or DPA is finalised (eg, on monitor compensation and monitor selection) at relatively little additional cost, since prosecutors and corporations will already have focused on the issues giving rise to a monitorship. However, the potential of frequent judicial oversight during the monitoring assignment may disrupt one of the benefits of a monitorship: the ability to economise on enforcement and corporate resources.151 For monitors appointed subject to a court order, the order should set forth that the court will resolve any dispute over fees and expenses. For monitorships established by agreement, the agreement and/or the engagement letter should provide a dispute resolution process to resolve disputes over fees and expenses that takes into account the government’s interest in the secrecy of investigations and the corporate defendant’s interest in the protection of proprietary or confidential information.152

F.  Public Disclosure Relating to Reports of Monitors An important and controversial issue is whether the reports of the monitor should be public. Since a criminal prosecution is a matter of public interest and is public, the public has an interest in DPAs and what the monitor may find.153 US Representative Cohen (Democrat-Tennessee), in introducing the ADPA, said that ‘[t]he prosecution of corporate crime should not be accomplished in backroom deals, allowing those who have broken the law to avoid public disclosure’.154 Once a DPA takes effect, the Attorney General should place the text of the agreement on the public website of the DOJ, together with all the terms and conditions of any agreement or understanding between an independent monitor appointed pursuant to that agreement and the organisation monitored. 149 

See n 108 above. SEC v Citigroup Global Markets, Inc, 752 F3d 285, 294 (2d Cir 2014). The Appellate Court overturned and remanded Judge Rakoff ’s decision, finding that, in reviewing a proposed consent judgment involving an enforcement agency, the District Court should determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the ‘Public interest would not be disserved’. 151  Khanna (n 50) 241. 152  American Bar Association, Monitor Standards, Standard 24-3.4.4. 153  Khanna (n 50) 241–44. 154  See n 109 above. 150 

Prosecutors and Judges as Corporate Monitors? The US Experience 55 Subject to an exception noted, the court may, upon petition of any interested party, approve an exception to the requirements of this section for good cause shown. Good cause includes that the information proposed be excepted from the requirements because it is proprietary, confidential or a trade secret. The court may not approve an exception from the disclosure requirements of this section of the fact that the DPA has been filed with the court, the name of the corporation to which it pertains, or the identity and financial terms agreed upon with respect to any independent monitor selected in connection with the agreement.155 The provisions allowing for an exception to disclosure ‘for good cause shown’ by ‘any interested party’ to withhold information that is “proprietary, confidential, or a trade secret” emulates the Freedom of Information Act (FOIA) exception for trade secrets and confidential business information.156 An FOIA lawsuit resulted in the disclosure of a previously unreleased agreement between ABC Professional Tree Services, Inc, and the US Attorney’s Office for the Southern District of Texas. In November 2013, University of Virginia School of Law research librarian Jon Ashley sued DOJ under the FOIA seeking access to the 2012 NPA. DOJ had previously announced the agreement only in a press release without actually releasing the agreement. Ashley, conducting research with Professor Brandon Garrett, a law professor at his university, brought a lawsuit against the DOJ with the goal of making NPAs and DPAs available online through a website at the university. The complaint sought declaratory relief, requiring disclosure of the agreement. The complaint and case claimed the researcher was entitled to the disclosure of the agreement which the DOJ had improperly withheld in violation of the law and the strong public interest in understanding why wrongdoers are not criminally prosecuted. In March 2014, the case was resolved when the DOJ released the agreement. Garrett characterised the NPA as totally unremarkable, and wondered the reason why DOJ had ever sealed it.157 The recommendations of the ABA Task Force seem to strike the right balance. They recommend that the court order or the Agreement should specify whether the Monitor’s report is to be confidential or whether it should be made available to the public, in part or in whole. When reports are to remain confidential, the government may decide whether other government agencies or departments may have access to the report unless the court order or the Agreement states otherwise. Any government agency or department that receives the report should keep it confidential. Unless the government objects or the court order or the Agreement specifies otherwise, the corporate defendant should have the right to disclose to third parties any written report it receives 155 

See n 109 above. Warin, ‘2014 Mid-Year Update’ (n 1). 157  ibid. For a copy of the superseding NPA between the US Attorney, SD of Texas and ABC Professional Tress Services, Inc, 14 May 2012, which at the bottom acknowledged that the contracting parties could publicise it, see http://lib.law.virginia.edu/Garrett/prosecution_agreements/sites/default/files/ pdf/ABC.pdf, accessed 27 February 2015. 156 

56  Bruce Zagaris In the event that a written report may be publicly disclosed to third parties, the Monitor should consult with the government and corporate defendant, or if appointed by a court, the court, in order to protect against the disclosure of sensitive or disparaging information concerning individuals who may be named in the report, and the disclosure of proprietary, confidential or competitive business information.158

VII.  POTENTIAL APPLICATION TO THE EUROPEAN UNION

Since this book concerns the challenges of financial and economic crime in Europe and the US, one overriding issue is whether the EU Member States should consider emulating corporate monitorships. This question is not easy to answer. It seems that a critical issue is whether prosecutors across the EU suffer from a shortage of resources and are grappling with a surge of international white collar crime cases? Another question is whether, in terms of sentencing, law enforcement and prosecutors can use a range of mechanisms to try to sanction organisations, especially when monetary penalties may not be sufficient? In civil law countries, more limits exist than in common law countries in terms of finding organisations criminally culpable. Another goal of corporate monitorships is to prevent the recurrence of the wrongdoing. Unless the Member States of the EU have addressed all of these issues, then it seems that individual Member States may want to at least consider examining the potential of some form of monitorship, provided it can be done in a way that is consistent with its fundamental law and substantive and procedural criminal laws. Some EU Member States are already experimenting with different types of settlements. Indeed in February 2014, a new Part 12 of the UK Criminal Procedure Rules came into force.159 The deferred prosecution agreement is now an additional mechanism to assist UK prosecutors, but it remains to be seen whether the UK prosecutors will try to experiment with monitors. Other EU countries, namely France, Italy and Spain seem to have mechanisms that approach some of the attributes of monitors or IPSIG.

158 

American Bar Association, Monitor Standards, Standard 24-4.3.4. K Roberts and D Grieve, ‘The American Way—DPAs Arrive in the UK’ (6 February 2014), available at accessed 27 February 2015; Warin, ‘2014 Mid-Year Update’ (n 1). 159 

3 The Necessity of Compliance Programmes Under German Law—‘Burden’ or ‘Blessing’? ALEXANDER CAPPEL

I. INTRODUCTION

‘I

t takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you‘ll do things differently.’1 It goes without saying that a company and its employees have to comply with the legal provisions that affect their respective business areas. Therefore, it can hardly be denied that it is of great advantage for companies to set up s­ pecial departments and operate special systems—called compliance departments or compliance management systems (CMSs)—to ensure that the company itself or its employees do not violate any legal provisions either directly or by being misused through third parties. Moreover, in particular as a response to the 2008 financial crisis, which ruined or almost ruined certain highly successful banks and companies (such as ­Lehman Brothers), authorities all over the world started to increase their enforcement actions against international banks and companies. In particular, US authorities no longer shrink back from investigating European and international banks and industrial companies for potential violations of US legislation and may impose tremendous fines and other legislative measures, such as blacklisting, on them. International banks and industrial companies have had to learn the hard way that surviving in an international market requires strong organisational structures which ensure that the companies and their employees minimise risks in any

1 Warren Buffett, American business magnate, investor and philanthropist, see http://www.­ telegraph.co.uk/finance/newsbysector/banksandfinance/8381363/Warren-Buffett-his-best-quotes. html, accessed 26 March 2015.

58  Alexander Cappel r­ elevant field of law to the utmost extent possible. Such measures are, in m ­ odern terms, referred to as ‘CMSs’.2 Although CMSs already existed long before the 2008 financial crisis, it has become obvious in recent years that managers of ‘big ­international players’ have started to reconsider and improve the CMSs of their company in order to meet the standards of the modern economic world. This chapter will assess the legal provisions which seem to call for the ­implementation of a CMS and illustrate the advantages for banks and companies in implementing such a CMS. First, this chapter will explore whether, under ­German law, banks and companies are required to implement a CMS. To this end, the chapter will discuss the various challenges which might be regarded as a ­‘burden’ when implementing a CMS. However, ultimately, for a company to have a CMS may also be considered a ‘blessing’, not just for the company but also for its employees. Finally, the chapter will provide some initial guidance as to how an efficient CMS could be implemented into the organisational structure as well as into the daily business of a company.

II.  REQUIREMENTS TO IMPLEMENT A CMS

A.  Implementation of CMSs—A New Trend? As already outlined above, a new compliance trend has been observed within the last decade. According to the compliance survey ‘Wirtschaftskriminalität und Unternehmenskultur 2013’ presented by PriceWaterhouseCoopers (PwC) and the Martin-Luther-University Halle-Wittenberg (Germany) the number of companies in Germany that have implemented a CMS has significantly increased over the last years. The observer found in 2007 that only 41 per cent of German industrial companies had already implemented a CMS, but since then the number has increased to 44 per cent in 2010, 52 per cent in 2011, up to 74 per cent in 2013 (See Figure 3.1).3 According to this compliance survey, the German industry companies which had already implemented a CMS stated that the reasons for implementing specific organisational compliance measures within the company were not only due to legal provisions (eg regulatory provisions requiring certain compliance measures; the prevention of fraudulent actions within the company; the minimisation of criminal and civil liabilities for the company and its employees; or imminent or factual criminal or regulatory proceedings against the company or its employees), 2  In the late 1980s the term compliance first appeared in the financial sector and described a ­concept for companies and banks to use to ensure that they act in accordance with the applicable provisions in the traditional risk areas, namely insider trading, bribery, money laundering, antitrust and ­competition law (for further details see, in particular, A Eufinger, ‘Zu den historischen Ursprüngen der Compliance’ (2012) Corporate Compliance Zeitschrift 21 et seq. 3 See compliance survey ‘Wirtschaftskriminalität und Unternehmenskultur 2013’ published by PwC and Martin-Luther-University Halle-Wittenberg, 26.

The Necessity of Compliance Programmes Under German Law 59 100 90 80 70 60 50 40 30 20 10 0 2007 No CMS: 59 CMS: 41

2010 No CMS: 56 CMS: 44

2011 No CMS: 48 CMS: 52

2013 No CMS: 26 CMS: 74

Figure 3.1: Statistics regarding German companies that have implemented a CMS during recent years

but also due to various other factors (eg group-wide pressure; pressure of business partners; media pressure; image reasons; better market opportunities, etc) which forced them to reconsider their approach.4 The minority of the companies which still refrain from setting up a CMS argue that such an implementation might, in particular, be too bureaucratic and too expensive and, therefore, the benefit may most likely not justify the efforts.5 However, the latter argument is not likely be made by any of the companies which have been, or will be, involved in one of the extremely uncomfortable investigations carried out by any of the US authorities.

B. Aggressive Extraterritorial Enforcement Actions by US Authorities Against European Companies Another major trend which can be noted over the past years and which might have encouraged companies to set up or improve an already existing CMS are the strong enforcement actions against internationally active companies (in ­particular banks) from authorities all over the world. Although EU authorities have also in the past investigated and prosecuted companies and managers due to shortcomings in their CMS,6 US authorities have demonstrated a more ­aggressive approach. In particular, several US authorities such as the US Department of Justice Office (DOJ), the Office of Foreign Assets Control (OFAC) of the

4 

See ‘Wirtschaftskriminalität und Unternehmenskultur 2013’ (n 3) 28. See ibid 27. 6  See eg LG München, Decision of 10 December 2013—file number 5 HK O 1387/10 (‘Neubürger decision’). 5 

60  Alexander Cappel US Department of the Treasury and the New York County District Attorney’s Office (DANY) have started prosecuting US and non-US banks and companies for v­ iolations of US law. The most relevant areas in this regard are potential violations against the US Foreign Corrupt Practices Act (FCPA) or the US financial sanctions programmes (eg against Iran, Syria, North Korea, Sudan, etc). Many of these US investigations have ended in a settlement with the banks and companies concerned, which have agreed to pay extraordinary fines (so-called ‘settlement fines’) to various US authorities. Such settlement fines have increased progressively over the past 10 years, up to an amount of almost $9 billion. The most remarkable cases in this regard have affected UK-based Hongkong & Shanghai Banking Corporation Holdings PLC (HSBC), French BNP Paribas and, most recently, German Commerzbank AG (See Table 3.1).7 Table 3.1:  Sample overview of settlements between US authorities and international financial institutions 2005: ABN AMRO Bank NV

USD 80 million

2009: Lloyds TSB Bank plc

USD 350 million

2009: ANZ Bank Group Ltd

USD 5.75 million

2009: Credit Suisse AG

USD 536 million

2010: RBS Bank NV (former ABN AMRO)

USD 500 million

2010: Barclays Bank plc

USD 298 million

2011: JPMorgan Chase Bank NA

USD 88.3 million

2012: ING Bank NV

USD 619 million

2012: National Bank of Abu Dhabi

USD 885,000

2012: Standard Chartered Bank

USD 327 million + USD 340 million

2012: HSBC

USD 1.9 billion

2012/13: Bank of Tokyo-Mitsubishi UFJ, Ltd.

USD 8.5 million + USD 250 million

2013: Intesa Sanpaolo S.p.A.

USD 2.95 million

2013: RBS Group plc

USD 100 million

2014: Bank Moscow

USD 9.5 million

2014: BNP Paribas

USD 8.9 billion

2015: Commerzbank AG

USD 1.45 billion

7  The overview, prepared by George Kleinfeld, partner at Clifford Chance US LLP Washington, illustrates selected ‘settlement fines’ imposed by US authorities against international companies.

The Necessity of Compliance Programmes Under German Law 61 In 2012, HSBC settled a deferred prosecution agreement with the DOJ and acknowledged that it had failed to maintain an effective programme against money laundering and failed to conduct basic due diligence on some of its account holders. Under the deferred prosecution agreement HSBC agreed to take steps to fix the problems, forfeit $1.256 billion and retain a compliance monitor. HSBC also agreed to pay $665 million in civil penalties to regulators including the Office of the Comptroller of the Currency, the Federal Reserve and the US Treasury Department. In this regard, HSBC Chief Executive Stuart Gulliver said: ‘We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes.’8 In 2014, BNP Paribas pleaded guilty to two criminal charges and agreed to pay almost $9 billion subsequent to accusations that it violated US financial s­ anctions against Sudan, Cuba and Iran. US authorities stated that the severe penalties reflected BNP’s drive to put profits first, even after US officials warned BNP of its obligation to crack down on illegal activity. BNP Paribas’ Chief Executive Officer Jean-Laurent Bonnafe said that the bank deeply regretted the past misconduct that led to this settlement and that BNP Paribas would implement a significant strengthening of its internal controls and processes.9 Finally, another major case concerned Commerzbank, in 2015, which agreed to pay $1.45 billion to various US authorities (the US Federal Reserve, the DOJ, OFAC, DANY, the New York Department of Financial Services and the Manhattan District Attorney’s office) to settle allegations of US financial sanctions and money laundering violations. According to various documents, which became public in the course of the settlement, deficiencies in Commerzbank’s anti-money laundering compliance programme allowed business partners to operate a corporate accounting fraud using special purpose vehicles. ‘When there was profit to be made, Commerzbank turned a blind eye to its anti-money-laundering compliance responsibilities’, said Benjamin Lawsky, superintendent of the New York Department of Financial Services.10 Under the settlement agreement with New York’s financial regulator, Commerzbank was required to install an independent monitor and fire several employees, including the head of anti-money laundering, fraud and sanctions compliance at the New York branch. Commerzbank’s Chief ­Executive Officer Martin Blessing said that the bank would continue to make changes to its systems, training and personnel to address the deficiencies identified

8 A Viswanatha and B Wolf, ‘HSBC to pay $1.9 billion U.S. fine in money-laundering case’ (11 December 2012), available at http://www.reuters.com/article/2012/12/11/us-hsbc-probeidUSBRE8BA05M20121211. 9  J Ax, A Viswanatha and M Nikolaeva, ‘U.S. imposes record fine on BNP in sanctions warning to banks’ (1 July 2014), available at http://www.reuters.com/article/2014/07/01/us-bnp-paribas-settlementidUSKBN0F52HA20140701. 10  S Rubenfel and E Henning, ‘Commerzbank Settles U.S. Allegations of Sanctions, Money-Laundering Violations’ (updated 12 March 2015), available at http://www.wsj.com/articles/commerzbankto-settle-u-s-allegations-of-sanctions-and-money-laundering-violations-1426177346.

62  Alexander Cappel and noted that the bank planned to more than double its US-based compliance staff by 2016.11 These three cases involving HSBC, BNP Paribas and Commerzbank illustrate how international companies and banks have been forced to reconsider their organisational structures, in order to survive in the global market. Settlement fines up to almost $9 billion cannot be considered as ‘peanuts’ and may almost ruin even the strongest corporate organisations. Furthermore, all settlement agreements required the affected companies to heavily improve their CMSs, in order to ensure that similar violations will not occur in the future.12 Moreover, even if the reputational impact of such settlement fines, which receive a lot of media attention, is difficult to calculate, companies affected by extraterritorial investigations and fines imposed by US authorities have to make extreme efforts to regain the trust of their business partners and customers. The key to regaining such trust is to demonstrate to them that the company has put in place a robust CMS which guarantees a minimisation of future potential risks to the greatest extent. Therefore, the cases discussed above illustrate how important it is to implement a CMS. These settlement fines concern the affected companies (like HSBC, BNP or Commerzbank) from a retroactive perspective as a reaction to the misconduct in the past. However, they also concern the affected companies—as well as competitors which might face the same challenges—from a preventive perspective, in order to mitigate the risk of further investigations which might lead to similarly heavy settlement fines in the future.

C.  Growing Number of Broad Crime Definitions In order to comply with relevant legal and internal provisions,13 in particular, the adherence to any legal requirements may be extremely challenging for (internationally active) companies, since an increasing number of legal provisions which affect a company’s business must be taken into consideration. In their own interests, companies must identify every business area where they might face internal and external legal risks. In doing so, the company will consider

11 ibid.

12  Regarding the requirements of CMSs in investigations of US authorities, see also M Rübenstahl and C Skoupil, ‘Anforderungen der US-Behörden an Compliance-Programme nach dem FCPA und deren Auswirkungen auf die Strafverfolgung von Unternehmen—Modell für Deutschland’ (2013) Zeitschrift für Wirtschafts- und Steuerstrafrecht 209 et seq. 13  The adherence to legal requirements and regulatory standards, as well as the fulfilment of the substantial requirements towards the stakeholders, are considered to be the major aspects of a CMS; see, in particular, S Salvenmoser and C Hauschka, ‘Korruption, Datenschutz und Compliance’ (2010) Neue Juristische Wochenschrift 331, 334 et seq.

The Necessity of Compliance Programmes Under German Law 63 potential risks under local law entailing criminal or administrative offences, such as fraud, breach of trust, commercial and public bribery, money laundering, insider trading, market manipulation, exchange offences, anti-competitive ­agreements, abuse of a dominant market position or financial sanctions, export control and customs law provisions. Moreover, companies must also consider international risks which might stem from the FCPA, US financial sanctions and export control provisions (eg OFAC sanctions), the Foreign Account Tax Compliance Act (FATCA) or the UK Bribery Act, to name just a few examples. It can be expected that the legislatures all over the world will impose further legal provisions which will have an impact on the respective companies and bring up further compliance challenges. Apart from an increasing number of legal provisions which are of relevance for a company’s business, such provisions themselves may contain further challenges that make it difficult to guarantee adherence with legal requirements to the best extent possible. The reason for this is that, in particular, ‘white-collar-crime’ provisions are generally written in a very vague way; as a consequence it is often not clear whether or not certain acts are covered by the prohibition.14 The advantage from a government perspective is that vague provisions allow prosecutors to investigate a wider range of business activities and decide only at a later stage whether certain conduct should be penalised with criminal or administrative fines. This tendency is very questionable. The challenge for internationally operating companies lies in determining which provisions apply to each business area and in taking proactive measures to protect the company from criminal investigations or criminal or administrative fines. If companies do not anticipate these risks, they will operate in a legal ‘minefield’. It is then only a question of time until they are facing criminal investigations, which might, in a worst case scenario, result in high settlement fines, like those being imposed for example against HSBC, BNP or Commerzbank, or even criminal prosecutions against managers or employees of the affected banks or companies. Against this background, the implementation of a robust CMS becomes more and more important in order to at least mitigate risks arising from the maze of legal provisions which companies have to comply with.15

14 S Braum, Europäische Strafgesetzlichkeit (Vittorio Klostermann Verlag, Juristische Abhandlungen Band 40, Frankfurt am Main, 2003) 477 et seq; A Cappel, Grenzen auf dem Weg zu einem europäischen Untreuestrafrecht—Das Mannesmann-Verfahren und § 266 StGB als Beispiele eines expansiven Wirtschaftsstrafrechts (Peter Lang, 2009) 144 et seq; a general introduction can be found by P-A Albrecht, Die vergessene Freiheit (Berliner Wissenschafts-Verlag, 2006). 15  Regarding the requirements of CMSs in investigations of US authorities, see also Rübenstahl and Skoupil, ‘Anforderungen der US-Behörden an Compliance-Programme nach dem FCPA’ (n 12) 209 et seq.

64  Alexander Cappel D. Overview of the Relevant Legal Provisions with Respect to CMS Under German Law16 Under German law, indications of the legal requirement to implement compliance programmes may be found in the areas of corporate law and administrative law as well as criminal law.17 1.  Corporate Governance Codex Although the German Corporate Governance Codex (GCGC) does not constitute binding law, the management board and supervisory board of the listed company must, pursuant to Section 161, para 1, sentence 1 of the German Companies Act (Aktiengesetz), annually declare that the recommendations of the Governments Commission GCGC published by the Federal Ministry of Justice in the official part of the Federal Gazette have been and will be complied with, as well as which recommendations have not been or will not be applied and why. In this regard, the Higher Regional Court of Munich (Oberlandesgericht München) decided that violations of the GCGC may lead to the invalidity of decisions of the supervisory board.18 Against this background, it is clear that companies are required to follow the GCGC or otherwise transparently declare why and to what extent they decided not to do so. With regard to the compliance measures, no 4.1.3 of the GCGC stipulates the following: ‘The Management Board ensures that all provisions of law and the enterprise’s internal policies are abided by and works to achieve their compliance by group companies (compliance).’ Although no 4.1.3 of the GCGC is rather vague and provides room for interpretation, it most likely should be interpreted as requiring that German companies analyse their business and implement appropriate measures, in order to ensure that they (including the whole corporate group) do not violate any external and internal laws and provisions.19 Therefore, the GCGC may also be interpreted as a requirement to implement a CMS.

16  Note, however, that the legal requirements to implement a compliance Management Programme are only analysed under German law in this chapter. Other jurisdictions and legal provisions (eg the UK Bribery Act or the US Sentencing Guidelines) might stipulate similar requirements. Furthermore, there might also be further provisions which stipulate the requirement to implement a compliance system for certain sectors, such as the financial industry. 17 An overview is also given in K Moosmayer, ‘Modethema oder Pflichtprogramm guter ­Unternehmensführung?—Zehn Thesen zu Compliance’ (2010) Neue Juristische Wochenschrift 3013 et seq. 18  OLG München, Decision of 6 August 2008—file number 7 U 5628/07 (Az 7 U 5628/07). 19  See also Salvenmoser and Hauschka, ‘Korruption, Datenschutz und Compliance’ (n 13) 334 et seq; E Bicker, ‘Corporate Compliance—Pflicht und Ermessen’ (2013) Zeitschrift für Wirtschaftsstrafrecht und Haftung im Unternehmen 473 et seq; S Funke, ‘Notwendigkeit von Compliance durch REMIT’ (2014) Corporate Compliance Zeitschrift 43 et seq.

The Necessity of Compliance Programmes Under German Law 65 2.  Corporate Law The requirement to implement compliance measures can also be derived from certain corporate law provisions.20 Section 93, para 1, sentences 1 and 2 of the German Companies Act stipulate the following: In conducting business, the members of the management board shall employ the care of a diligent and conscientious manager. They shall not be deemed to have violated the aforementioned duty if, at the time of taking the entrepreneurial decision, they had good reason to assume that they were acting on the basis of adequate information for the benefit of the company.

Furthermore, Section 43, paras 1 and 2 of the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung) stipulate the following: The directors shall conduct the company’s affairs with the due diligence of a prudent businessman. Directors who breach the duties incumbent upon them shall be severally and jointly liable to the company for any damage arising.

A violation of the requirements under both Section 93, para 1, sentences 1 and 2 of the German Companies Act and Section 43, paras 1 and 2 of the Limited Liability Companies Act may cause a civil liability for board members or directors towards the company itself. Therefore, in order to mitigate civil liability risks, board members or directors of a company (regardless of the legal form of a company) are (indirectly) required to combat fraud or other illegal behaviours, in order to avoid any harm caused by such misconduct for the company. Setting up a CMS is an effective solution to ensure that the company will not be vulnerable for any financial losses due to the violation of legal provisions, either by claims of third parties or by criminal or administrative fines of responsible authorities, because in this event, a company may hold the board members or directors directly liable.21 The obligations to implement a CMS under German corporate law have most recently also been discussed in the ‘Neubürger decision’, in which the district court of Munich (Landgericht München) decided that a former board member was required to pay damages for not implementing sufficient compliance measures within the company, which allowed severe misconduct (bribes, breach of trust, etc) to be committed by ­certain employees.22

20  See also Bicker, ‘Corporate Compliance’ (n 19) 473 et seq; D Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion—§ 130 OWiG als zentrale Norm der Criminal Compliance’ (2009) Zeitschrift für Internationale Strafrechtsdogmatik 68 et seq; K von Busekist and O Hain, ‘Der IDW PS 980 und die allgemeinen rechtlichen Mindestanforderungen an ein wirksames CMS (1)—Grundlagen, Kultur und Ziele’ (2012) Corporate Compliance Zeitschrift 41, 43 et seq. 21  Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion’ (n 20) 69 et seq. 22 LG München, Decision of 10 December 2013—file number 5 HK O 1387/10 (‘Neubürger decision’).

66  Alexander Cappel Therefore, the German corporate law provides an incentive for the board members or the directors of a company to implement a CMS in order to mitigate their civil and corporate liability. 3.  Administrative Law a.  Section 130 of the German Act on Regulatory Offences An obligation to implement a CMS may also be found in the German administrative law. In particular, Section 130, para 1 of the German Act on Regulatory Offences (Ordnungswidrigkeitengesetz) states the following: Whoever, as the owner of an operation or undertaking, intentionally or negligently omits to take the supervisory measures required to prevent contraventions, within the operation or undertaking, of duties incumbent on the owner and the violation of which carries a criminal penalty or a regulatory fine, shall be deemed to have committed a regulatory offence in a case where such contravention has been committed as would have been prevented, or made much more difficult, if there had been proper supervision. The required supervisory measures shall also comprise appointment, careful selection and surveillance of supervisory personnel.

Section 130, para 1 of the German Act on Regulatory Offences clarifies that managers who violated their obligation to supervise can be held liable if such omission led the employees of the company to commit an administrative or criminal offence. The misconduct penalised in Section 130, para 1 of the German Act on Regulatory Offences is not the violation of a provision affecting the company’s business (eg the violation of export control or anti-trust provisions), but, rather, the failure to set up and operate adequate compliance measures. Violations of Section 130 of the German Act on Regulatory Offences may lead to an administrative fine of up to €1 million for the respective manager.23 Moreover, such individual misconduct by managers or other persons acting for a company may lead to an administrative fine (Unternehmensgeldbuße) or to a forfeiture order (Verfallsanordnung) against the company itself. An administrative fine against a company can amount up to €10 million (Section 30 of the German Act on Regulatory Offences) or even exceed this amount if this is deemed necessary to siphon off a higher economic benefit generated by the alleged offences (Section 17, para 4 of the Act on Regulatory Offences). Also a forfeiture order under German law may siphon off the so-called gross proceeds without deducting the expenses incurred in order to generate these proceeds (eg the gross payments for certain allegedly illegal exports without deducting the related expenses).24 23 H Milena, ‘Strafrechtliche Folgen von Non-Compliance’ (2014) Zeitschrift für das gesamte ­ andels- und Wirtschaftsrecht 13 et seq; Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion’ H (n 20) 68 et seq; Moosmayer, ‘Modethema oder Pflichtprogramm guter Unternehmensführung?’ (n 17) 3013 et seq. 24  Milena, ‘Strafrechtliche Folgen von Non-Compliance’ (n 23) 19 et seq; cf E Göhler, Gesetz über Ordnungswidrigkeiten, 16th edn (CH Beck, 2012), s 17 no 1 et seq.

The Necessity of Compliance Programmes Under German Law 67 Against this background, board members, directors and other managers of a company need to set up a CMS in order to demonstrate that—to the extent relevant—a potential violation of legal provisions by employees of the company could not have been prevented, because the organisational measures were deemed as appropriate and sufficient.25 Within the meaning of Section 130, para 1 of the German Act on Regulatory Offences a sufficient CMS must, in particular, include the following aspects:26 —— Careful selection of employees (especially with regard to their integrity and reliability). —— Implementation of an adequate organisational structure and allocation of responsibilities (especially with regard to compliance management). —— Adequate training of employees (especially with regard to compliance). —— Sufficient supervision of employees (including sample checks). —— Adequate intervention in the event of wrongdoing (including appropriate disciplinary measures). b.  Section 22, Para 4 German Foreign Trade Act CMS can also be found in further provisions of German administrative law. Section 22, para 4 of the German Foreign Trade Act (Außenwirtschaftsgesetz), for instance, stipulates for the foreign trade sector the possibility of voluntary selfdisclosure to avoid administrative fines for selected violations, such as certain shortcomings regarding notification obligations. Pursuant to Section 22, para 4 of the Foreign Trade Act, prosecution as an administrative offence will not take place in the cases of a negligent violation within the meaning of Section 19, paras 2 to 5 of the German Foreign Trade Act if the violation is uncovered by ‘in-house controls’ and is notified to the competent authority and if appropriate measures are taken to prevent a violation due to the same reason. In this context, ‘in-house control’ is not limited to companies that have already installed a CMS,27 but also extends to those which have still refrained to do so. By implementing self-disclosure based on in-house-control, the legislature intended to give further incentives to persuade those who may argue that the costs of setting up compliance systems does not justify the benefit.28 However, a well-functioning CMS significantly increases the chances that any violations will be uncovered in-house. A well-structured 25  Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion’ (n 20) 68 et seq; von Busekist and Hain, ‘Der IDW PS 980’ (n 20) 45 et seq. 26  See further section III below. 27  J Klengel and A Raschke, ‘Die Selbstanzeige im Außenwirtschaftsrecht’ (2014) Zeitschrift für das Wirtschaftsstrafrecht und Haftung im Unternehmen 369, 373; DM Krause and H-J Priess, ‘Die bußgeldbefreiende Selbstanzeige bei fahrlässigen Verstößen im neuen Außenwirtschaftsrecht (§ 22 IV AWG n. F.)’ (2013) Neue Zeitschrift für Strafrecht 688, 690 et seq; cf C Pelz and Y Hofschneider, ‘Die Selbstanzeige im neuen Außenwirtschaftsrecht—Chance oder Risiko’ (2014) Zeitschrift für Wirtschafts- und Steuerstrafrecht 1, 2. 28  Krause and Priess, ‘Die bußgeldbefreiende Selbstanzeige’ (n 27) 690 et seq.

68  Alexander Cappel compliance department has an advantage compared to companies which are surprised by external allegations of violating the Foreign Trade Act, simply due to the fact that they have no compliance system installed yet. In addition to that, pursuant to Section 22, para 4 of the German Foreign Trade Act, the privilege of self-disclosure is only given to those that, inter alia, avoid any further violations by implementing appropriate measures. Such measures are exactly those of a functioning CMS. c.  Guidelines of the German Federal Financial Supervisory Agency Another indirect reference is given in the guidelines, issued by the German Federal Financial Supervisory Agency (Bundesanstalt für Finanzdienstleistungsaufsicht; BaFin), that it applies to assessing administrative fines on violations of the German Securities Trade Act (Wertpapierhandelsgesetz). The German Securities Trade Act provides for, inter alia, ad hoc publications, voting rights and financial reporting duties. The guidelines are actually not formal law, but a general administrative regulation that provides a standard for the sanctioning practice in the case of regulatory offences covered by the German Securities Trade Act.29 The assessment of fines pursuant to the guideline is set out in three steps, but only the first step is of significance here. In step one the basic amount of the fine is determined, according to the severity of the violation. The severity of violation itself is determined by another two aspects, which are the market capitalisation and gravity of circumstances. Such circumstances may be alleviated by an implemented CMS, which does not in itself mitigate the fine; however, if the violation is uncovered by an implemented CMS and this violation is then reported to the BaFin in a self-disclosure, the BaFin has discretion authority to reduce the administrative fine. Therefore, German administrative law contains clear incentives for the board members, the directors or other managers of a company who have supervisory obligations to implement a CMS in order to mitigate their administrative liability. 4.  Criminal Law Furthermore, German criminal law also contains provisions which may lead to the conclusion that implementation of a CMS will be necessary. The criminal offence of embezzlement and abuse of trust pursuant to Section 266, para 1 of the German Criminal Code (Strafgesetzbuch) states the following: Whosoever abuses the power accorded him by statute, by commission of a public authority or legal transaction to dispose of assets of another or to make binding agreements for

29  Cf T Heinrich, L Krämer and O Mückenberger, ‘Die neue WpHG-Bußgeldleitlinie der BaFin— kritische Betrachtungen und europäische Perspektiven’ (2014) Zeitschrift für Wirtschaftsrecht 1557 et seq.

The Necessity of Compliance Programmes Under German Law 69 another, or violates his duty to safeguard the property interests of another incumbent upon him by reason of statute, commission of a public authority, legal transaction or fiduciary relationship, and thereby causes damage to the person, whose property interests he was responsible for, shall be liable to imprisonment not exceeding five years or a fine.

Section 266, para 1 of the German Criminal Code contains a duty for board members, directors or other managers to safeguard the property interests and assets of a company. Therefore, if the board members, directors or other managers fail to organise the company in a way which would prevent violations of legal provisions through the company’s business—provided that such behaviour would lead to civil claims or criminal or regulatory fines against the company—this will constitute a serious risk that authorities and courts will take the view that this omission may be qualified as a criminal offence of embezzlement and abuse of trust.30 In order to exclude, or at least mitigate, this risk, board members, directors or other managers should implement a compliance system that in a first instance analyses the potential risk areas of a company’s business and then implements measures to prevent potential legal violations that may cause a financial loss for the company. Where board members, directors or other managers refrain from implementing such a CMS, they may face a risk under Section 266, para 1 of the German Criminal Code. Therefore, in addition to the above mentioned incentives, German criminal law also contains incentives for the board members, the directors or other managers of a company who have supervisory obligations in order to mitigate criminal liability to implement a CMS.

E.  Future Legislative Initiatives Furthermore, there are various legislative initiatives which intend to strengthen the requirement for companies to implement compliance systems directly into the applicable law.31 1.  Draft Law of North Rhine-Westphalia on Corporate Criminal Liability The government of the federal state of North Rhine-Westphalia, mainly driven by the Minister of Justice Thomas Kutschaty (SPD), has proposed a draft law on corporate criminal liability (Verbandsstrafgesetzbuch). The draft law on corporate criminal liability provides sanctions for any criminal behaviour or omission of

30 For potential risks under Section 266 of the German Criminal Code, see also H Theile, ‘Strafbarkeitsrisiken der Unternehmensführung aufgrund rechtswidriger Mitarbeiterpraktiken’ (2010) Zeitschrift für Wirtschafts- und Steuerstrafrecht 457 et seq. 31  As a general introduction see Moosmayer, ‘Modethema oder Pflichtprogramm guter Unternehmensführung?’ (n 17) 3013 et seq.

70  Alexander Cappel supervisory obligations by managers. The sanctions may also apply for actions or omissions committed outside Germany, if the corporate entity is located in Germany. According to the draft, criminal behaviour or omissions of supervisory obligations can lead to a criminal fine against the company which can be up to 10 per cent of the annual turnover. Another sanction under the draft could, in a worst case scenario, be the dissolution of the corporate entity. However, the draft also contains provisions under which the investigating authorities and courts could refrain from a potential sanction, if the respective corporate company voluntarily disclosed certain misconduct (eg violation of anti-trust, anti-bribery or exportcontrol regulations, which would be considered as a typical ‘compliance case’ by the affected company) and if the company has implemented a suitable CMS to prevent similar violations in future.32 The North Rhine-Westphalia draft law on corporate criminal liability clearly provides incentives for companies to implement a CMS, in order to avoid sanctions which may arise from, for example, legal violations committed by the c­ ompany’s employees. In contrast with the current situation under Section 130, para 1 of the German Act on Regulatory Offences, the draft law clearly describes the benefit of an existing CMS, rather than relying on vague descriptions and interpretations according to which a CMS might be an advantage for companies in a compliance case. However, it should be noted that it is, to date, unclear if and when the draft law will be ratified. 2. German Association of In-house Lawyers In reaction to the draft law by North Rhine-Westphalia on corporate criminal liability, the German Association of In-house Lawyers (Bundesverband der Unternehmensjuristen) drafted a counterproposal which objects the need to introduce corporate criminal liability and proposes instead to amend Sections 30 and 130 of the German Act on Regulatory Offences.33 In this regard, the counterproposal suggests defining clear measures to prevent omissions of supervisory measures (five-step-theory), in order to guide companies as to what measures must be implemented within a sufficient CMS. In the event of compliance cases, the counterproposal suggests a mitigation of regulatory fines against the company and the responsible board members, directors or other managers, if a CMS was already implemented in the past or will be implemented in the future. Moreover, the counterproposal also suggests an exemption from regulatory fines for the company and the responsible board members, directors or other managers if a CMS exists and if the company voluntarily disclosed the compliance case. 32  For further details see, in particular O Hain, ‘Verbandsstrafgesetzbuch (VerbStrG-E)—Bietet der Entwurf Anreize zur Vermeidung von Wirtschaftskriminalität in Unternehmen?’ (2014) Corporate Compliance Zeitschrift 75 et seq. 33  Available at http://www.buj.net/resources/Server/BUJ-Stellungnahmen/BUJ_Gesetzgebungsvorschlag_OWiG.pdf, accessed 26 March 2015.

The Necessity of Compliance Programmes Under German Law 71 Therefore, without creating a specific act regarding the direct liability for (corporate) companies, the counterproposal also intends to create incentives for companies to implement a CMS, which should be directly stipulated in the applicable laws (German Act on Regulatory Offences). In contrast to the draft law by North Rhine-Westphalia, the counterproposal also gives a clearer guidance as to how an effective CMS for companies should be structured. However, it is to date also unclear if and to what extent the counterproposal will be considered by the federal legislature. 3.  German Institute of Compliance As an alternative to the draft law of North Rhine-Westphalia and the counterproposal by German Association of In-house Lawyers, the German Institute of Compliance (Deutsches Institut für Compliance eV) has drafted a ‘Compliance Incentive Act’ (Compliance-Anreiz-Gesetz) which also suggests amendment of the German Act on Regulatory Offences, in particular Sections 30 and 130.34 According to the German Institute of Compliance the draft proposal should be more efficient and, therefore, it is suggested that the German Act on Regulatory Offences should be adjusted only to the extent necessary. In general, the draft proposal stipulates that in the event of misconduct companies should be liable as follows: —— full administrative liability, if they did not have a CMS prior to the compliance case; —— no administrative liability, if they had an appropriate CMS; and —— mitigated administrative liability only, if the company implements a CMS subsequently.35 Again, the draft ‘Compliance Incentive Act’ includes incentives for companies to implement a CMS, which should be explicitly laid down in the applicable laws (German Act on Regulatory Offences). However, as for the other proposals, it is to date also unclear if and to what extent the draft ‘Compliance Incentive Act’ will be considered by the legislature.

F.  Provisional Conclusion As outlined above, almost 75 per cent of German companies have decided to implement a CMS.36 The reasons for this appear to be obvious, since German law 34 

See https://dico-ev.de/index.php?id=79, accessed 18 August 2016. also A Dierlamm, ‘Compliance-Anreiz-Gesetz (CompAG): Ein Vorschlag des Deutschen Instituts für Compliance—DICO e.V. für den Entwurf eines Gesetzes zur Schaffung von Anreizen für Compliance-Maßnahmen in Betrieben und Unternehmen’ (2014) Corporate Compliance Zeitschrift 194 et seq. 36  See ‘Wirtschaftskriminalität und Unternehmenskultur 2013’ (n 3) 26. 35 See

72  Alexander Cappel gives various incentives to mitigate severe risks under civil, administrative and even criminal law. On an international basis, such risks are, furthermore, most vividly illustrated by the extraterritorial investigations of US authorities which have resulted in heavy ‘settlement fines’, which could have been avoided or at least reduced, if the involved companies had had an appropriate CMS.

III.  CHALLENGES (BURDEN) OF IMPLEMENTING A CMS

As underlined above, implemention of a CMS could provide a substantial benefit for banks and companies. However, the implementation of a sufficient CMS can be very burdensome, since companies have to take great efforts to ‘make compliance work’. The burden is to implement relevant risk mitigation measures. The most important ones will be discussed in more detail below.37

A.  Corporate Structure The company should carefully consider whether the implementation of a CMS requires a change of the corporate structure. It should, in particular, consider, whether the compliance department should be an independent unit with a direct reporting line to the board (Autonomous Compliance Organisation) or whether the units which already exist (Legal, Human Resources, Business, etc) should handle compliance cases on their own and all have a respective reporting line to the board (Matrix Compliance Organisation). In any event, the responsible board members should delegate responsibilities in a way that ensures the company’s compliance with the relevant legal provisions.38

B.  Compliance Resources Regardless of whether the company votes for an Autonomous Compliance Organisation or a Matrix Compliance Organisation, it is crucial that the company employs enough staff to handle relevant compliance questions. However, what ultimately is to be considered ‘enough’ depends on the structure, the business and the vulnerability of the company.39 37 

Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion’ (n 20) 76 et seq. and Skoupil, ‘Anforderungen der US-Behörden an Compliance-Programme nach dem FCPA’ (n 12) all Bicker, ‘Corporate Compliance’ (n 19) 476. 39  O Lucius, ‘Der Standard Compliance Code der österreichischen Kreditwirtschaft’ (2008) Corporate Compliance Zeitschrift 186, 189; D Hense and H Renz, ‘Die Wandlung der Compliance-Funktion in Wertpapierdienstleistungsunternehmen unter besonderer Beachtung der neuen Berichtspflicht an das Senior-Management’ (2008) Corporate Compliance Zeitschrift 181, 183; Rübenstahl and Skoupil, ‘Anforderungen der US-Behörden an Compliance-Programme nach dem FCPA’ (n 12) 212. 38  Rübenstahl

The Necessity of Compliance Programmes Under German Law 73 C.  Implementation of Guidelines The company will also have to implement guidelines (such as a Code of Conduct, anti-bribery guidelines, export-control guidelines, etc) tailored to the company’s business. In this regard, it is important to note that guidelines emanate from the company’s risk analysis and do not follow a ‘one-size-fits-all’ pattern.40 D.  Implementation of Sufficient Systems Based on the risk analysis and a survey of relevant external service providers it may also be useful (and most likely be necessary) for the company to implement and adopt IT systems tailored to the company’s needs (eg customer checks, etc).41 E.  Implementation of Training Once the company has implemented an organisational structure, compliance guidelines and IT systems, it will be necessary to provide internal and external resources to create and conduct training for all relevant employees and make them aware of the relevant legal provisions as well as the legal consequences in case of violations of such provisions. Such training should be conducted in personal sessions as well as via other methods such as training programmes provided over the internet.42 F. Supervision With regard to any measure of the CMS implemented, it is important to also implement a sufficient monitor system which ensures that the employees follow the implemented system and guidelines.43 G.  Implementation of Sanctions for Non-compliance The company should also define the sanctions it will take in case of non-compliant behaviour of its employees. Such measures should, in particular, be labour law 40 

Cf M Zimmer and S Stetter, ‘Korruption und Arbeitsrecht’ (2006) Betriebsberater 1145, 1151 et seq. Salvenmoser and Hauschka, ‘Korruption, Datenschutz und Compliance’ (n 13) 334. 42  Salvenmoser and Hauschka, ‘Korruption, Datenschutz und Compliance’ (n 13) 334; Rübenstahl and Skoupil, ‘Anforderungen der US-Behörden an Compliance-Programme nach dem FCPA’ (n 12) 212; Dierlamm, ‘Compliance-Anreiz-Gesetz (CompAG)’ (n 35) 197. 43 Bayrisches Oberlandesgericht (Bavarian High Regional Court) (2002) Neue Juristische ­Wochenschrift 766; Salvenmoser and Hauschka, ‘Korruption, Datenschutz und Compliance’ (n 13) 334; Dierlamm, ‘Compliance-Anreiz-Gesetz (CompAG)’ (n 35) 197. 41 

74  Alexander Cappel measures, such as official warnings, termination of bonuses, internal transfers or termination of employment.44 Apart from the implementation of the required compliance measures, it is most important that the whole company creates a compliance culture which starts with the right ‘tone from the top’, in order to convince the employees to resist critical non-compliant business opportunities and show a compliant behaviour in favour of both the company and themselves.45

IV.  THE ‘BLESSING’ OF HAVING A CMS

Although the implementation of a CMS requires considerable effort, such implementation will ultimately have significant benefits not only for the affected companies, but also for the employees. As observed above, companies which act internationally are facing a high number of serious risks for both the individuals acting for the company as well as the company itself. Therefore, the biggest advantage—and ultimately a blessing—of the compliance system is the reduction of risks for the company and its employees. In the following, various risks of not having a compliance system will be described from a German law perspective.46

A.  Reduction of Risks for the Employees As outlined above, a company which operates internationally faces a wide range of criminal and administrative law provisions which will apply to its business in the event of a violation, and which might either lead to imprisonment or heavy criminal or regulatory fines for managers or employees. In this regard, under German law employees face the risk of criminal or administrative fines not only as principal perpetrators (Section 25 of the German Criminal Code, regardless of whether acting actively or by omission (Section 13 of the German Criminal Code)), but

44 Cf M Benecke and N Groß, ‘Druck von Dritten nach Compliance-Verstößen’ (2015) Betriebsberater 693. 45  ‘In order to convey the importance of integrity and honesty to a corporation’s employees, those who run the business, those who are responsible for the bottom line, have to be the ones to tell employees that integrity and honesty matter. If they don’t do it, employees won’t believe that those values are core values; they won’t believe that integrity and honesty are important to those who really matter; they won’t believe that their path to success will require adherence to those values’ (SM Cutler, lawyer and former Director of the Division of Enforcement for the US Securities and Exchange Commission); cf K von Busekist and C Schlitt, ‘Der IDW PS 980 und die allgemeinen rechtlichen Mindestanforderungen an ein wirksames CMS (2)—Risikoermittlungspflicht’ (2012) Corporate Compliance Zeitschrift 86, 88 et seq; Bicker, ‘Corporate Compliance’ (n 19) 475 et seq. 46  Note that the legal risks for the companies and their employees are only described under German law in this article. However, there are various risks under the law of other jurisdictions, which could also apply to companies and their employees.

The Necessity of Compliance Programmes Under German Law 75 also as participants (Sections 26, 27 of the German Criminal Code or Section 9 of the German Act on Regulatory Offences), which could, for example, be the case if an employee aids and abets a business partner in criminal activities, such as money laundering.47 Furthermore, violations committed by employees may also cause civil liability of the employee against the company or third parties since this may, in particular, be a breach of the employment contract or an unlawful act (eg risk of claims for damages pursuant to Sections 611, 280, para 1 of the German Civil Code or Section 823 et seq of the German Civil Code). Furthermore, employees face the risk that their employment will be terminated or that they will be dismissed from their profession.48 Moreover, the lack of a sufficient CMS also stipulates risks for other individuals involved. As outlined above, for example, managers of the company who know about any misconduct of an employee and do not intervene can be held liable for participation in such criminal or administrative offences by omission. Furthermore, even where managers did not know about such misconduct, if they do not take appropriate supervisory measures (compliance measures) when it is revealed, they may be held liable for an administrative offence of violation of supervisory duties and an administrative fine of up to €1 million may be imposed under Section 130 of the German Act on Regulatory Offences. Furthermore, managers face a risk under Section 266, para 1 of the German Criminal Code, if misconduct by any employee leads to a financial loss for the company and the manager could have been prevented such misconduct. Against this background and given that a sufficient CMS, in particular, contains guidelines and trainings for employees, in order to make them aware of the ­various risks which might directly affect them, it is evident that a sufficient compliance programme will directly mitigate the outline risks for the employees, as well as for the managers involved.

B.  Reduction of Risks for the Company In the event of a misconduct of company managers or other persons with ­supervisory authority, a company faces the risk of an administrative fine against the company or a forfeiture order. As outlined above, an administrative fine against a company can amount up to €10 million (Section 30 of the German Act on ­Regulatory Offences) or even exceed this amount if this is deemed necessary to siphon off a higher economic benefit generated by the alleged offences (Section 17, para 4 of the German Act on Regulatory Offences). Additionally, a forfeiture order 47 

Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion’ (n 20) 69 et seq. Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion’ (n 20) 69 et seq; Zimmer and Stetter, ‘Korruption und Arbeitsrecht’ (n 40) 1149; Benecke and Groß, ‘Druck von Dritten nach ComplianceVerstößen’ (n 44) 693. 48 

76  Alexander Cappel under German law may forfeit the so-called gross proceeds without deducting expenses made in order to generate them (eg the gross payments for certain allegedly illegal exports without deducting the related expenses). In this case, it is also possible that the administrative fine against the company will be entered into the German Federal Commercial Register (Gewerbezentralregister).49 Furthermore, even if no one from the management is involved in the misconduct of an employee, a company still faces the risk of a forfeiture order (Section 73, para 3 of the German Criminal Code, Section 29a, para 2 of the German Act on Regulatory Offences). Again, in the case of such a forfeiture order there is a high risk that the so-called gross proceeds will be siphoned off without deducting any expenses made in order to generate them. However, a forfeiture order will not be entered into the German Federal Commercial Register. In addition, in the case of misconduct a company also faces the risk of civil claims, termination of contracts or contractual penalties from its business partners. The company will also have to consider whether there are certain tax law risks and correction obligations if it deducted, for example, expenses which were not deductable under the relevant tax law. Additionally, the company might face the risk of entries into certain ‘corruption black lists’ or commercial registers which might exclude it from future business opportunities. Last but not least, any misconduct involving a company bears a serious reputational risk which is hard to quantify.50 Against this background, a suitable CMS will help the company to reduce the various risks for the companies and their employees and, therefore, ultimately be a ‘blessing’ for everyone involved. Furthermore, against the background of aggressive extraterritorial investigations by US authorities, companies will consider the CMS ultimately to be a real ‘blessing’ if they can avoid heavy fines or ultimately the risk of termination of the whole business.

V.  WAYS TO IMPLEMENT A COST-EFFICIENT CMS

The key and starting point for a sufficient CMS is a company (group-wide) risk analysis, since companies need to understand in a first instance what legal risks they face before they can start to implement measures to minimise potential risks.51 The risk analysis itself is part of the management’s business decision as to which compliance measures should be implemented (eg human and financial resources, 49  Milena, ‘Strafrechtliche Folgen von Non-Compliance’ (n 23(a)) 19 et seq; Zimmer and Stetter, ‘Korruption und Arbeitsrecht’ (n 40(b)) 1148. 50  Regarding the various company risks in case of misconduct, see generally: Bock, ‘Strafrechtliche Aspekte der Compliance-Diskussion’ (n 20) 69 et seq; Benecke and Groß, ‘Druck von Dritten nach Compliance-Verstößen’ (n 44) 693 et seq; Zimmer and Stetter, ‘Korruption und Arbeitsrecht’ (n 40) 1145. 51  Bicker, ‘Corporate Compliance’ (n 19) 475 et seq.

The Necessity of Compliance Programmes Under German Law 77 control mechanism, business partner due diligence, etc). If the m ­ anagement fails to conduct a respective risk analysis, it faces, in the event of misconduct, severe risks under German civil, administrative and criminal law. The importance of a risk assessment is also provided for under US and UK law. In this regard, the Criminal Division of the DOJ and the Enforcement Division of the US Securities and Exchange Commission furthermore consider an assessment of risk fundamental to developing a strong compliance programme, and as an important factor when evaluating a company’s compliance programme.52 Furthermore, the UK government stresses the importance of risk assessments for the functionality of a sufficient compliance programme in its guidance to the UK Bribery Act.53 Against this background, it is clear that companies which act internationally are required to conduct a risk analysis, in order to understand their risks and take the appropriate measures to react to them. In this regard, companies should, in particular, analyse risks regarding the relevant laws, organisational risks, customer risks, product risks and country risks. However, all other fields of business activities and the (legal) business setup itself also need to be thoroughly evaluated for their vulnerability to potentially harmful business practices.54 Once a company has analysed the various compliance risks it is facing, it has to implement the right measures. However, such measures only need to be implemented where necessary. The company must not create and implement measures in areas where the risk analysis has not identified a respective risk exposure. For example, a company which is only acting on a local market and does not export products would not be required to implement compliance measures with regard to export control. However, the implementation of a CMS has to cover at least the following five steps:55 —— —— —— —— ——

careful selection of employees; adequate organisational and procedural structure; guidelines and training; sufficient supervision; intervention in case of violations/wrong-doing.

52  Criminal Division of the US Department of Justice and the Enforcement Division of the US Securities and Exchange Commission, ‘A Resource Guide to the US Foreign Corrupt Practices Act’, 58 et seq, available at http://www.justice.gov/criminal/fraud/fcpa/guidance/guide.pdf, accessed 26 March 2015. 53  Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing (s 9 of the Bribery Act 2010), pp 25 et seq, available at http://www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf, accessed 26 March 2015. 54  For further details regarding the set-up of a sufficient risk analysis see, in particular: C Hauschka, Corporate Compliance (CH Beck Verlag, 2010), s 27—‘Compliance-Managementsysteme für Unternehmensrisiken im Bereich des Wirtschaftsstrafrechts’. 55  See also in Hauschka, Corporate Compliance, ibid, who describes the six silos of ‘compliancearchitecture’, with the first silo being the risk analysis itself. See also Bicker, ‘Corporate Compliance’ (n 19) 476 et seq.

78  Alexander Cappel Furthermore, it is crucial that the company really ‘lives’ the implemented CMS and does not just implement it for its own paper trail. In order to implement a CMS in a cost-efficient way, companies can, for instance, use already existing resources and improve them based on the results of the risk analysis. For example, if the risk analysis identifies that a company has certain specific customer due diligence requirements under anti-money laundering laws, it might not be necessary to implement a complete new process but instead use existing customer due diligence measures the company already uses (eg for customer credit reasons) and simply adjust the tools which are additionally required under anti-money laundering laws. However, the company could only use such existing tools if the risk analysis was conducted thoroughly and identified the resources which already existed. Hence, the most cost-efficient way to implement a CMS is by using tools that already exist in the respective organisation. Furthermore, the impact will be most effective if the management clearly commits to the CMS in order to convince the employees to follow the same approach (the ‘tone from the top’).56 Also, a whistle-blowing system might help a company to identify compliance cases at an early state and react quickly before matters escalate further.57 Moreover, a cost-efficient way to gain acceptance is to provide incentives to the employees to follow the company’s CMS (eg compliance focused bonus payments).58 Therefore, companies are relatively free to choose the method of implementation of compliance measures as long as they are effective.59 However, once the measures are chosen, implemented and documented, it will be important that the company creates a ‘compliance culture’ which must be accepted by the employees, the business partners and by relevant authorities. In this case, the cost efficiency will not only affect the CMS itself, but also reduce the risk of heavy fines and, even more, grant new business opportunities.60

VI. CONCLUSION

Due to the increasing legal and enforcement risks highlighted above, in particular in investigations by US authorities, as well as an increasing number of relevant criminal and regulatory provisions, companies cannot afford not to have a CMS. Companies have recently started to understand that a sufficient and effective CMS

56  von Busekist and Schlitt, ‘Der IDW PS 980 und die allgemeinen rechtlichen Mindestanforderungen an ein wirksames CMS (2)’ (n 45) 88 et seq; Bicker, ‘Corporate Compliance’ (n 19) 475 et seq. 57  Hauschka, ‘Corporate Compliance’ (n 54) s 27, pp 673 et seq; A Mengel and V Hagemeister, ‘Compliance und arbeitsrechtliche Implementierung im Unternehmen’ (2007) Betriebsberater 1386, 1389. 58  Bicker, ‘Corporate Compliance’ (n 19) 478. 59  Moosmayer, ‘Modethema oder Pflichtprogramm guter Unternehmensführung?’ (n 17) 3014 et seq. 60  Benecke and Groß, ‘Druck von Dritten nach Compliance-Verstößen’ (n 44) 693 et seq; ­Salvenmoser and Hauschka, ‘Korruption, Datenschutz und Compliance’ (n 13) 334.

The Necessity of Compliance Programmes Under German Law 79 minimises massive legal and reputational risks and protects them from further costs. Based on an efficient and appropriate risk analysis there are ways to implement or improve the CMS cost-efficiently, in particular by using already existing tools and setting the right incentives for the employees. Most importantly, companies must create a ‘compliance culture’ from the top (management board) to the bottom (every employee involved). If a company succeeds in this exercise, it is most likely that compliance will not be considered as a ‘burdensome business blocker’, but as a ‘blessing’ and as a helpful tool, which not only minimises the risk of heavy exposures towards authorities and business partners, but also provides new business opportunities, as business partners have increasingly begun to appreciate companies that conduct their business in a compliance sustaining way instead of chasing quick profits under the risk of legal violations. Companies that are still struggling to implement a CMS, should, therefore, quickly start considering Paul McNulty’s famous advice, in order to form their own opinion as to whether compliance is a burden or rather a blessing: ‘If you think compliance is expensive, try non-compliance.’61

61 

P McNulty, former US Deputy Attorney-General.

80 

Part II

Challenges with Respect to the Administration of Justice and Criminal Procedure

82 

4 Detecting Economic and Financial Crime: A Special Toolkit of Investigation Techniques in Luxembourg JEANNOT NIES1

I. INTRODUCTION

T

HE SLOGAN ‘CRIME does not pay’ has been around for a long time, especially with respect to economic and financial crime. Nevertheless, the focus of the criminal investigation was mainly on the identification of the suspect and the gathering of evidence to prove his guilt; the recovery of the illegal proceeds was not a priority. These times are long gone. Nowadays, discovering the proceeds of a crime and discovering the crime itself are very often synonymous terms in the field of economic and financial crime. The recovery of the proceeds of the crime has become the primary objective of criminal prosecution, especially once the person behind the crime has been identified. This explains why the financial investigation has become of tantamount importance for the success of a criminal prosecution and has become a top priority for law enforcement authorities. In view of the modern techniques used in the economic and financial world, it is not surprising that white collar crime cannot be fought with only the traditional investigative tools, such as the classical search and seizure procedures, To be effective, the fight against sophisticated fraudulent economic crime (or, as the French call it, ‘criminalité astucieuse’) requires new ways to detect the crime in itself, as well as its proceeds. This chapter will present how Luxembourg’s criminal justice system has responded to these challenges. By focusing on Luxembourg, the chapter will take a bottom-up approach. Instead of discussing international instruments or EU legislation, it will approach the topic from the perspective of national legislation and jurisprudence. In this way it will demonstrate the extent and impact of the changes

1  The views expressed here are solely those of the author in his private capacity and do not necessarily reflect the views of any official body of which the author is a member.

84  Jeannot Nies resulting from the fight against economic and financial crime. Therefore, the main focus is on recent changes in the Luxembourgish criminal procedure, in all stages of the criminal process: —— the pre-trial stage, including the detection of the offence, the identification of the perpetrator and the gathering of evidence; —— the trial stage, aimed at establishing whether the suspect is guilty or innocent and at determining an appropriate sentence, such as the confiscation of the proceeds of the crime; and —— the enforcement of the sentence, including the enforcement of confiscation orders. Due to its importance, the pre-trial stage will receive more attention, whereas the trial and the enforcement of confiscation orders will be addressed jointly. The analysis in this chapter will primarily focus on the investigative measures laid down in the Luxembourgish Code of Criminal Procedure (CCP).2 In addition to those investigative measures, other specific tools can be found in legislation on anti-money laundering and terrorist financing (AMLTF).3 However, as these tools are more specifically tuned to collecting intelligence to be shared with other national and/or international AMLTF bodies and are not destined to be used directly in court, they will not be analysed here. The chapter will conclude with a brief assessment on the adequacy and use of these tools.

II.  DETECTING ECONOMIC CRIME

Economic crime can be detected by its victim or through other channels. If the crime is detected by the victim, he or she has a choice: a complaint can be lodged either with the police,4 the public prosecutor5 or the investigating judge.6 In some cases, the victim may even bring the case directly before a criminal court. but this is only possible if all the relevant facts of the case are already available and no further investigative measure is required.7

2  Code d’Instruction Criminelle 2015, available at http://www.legilux.public.lu/leg/textescoordonnes/codes/code_instruction_criminelle/cic.pdf, accessed 3 February 2016. 3  See Law of 12 November 2004 on the fight against money laundering and terrorism financing, Mémorial A, 19 November 2004, No 183, at 2765, amended several times since. For a current version, see http://www.cssf.lu/fileadmin/files/Lois_reglements/Legislation/Lois/L_121104_blanchiment_ upd240715.pdf. 4  Art 9-2 CCP. 5  Art 23(1) CCP. 6  Art 56 CCP. 7  Art 145 (‘peace court’ sitting in police matters) and Art 182 CCP (district court sitting in offence matters). In criminal cases, the possibility of direct summons to appear before the Criminal Court (‘citation directe’) is excluded, see Art 217 CCP.

A Special Toolkit of Investigation Techniques in Luxembourg 85 Often, economic crime will, however, not be detected by its victims, but will be discovered by other persons or institutions (‘third parties’). In this respect, it is noteworthy that Art 23(2) CCP imposes an obligation on every ‘constituted authority,8 every public officer or civil servant, as well as on every employee or agent with a public service mission …’ to inform ‘without delay’ the public prosecutor of any facts that are susceptible to constitute a crime or a misdemeanour as well as to transmit to the prosecutor all information, official reports and other documents relating to the offence, and this ‘notwithstanding any rule of confidentiality or professional secret that may be applicable’. This rule is thus a very important vector of information to the public prosecution service, not only as it is the legal basis of the transmission of information by the police, but also for all of the other persons or instances mentioned in Art 23(2) CCP.9 In addition to the general obligation to report offences, economic crime may also be discovered and reported to the authorities on the basis of the AMLTF legislation. The Law of 12 November 2004 on the fight against money laundering and terrorism financing10 not only obliges financial institutions to fully cooperate with the anti-money laundering authorities (including the Financial Investigation Unit (FIU)), but also to inform, on its own initiative, the district public prosecutor of Luxembourg city of any indication of money laundering or terrorism financing and to provide the public prosecutor, upon request, with any (additional) necessary information.11 The information transmitted by the financial institutions to anti-money laundering authorities can in principle only be used for purposes of the fight against money laundering or against terrorism financing (due to a specialty rule in Art 5, para 2). Nevertheless, this purpose limitation (or specialty rule) does not apply to judicial authorities, meaning that the information reported to the district public prosecutor can be used for any prosecution purposes. Hence, when financial institutions report indications on suspicious money laundering activities to the public prosecutor, the latter may use this information to open a criminal file and to prosecute other offences.12 The transmission of this information is also facilitated by the fact that the FIU, which is responsible for the surveillance of transfers of money in order to combat money laundering and terrorism

8  There is no clear-cut definition of the term ‘constituted authority’ (a literal translation of the French term ‘autorité constituée’), but according to legal doctrine and jurisprudence ‘autoritées constituées’ are authorities which are vested with constitutional powers. The term ‘constituted authorities’ thus refers to the representatives of the legislative, executive and judiciary branches, which are laid down in the national constitution. For instance, the term would include all elected representatives at the national and the local level. 9  Art 23(3) CCP imposes a similar obligation of communication of suspicious transactions to the Luxembourg Financial Intelligence Unit (FIU) in AMLTF cases. 10  Law of 12 November 2004, as amended. 11  Art 5, para 1 of the Law of 12 November 2004, as amended. 12  Art 5, para 2 of the Law of 12 November 2004, as amended.

86  Jeannot Nies financing, also comprises public prosecutors who act with ‘two hats’.13 If they discover an offence as officers of FIU they can, using their other hat, prosecute the case.14 The foregoing reporting obligation was particularly important before the Law of 17 July 2008,15 which substantially extended the list of the predicate offences for money laundering. Since 2008 almost any offence liable to result in a material benefit, including economic crimes, can be a predicate offence of money laundering,16 whereas before that date only a handful of offences qualified as predicate offences. As a consequence, before 2008, the majority of reports of suspicious transactions resulted in criminal files relating to common economic crimes, not money laundering. Finally, a third, more indirect possibility for detecting economic crime with the help of a third party can be found in a relatively new text on whistleblowing, which was introduced by the Law of 13 February 201117 with the aim of reinforcing the means to fight corruption. It guarantees the protection of employees, as well as of civil servants, against any sanctions if they reveal, in good faith, to their superiors or to the competent authorities, facts constituting illegal interest taking, corruption or trading in influence. The same protection is availed if the person acts as a witness in court proceedings. The scope of application of this whistleblowing law includes offences which lie at the heart of economic crime. Therefore, the possibility of whistleblowing is most certainly an interesting development, especially as Transparency International Luxembourg has opened a helpline enabling potential whistleblowers to make their report without difficulties.18

III.  INVESTIGATING ECONOMIC CRIME

Once the crime has been detected, investigations will have to be conducted to collect the necessary evidence. 13  In fact, the FIU is part of the district prosecution office of Luxembourg City (Art. 13bis of Law of 7 March 1980 on the judicial organisation, as amended, Mémorial A 14 March 1980, No 12, at 143. See http://www.legilux.public.lu/leg/a/archives1980/0012/a012.pdf. 14  Nevertheless, a recent practice consists in de facto separating again the two functions, implying that the FIU officer, despite being a public prosecutor, elaborates a report of transition (‘rapport de transition’) and sends it to the public prosecution office. 15  Law of 17 July 2008 on the fight against money laundering and terrorism financing, Mémorial A, 23 July 2008, No 106, at 1495. See http://www.legilux.public.lu/leg/a/archives/2008/0106/a106. pdf#page=2. 16  Art 506-1 of the Criminal Code, 2015. 17 Law of 13 February 2011 strengthening the means to fight against corruption, Mémorial A 18 February 2011, No 32, at 347, available at http://www.legilux.public.lu/leg/a/archives/2011/0032/ a032.pdf. 18  Despite the potential of the whistleblowing law, this legislative possibility has not yet resulted in concrete practice. So far, no criminal case has been opened as a consequence of whistleblowing information. See http://www.transparency.lu/hotline/whistleblowing, accessed 28 January 2016.

A Special Toolkit of Investigation Techniques in Luxembourg 87 As regards the pre-trial phase, it should be noted from the outset that the Luxembourgish criminal justice system contains, in respect of both crimes (crimes) and of certain misdemeanours (délits),19 two procedural steps.20 First, the police— either on their own initiative or ordered by the public prosecutor—start an investigation (enquête de police or enquête officieuse) which, if the legal conditions are met, is followed by the investigation carried out by the investigating judge (instruction judiciaire). Most of the investigative measures discussed in this chapter are only possible if the investigation is led by the investigating judge, due to the coercive or intrusive nature of those measures. As in the French and the Belgian system, in Luxembourg the investigating judge (an independent judge who is member of a district court) is in charge of criminal investigations.21 The investigating judge plays a central role in the Luxembourgish pre-trial investigation,22 and has the coercive powers laid down in the CCP. As described by Thiry: in this respect his powers are almost absolute. For him, there is neither banking secrecy, nor communication nor residence that is inviolable, regardless of the position of the person involved. There are very few professional secrets to comply with (excepting the confidentiality of the investigations). Anyone can be forced, even physically, to come forward and testify, the accused person may be forcibly taken and detained (custody), public force can be directly required to implement the decisions and orders of the investigating judge.23

The opening of a judicial investigation led by the investigating judge is, according to Art 49 CCP, mandatory in case of crimes and optional in case of misdemeanours. In practice, the investigation of economic crime is nearly always undertaken by an investigating judge, assisted by specialised police officers normally attached to the Judiciary Police Department of the Grand-Ducal Police, Economic Crime Division. The reason lies in the fact that these investigations generally need coercive and/or intrusive measures, especially search and seizure procedures, which can only be ordered by a judge. To investigate economic crimes, the investigating judge can of course apply all the traditional tools which have always been in his arsenal, such as for example,

19 The Luxembourgish Criminal Code distinguishes between three types of offences: a serious offence (‘crime’) which is punished by at least five years of imprisonment; a less serious crime (‘délit’) which is punished by imprisonment of at least eight days to maximum five years and infringements (‘contraventions’), which are punished by a criminal fine ranging from €25 to €250. 20  For a general description of the pre-trial procedure in Luxembourg see M Petschko, M Schiltz and S Tosza, ‘Luxembourg’, in K Ligeti (ed), Toward a Prosecutor for the European Union, Vol 1 (Oxford, Hart Publishing, Oxford, 2013) 449–72. 21  Art 27(1) CCP. 22  On the role and powers of the investigating judge, see Petschko, Schiltz and Tosza: ‘Luxembourg’ (n 20). 23  R Thiry, Précis d’ Instruction Criminelle, Vol 1 (Luxembourg, Lucien de Bourcy, 1971), no 253, to be read with the nuances the author adds in later developments.

88  Jeannot Nies search and seizure warrants,24 arrest warrants and pre-trial detention, requesting expert statements, etc. However, recent developments in Luxembourgish criminal procedure have introduced several new tools to the legislative toolkit of the investigating judge. All of these tools are also applicable to economic crime, although they are not limited to this particular type of criminality. In what follows, the most relevant new measures will be discussed. It should be noted that this chapter does not discuss the new investigative measures introduced by a recent amendment of the CCP transposing the Budapest Convention on Cybercrime in Luxembourgish law.25 Several of the newly introduced measures are also of interest to investigations of economic crime committed with the help of the new technologies. However, gathering digital evidence falls outside the scope of this chapter.

A. ‘Mini-instruction’ Article 24-1 CCP, introduced by the Law of 6 March 2006,26 provides for a simplified investigation procedure in cases where the public prosecutor is of the opinion that, in view of the importance of the case, only specific coercive measures are required, and in which a judicial pre-trial investigation would appear to be too cumbersome. Initially, the ‘mini-instruction’ was limited to misdemeanours excluding crimes as well as all AMLTF offences, although there are some exceptions. A recent amendment of the CCP,27 however, extended the scope of application of the mini-instruction to all offences except for most crimes. As the preliminary investigation continues to be led by the prosecutor, the measures the investigating judge is allowed to order based on Art 24-1 CCP are limited to house searches, seizures, taking witness statements or nominating an expert witness. These measures can, however, be ordered in the framework of a miniinstruction without any restriction (meaning that the scope of these measures is identical in the context of a mini-instruction as in the framework of a full-blown

24  Art 66 CCP, as amended. Art 66 CCP refers to Art 31(3) CCP, which lists the objects that can be seized. This list, apart from the traditional items seized as evidence to be used in the case, includes also all objects susceptible to be handed back to their legitimate owner or to be confiscated. If one takes into account that Luxembourg applies the principle of the confiscation of values equivalent to the proceeds of the crime, one can easily imagine the practical importance of this power, especially in financial cases. 25  Law of 18 July 2014, Mémorial A, 25 July 2014, No 133, at 2133, available at http://www.legilux. public.lu/leg/a/archives/2014/0133/a133.pdf. 26  Law of 6 March 2006 introducing the simplified investigation procedure, as amended Mémorial A, 15 March 2006, No 47, at 1074, available at http://www.legilux.public.lu/rgl/2006/A/1074/A.pdf, accessed 3 February 2016. 27  Law of 27 October 2010 strengthening the legal framework for the fight against money laundering and terrorist financing, Mémorial A, 3 November 2010, No 193, at 3171, available at http://www. legilux.public.lu/leg/a/archives/2010/0193/a193.pdf#page=2.

A Special Toolkit of Investigation Techniques in Luxembourg 89 judicial investigation). Accordingly, the courts have ruled that a search of bank premises can be ordered based on Art 24-1 CCP.28 The mini-instruction is thus a valuable instrument for investigating economic crime essentially in cases that require only punctual coercive measures (ie certain types of coercive measures and with regard to specific aspects only). For instance, a mini-instruction can be very useful in a simple bankruptcy case, where the search of bank premises may seem to be sufficient to obtain the necessary information on bank accounts and to solve the case, without requiring further coercive measures. Nevertheless, even if the prosecutor requests the investigating judge to order only one specific investigative measure based on Art 24-1 CCP, the investigating judge may decide proprio motu to open a full-blown judicial investigation, if it is considered necessary. In this case, the judge will ask the public prosecutor to produce a réquisitoire, ie a decision asking the investigating judge to open an investigation, without which the investigating judge may not act.29 However, Art 24-1(2), para 2 of the CCP expressly states that the prosecutor cannot withhold this réquisitoire and is obliged to transmit the file in its entirety to the judge and thus open a normal judicial investigation.

B.  Access to Databases Article 48-24 CCP30 authorises the General Public Prosecutor, the district prosecutors, as well as the members of their offices, in the exercise of their function, to directly access through an automated system a certain number of databases operated by the state. Article 51-1 CCP authorises the investigating judge to have the same access. This legal authorisation covers different digital registers, some of which are certainly relevant to the fight against economic crime, such as the register of persons (natural and legal) subject to Value Added Tax (VAT), the register of the Social Security Administration, the register of motor vehicles and their owners and holders and the register of licences to open a business. In addition, any member of the prosecution service attached to the economic crimes division has a direct digital access to the very important Registre du commerce et des sociétés (RCSL—the trade and companies register), which in the framework of a specific criminal case,31 allows him to acquire valuable information in a very short time.

28 

CcCour, 6 May 2011, No 306/11. Art 24-1(2) CCP. 30  Law of 22 July 2008, on access for judges and police officers to certain personal data processing carried out by legal entities of public law, as amended, Mémorial A, 27 July 2008, No 126, at 1895, available at http://www.legilux.public.lu/leg/a/archives/2008/0126/a126.pdf. 31  Art 22 of Grand-Ducal Regulation of 23 January 2003, as amended, Mémorial, 30 January 2003, No 15, at 248; for a current version see https://www.rcsl.lu/mjrcs/jsp/webapp/static/mjrcs/fr/mjrcs/ legislation.html?FROM_MENU=true&time=1417258288812&pageTitle=menu.item.geninfolegislati on¤tMenuLabel=menu.item.geninfolegislation. 29 

90  Jeannot Nies C.  Special Investigative Measures Related to Financial Information A recent legislative reform that implemented the EU Convention on Mutual Assistance in Criminal Matters as well as its Additional Protocol in Luxembourgish law, added further special investigative measures relating to banking information to the toolkit of the investigating judge.32 Articles 66-2 to 66-5 CCP transpose, in particular, Arts 1 to 3 of the Additional Protocol on the access to information on bank accounts into Luxembourgish law.33 Article 66-2 CCP34 regulates the access to present and past financial information, ie the possibility of obtaining the identity of specific accounts. It grants the investigating judge the possibility, for a list of particularly dangerous crimes including certain economic and financial offences such as corruption and trading in influence as well as AMLTF offences, to order financial institutions to disclose whether the accused person owns or owned, controls or controlled, holds or held a proxy on one or more accounts. This provision formally authorises the investigating judge to order a so-called perquisition toutes banques (ie a search directed simultaneously to all banks as opposed to a search warrant issued against one specific financial institution). This judicial measure is executed directly at the source of the information, ie in the banks. This measure has the advantage that it renders a central register of bank accounts unnecessary. However, in view of the particularly intrusive nature of this measure, the law does provide for a subsidiarity rule: before ordering such a general search, the judge has to assess whether the same result cannot be obtained by less intrusive means. Along the same line, the law specifies that a search directed to all banks must be exceptional and should not be ordered systematically.35 Article 66-3 CCP36 provides for the monitoring of bank accounts, ie a sort of real-time surveillance of financial transactions. Accordingly, the investigating judge, under the same conditions as those laid down in Art 66-2, can order a credit institution to inform him or her of any operation done or intended to be done on a specific bank account of the accused person, and this during the period indicated in the order. Finally, Art 66-437 provides for access to past financial transactions, which allows authorities to access more precise information on the transactions carried

32  Law of 27 October 2010, Mémorial A, 3 November 2010, No 194, at 3193, available at http://www. legilux.public.lu/leg/a/archives/2010/0194/a194.pdf. 33  Parliamentary document No. 6017, initial draft law, at 18. 34  Art 1 of the Protocol established by the Council in accordance with Art 34 of the Treaty on European Union to the Convention on mutual assistance in criminal matters between the member states of the European Union, [2001] OJ C 326/1, 21 November 2001 (‘Additional Protocol of 2001’). 35  Parliamentary document No 6017-8, report of the Justice Commission of the House of Representatives, at 19. 36  Art 3 of the Additional Protocol of 2001. 37  Art 2 of the Additional Protocol of 2001.

A Special Toolkit of Investigation Techniques in Luxembourg 91 out for a specific period. Accordingly, the investigating judge can order a financial institution to hand over to his or her office information or documents pertaining to accounts or bank operations made during a specified period on one or more accounts indicated in the order. Although these possibilities are already of the utmost interest in the fight against economic crime, two more elements should be stressed. First, compliance of the banks with the different orders issued in application of Art 66-2 and 66-3 CCP is enforced by the criminal sanction prescribed in Art 66-5(3) CCP: a refusal by a bank to respond to the request of the investigating judge is sanctioned by a fine ranging from €1,250 to €125,000.38 By contrast, noncompliance with Art 66-4 CCP (ie the order to give access to past financial transactions) is not sanctioned by criminal fines. This lack of a criminal fine in the law can be explained by the possibility for the investigating judge to issue a classic production order to obtain the documents that the bank did not hand over upon the first order.39 Second, in order to enhance the efficiency of the foregoing special measures, Art 66-5(1) CCP allows for the order issued by the investigating judge pursuant to Arts 66-2 to 66-4 CCP to be transmitted by electronic means. Similarly, the financial institution may reply to the order by way of electronic messaging, thus enabling the institution to use modern and much faster means of communication with the judicial authorities.40

D.  Direct Cooperation Between Administrative and Judicial Authorities As noted earlier, Art. 23(2) CCP imposes on civil servants an obligation to inform the public prosecutor of any crime they encounter during the exercise of their functions. However, the legislator has gone a step further by establishing, on the basis of the Law of 19 December 2008,41 a direct channel of communication between the fiscal and the judicial authorities. The purpose of Art 16 of this Law is two-fold. First, it aims to clarify the application of Art 23(2) CCP in relation to fiscal authorities and it ensures that the

38  A maximum of €250.000 if the person responsible for the refusal to cooperate is a legal person (Art 36(3) CCP). In any case, the fine will be inscribed in the criminal register of the convicted legal entity or natural person, which is something banks and/or bankers will wish to avoid. 39  Parliamentary document No 6017– 8, at 21. 40  Actually, a secure and dedicated communication channel between the investigating judges, the judicial police in charge with executing the search warrants and the banks has been put in place, thus enabling the transmission both of the orders and of the replies. This system has reduced the time needed for the notification of the orders to the banks from about eight hours, as was previously the case when transmitted by fax, to the time needed for a mouse click! 41  Law of 19 December 2008, Mémorial A, 23 December 2008, No 198, at 3129.

92  Jeannot Nies reporting obligation is not limited to fiscal offences. Second, it authorises the judicial authorities to receive all relevant information from the fiscal authorities upon simple request, ie without issuing a formal production order. This way the investigative authorities may obtain the information held by the fiscal authorities significantly more quickly.42 This exchange of information is especially relevant in cases concerning indirect taxation, eg VAT carousels, but it can also be useful in any other field of criminality.

IV.  ADJUDICATING ECONOMIC CRIME AND EXECUTING THE SENTENCE

In principle, there is no need for special investigative techniques in the trial stage, as all the necessary elements to prove the accused’s guilt will already be included in the file. For this reason, trial courts generally do not have any investigative powers.43 Normally, during the hearing, the trial court will hear the accused, as well as witnesses and experts, the evidence will be discussed and then both the prosecutor and the defence lawyer will expose their arguments to the court. The accused will have the last word before the court retires to deliberate. However, the judicial decision rendered will, especially in economic cases where the monetary value of the case is very often significant, be of tantamount importance, evidently enough for the defendant in terms of the sentence imposed, but also, more specifically, with respect to the confiscation. Article 32 of the Luxembourgish Criminal Code (CC) provides for mandatory confiscation in case of crimes, whereas in case of misdemeanours, confiscation is optional. In case of petty offences, confiscation must be expressly provided for in the law.44 Article 31 CC45 authorises four forms of confiscation: —— proceeds of crime, ie assets that are the product of the offence; —— instrumentalities of crime, ie assets used to commit an offence; —— assets that substitute the crime proceeds, ie that have been directly acquired by the proceeds of the specific crime, so that there is still a link between the proceeds of the crime and the confiscated assets; —— assets of ‘equivalent value’ to the crime proceeds, if the latter cannot be traced. In case of this value confiscation, there is no longer a link between the

42 

Parliamentary document no 5757, at 13. An exception to this is the criminal court, but then again economic crime is almost never brought to judgment before that specific court. 44  For more details on confiscation, see J Nies, ‘La Confiscation en Droit Luxembourgeois, une Peine en Pleine Ėvolution’, in Quo vadis droit luxembourgeois, Actes du 1er Lëtzebuerger Juristendaag (Luxembourg, Promoculture/Larcier, 2013) 141–56. 45  Art 32-2 CP contains specific provisions for AMLFT. 43 

A Special Toolkit of Investigation Techniques in Luxembourg 93 confiscated assets other than the fact that the total value to be confiscated is equivalent to the sum gained from the crime. In cases concerning economic offences, Art 31(4) CC is of particular relevance, as experience shows that the proceeds of the crime are often no longer available or cannot be traced. A decision of the Cour de Cassation (the Supreme Court of Luxembourg)46 has clarified the scope of application of this provision, confirming the lawfulness of confiscation based on Art 31(4) CP. In particular, the Court clarified that ‘value confiscation’ applies even if there is no link whatsoever between the assets ‘of equivalent value’ and the offence. In other words, according to the Cour de Cassation, in order to enforce the ‘value confiscation’ provided by Art 31(4), it suffices that it is not possible to trace the crime proceeds. In that case, any other assets belonging to the convicted person can be confiscated, and no further condition needs to be fulfilled. Once the confiscation is ordered, it is up to the General Prosecutor’s Office, competent for the execution of penal sanctions, to have the confiscation executed in the most efficient way. Luxembourg has transposed in its national law not only the different international conventions on specific criminal phenomena, such as for example the 1988 Vienna Convention on Drugs,47 the 2000 Palermo Convention on Transnational Organised Crime48 and the 2003 Merida UNCAC Convention on Corruption,49 but also the more general 1990 Strasbourg Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime.50 All these conventions, the provisions of which are directly applicable in Luxembourgish law, provide a legal basis for the execution in Luxembourg of confiscation decisions rendered by courts of countries parties to those treaties. In the absence of a treaty, mutual legal assistance in confiscation matter can be granted on basis of the subsidiary provisions found in Arts 659–668 CCP, as inserted by the Law of 1 August 2007 on confiscation.51 To handle confiscation in national, as well as in international cases, an Asset Recovery Office (ARO) has been set up at the level of the Luxembourg District 46  Cass, 27 November 2014, No 41/2014, see http://www.justice.public.lu/fr/jurisprudence/courcassation/penal/index.html, accessed 3 February 2016, and the decision rendered by the appeal court after the decision of the Court of Cassation, CA, 23 February 2015, No 66/15, unpublished. 47  Law of 17 March 1992, Mémorial A, 26 March 1992, No 15, at 697, available at http://www.legilux. public.lu/leg/a/archives/1992/0015/a015.pdf#page=2. 48  Law of 18 December 2007, Mémorial A, 28 December 2007, No 242, at 4409, available at http:// www.legilux.public.lu/rgl/2007/A/4410/A.pdf. 49  Law of 1 August 2007, Mémorial A, 24 August 2007, No 158, at 2927, available at http://www. legilux.public.lu/leg/a/archives/2007/0158/a158.pdf#page=2. 50  Law of 14 June 2001, Mémorial A, 17 July 2001, No 81, at 1707. See J Nies, ‘Ratification de la Convention de Strasbourg relative au Blanchiment’, Agon, Associations des juristes européens pour la protection des intérêts financiers des Communautés européennes, 2001, No 32, 20–23., available at http://ec.europa.eu/anti_fraud/documents/publications-agon/agon/32_en.pdf. 51  Law of 1 August 2007 on confiscation, Mémorial A, 13 August 2007, No 136, at 2429, available at http://www.legilux.public.lu/leg/a/archives/2007/0136/a136.pdf#page=2m.

94  Jeannot Nies Prosecution Office, following the 2007 decision of the European Council concerning cooperation between asset recovery offices of the Member States in the field of tracing and identification of proceeds from, or other property related to, crime.52 New legislation is being prepared to create at the prosecution level a specialised department which would be specifically competent for managing seized as well as confiscated assets. This new legislation would not only enable the Grand-Duchy to respect its international obligations, but also to streamline and render more efficient the practical procedures now in operation, so that the confiscation and the day to day management of assets can be optimised. In the course of setting up this new department, the legislator will also have to decide upon the question whether or not the ARO should have the competence as well as the necessary powers to open independent financial investigations in order to discover hidden assets with the aim to see the courts’ sentences executed in the best possible way. However, this will be another story, as the intentions of the legislator are still too imprecise to be commented on.

V. CONCLUSION

As has been shown in this chapter, prosecutors and judges in Luxembourg can rely on a rather comprehensive toolkit when facing economic crime. However, even if the laws seem to be adequate enough to combat this specific form of criminality, this discussion cannot be concluded without pointing to a very important shortcoming in system in Luxembourg, which has not been touched upon until now, but which has been systematically underscored by the judicial authorities in their annual activities reports,53 ie that even the best laws will miss their goal, if the manpower, both at the prosecutors’ and judges’ level, but also at the police level, is insufficient. But this is yet another story, which is not part of this discussion.

52 Council Decision 2007/845/JHA of 6 December 2007 concerning cooperation between asset recovery offices of the member states in the field of tracing and identification of proceeds from, or other property related to, crime [2007] OJ L 332/103. The ARO replaced the CARIN contact point, already in existence since the beginning of the CAMDEN process, initiated in October 2002 in Dublin during a conference co-hosted by the Criminal Assets Bureau Ireland and Europol. One of the recommendations made during this conference was to envisage the establishment of an informal network of contacts and a cooperative group in the area of criminal asset identification and recovery. The name agreed for the group was the Camden Assets Recovery Inter-Agency Network (CARIN). As the Camden Court Hotel in Dublin was the location of the workshops where the initiative started, its name was retained for the whole setup. See P Gatineau, ‘The Camden Asset Recovery Inter-Agency Network (CARIN), EU National Asset Recovery Offices (AROs) and Europol’s Role in Asset Recovery’, available at https://e-justice.europa.eu/fileDownload.do?id=d2fa637b-db56-434e-89df-a50d180a4652, accessed 9 April 2016. 53  See, eg, the report of the director of the investigation judges, in Rapport annuel 2011–2012, available at http://www.justice.public.lu/fr/publications/rapport-activites-judiciaires/rapports-juridictionsjudiciaires-2012.pdf, accessed 9 April 2016. However, the subject keeps coming up regularly in almost every annual report.

5 The Role of Whistleblowing and Leniency in Detecting and Preventing Economic and Financial Crime: A Game of Give and Take? CHRISTOPHER HARDING

I. INTRODUCTION

T

HE DISCUSSION HERE considers the role and character of whistleblowing or insider reporting in relation to economic illegality and crime, and in particular in the context of competition policy and leniency programmes. Such insider reporting of illegal activity within organisations such as government departments and companies is not a new phenomenon, but more recently it has attracted increasing attention and critical discussion as the consequent policy, ethical and legal issues have appeared as more pressing matters for resolution. Generally, it is possible to cast whistleblowing as a matter of betrayal in a situation of divided loyalty. However, it will be argued that insider reporting in the context of economic violations and criminality should be understood differently and an important distinction will be drawn between, on the one hand, altruistic and, on the other hand, strategic or self-interested whistleblowing. The need for such a different appreciation of the activity is especially evident in the context of competition policy leniency programmes, which have emerged in recent years as one of the most significant examples of contemporary whistleblowing. The motivation and tactics of whistleblowers who apply for leniency, not unlike that in many other instances of reporting on economic and organised crime, needs to be carefully considered. A profile of leniency applicants will be presented as a way of indicating some of the ethical and political risks for law enforcement in a context of possible self-interested exploitation of an enforcement strategy designed to advance a public interest in norm compliance—a risk in particular of ‘business capture’ of regulation and law enforcement.

96  Christopher Harding II.  OUTSIDE LOOKING IN AND INSIDE LOOKING OUT: THE INTEREST IN THE INTERNAL LIFE OF ORGANISATIONS

Undoubtedly, life in the contemporary world is dominated by a large number of significant and powerful organisations, whether taking a perspective which is political, economic, cultural or social, or whether subscribing to a Westphalian or postWestphalian interpretation of governance. This observation should also be set in the context of a prevalent understanding of human behaviour in Western society as individually determined, springing from a strongly embedded belief in the autonomy and rationality of human individuals as the principal units of agency for purposes of making sense of what happens in the world—the so-called explanatory filter of methodological individualism.1 This latter way of viewing the world complicates an understanding of the significance and impact of organisational activity, but also results in a number of tensions in the relationship between individual humans and the organisations with which the great majority are inevitably involved. In intellectual terms, much social science is then a matter of appreciating the sometimes differing, sometimes overlapping interests of individuals and organisations and of disentangling the complex relationships between these two forms of entity and actor. In so far as there are then two principal forms of self-interest to consider in this context—the individual and the organisational—the management and reconciliation of these interests has resulted in a number of challenging ethical, political and moral questions and dilemmas. One such, of increasing significance and debate in contemporary society, is the issue of the individual within an organisation who reveals something from the inside to those on the outside—the insider informant or ‘whistleblower’.2 Although the role of organisations is being presented here as something which has emerged as a significant aspect of contemporary life, that is not to assert that organisations and whistleblowing are historically recent or novel phenomena, but rather that their conceptualisation, identification, problematisation and regulation are relatively recent. Moreover, it is the recent expansion in the number of different types of organisation and the possibility of multiple membership of and involvement in organisations, which has given rise to more and more legal issues concerning the relation between individuals and organisations. As Starbuck has observed in his discussion3 of the origins of organisation theory, it is important 1  The term ‘methodological individualism’ has been frequently associated with M Weber’s pioneering sociological study Economy and Society (University of California Press, 1922). For a useful overview, see L Udehn, Methodological Individualism: Background, History and Meaning (Routledge, 2001) and, more recently, GM Hodgson, ‘Meanings of Methodological Individualism’ (2007) 14 Journal of Economic Methodology 211; for some discussion of individualism as a basis for western models of criminal law, see C Harding, Criminal Enterprise: Individuals, Organisations and Criminal Responsibility (Willan Publishing, 2007) ch 3 and especially 61 et seq. 2  The term ‘whistleblower’ will be used as a convenient shorthand in the following discussion. Although, as explained below, this descriptive term for insider informing is in some respects a loaded term, it has been widely adopted in general parlance. 3  WH Starbuck, ‘The Origins of Organization Theory’, in H Tsoukas and C Knudsen (eds), The Oxford Handbook of Organization Theory: Meta-Theoretical Perspectives (Oxford University Press, 2003).

The Role of Whistleblowing and Leniency 97 to appreciate the historical transformation from a sense of organisation as a linear structure of authority and command to something more complex and possessing an independent identity, as not just a collective but an organisational actor and agent with a set of interests distinct from those of its human components. And this transformation may be understood and explained by reference to certain historical developments in technology, bureaucracy and education, in particular from the middle of the nineteenth century onwards, which have enabled the appearance of the company and other significant corporate forms which now dominate twenty-first century life. While not a matter for detailed discussion here, such an appreciation of the more recent history of individual and collective interrelations is an important and helpful frame of reference for the ensuing discussion of insider reporting to the world outside the organisation. In particular, it is important to be aware of this historical shift in the sense of belonging and the nature of the consequent tie of loyalty. As Starbuck has argued in relation to earlier forms of organisation: Organizations did exist, of course. There were armies, businesses, construction projects, and royal households. But, it appears that people did not regard themselves as working for or in organizations. They perceived themselves primarily as subordinates of specific individuals—such as kings, ministers, or owners of businesses. Their exact job assignments were secondary because their first responsibility was to do whatever their superiors asked of them.4

In other words, there were loyalties then as there may be now, but it is important to understand that the loyalties and the relationship to the organisation have evolved and changed through time to the present twenty-first century situation of organisational membership. The real starting point for discussion then is the involvement of individuals within organisations and the resulting conflict of interest and loyalty as members of the organisation and also of the wider community outside. Typically an individual may, in addition to his or her individual and personal identity, possess a number of organisational identities—for instance as a citizen of a State, member of a family, spiritual adherent to a belief or faith, employee of a company or other corporate entity, or a member of a gang—performing in this way concurrently different roles and having different experiences and then perhaps competing loyalties. Organisations may assert their own pressures in this regard, invoking arguments such as treason, omertà (code of silence), family first, ‘be true to your school’, and the like. Therein lies the classic dilemma—ethical, political, social and legal—for the whistleblower. The fact that the whistleblower is traitor to one group but hero and protector to another does not help to resolve the personal quandary, but rather renders it more acute. In human psychology, divided loyalty is a very uncomfortable experience.5 4 

ibid 147. of this discussion will set the issue of whistleblowing within the framework of competing loyalties and it will be valuable to draw upon the literature on the psychology and philosophy of loyalty; for an overview of the latter and useful bibliography, see J Kleinig, ‘Loyalty’, in EN Zalta (ed), 5  Much

98  Christopher Harding A brief linguistic survey will demonstrate this point—the whistleblower’s role may be described in differing vocabulary which indicates conflicting interpretations and values. On the one hand, viewed in particular from the outside, the whistleblower as informant will be seen as doing the right thing. Indeed, this is implicit in the metaphor of blowing a whistle, originating probably in the description of a police officer’s method of alerting public attention to the commission of an offence, or a sporting referee indicating foul play.6 In this perspective, what is happening inside the organisation is wrong or problematic, needs to be known about outside, and so the informant is cast as good citizen, moral crusader and brave reporter. On the other hand, the more typical view on the inside of the organisation, recognising the specific interests of the latter, may well see the informant’s act as a matter of betrayal of loyalty to that interest, an act of treachery, breaking confidence and breaching trust, as embodied in a range of derogatory colloquialisms, such as ‘snitch’, ‘sneak’, ‘grass’ or ‘canary’.7 In the parlance of organised crime, the whistleblower has breached the internal code of silence (the Mafia ‘omertà’) or allied him/herself with outside interests (as Michael Corleone says to his brother Fredo, ‘You’re my older brother, and I love you. But don’t ever take sides with anyone against the Family again. Ever.’)8 In turn, this descriptive vocabulary may be translated conceptually into the expression of differing interests of a political and legal kind. Thus, the interest in knowing from the outside may be cast as an overriding ‘public interest’ and supported by legal and constitutional argument and a conceptual vocabulary of openness, transparency and freedom of speech. Conversely, the protective inside interest may be framed in terminology of the ‘code’ of silence or ‘omertà’, loyalty, privacy and legal confidentiality. And then, at a higher legal and constitutional level, the conflict of interest may be further transformed into a clash and balancing of basic rights: privacy and confidentiality versus freedom of speech, transparency and accountability (as discussed further below). Pity, then, the poor whistleblower whose lot is unhappy in this way? Raising that as a question invites an answer which depends on context and motivation. One of the more specific objectives of this discussion will be to test the hypothesis that the ethically motivated ‘political’ whistleblower and the economically motivated ‘business’ whistleblower are different animals, so raising comparative ethical and political questions of how their conduct should be viewed and dealt with in normative and legal terms. The Stanford Encyclopedia of Philosophy (fall 2013), http://plato.stanford.edu/archives/fall2013/entries/ loyalty, accessed 1 April 2015; see also J Connor, The Sociology of Loyalty (Springer, 2007); S Keller, The Limits of Loyalty (Cambridge University Press, 2007); A Westin (ed), Whistle Blowing! Loyalty and Dissent in the Corporation (McGraw-Hill, 1981). 6  In the present context of informing, the word was apparently popularised by the American political activist Ralph Nader in the 1970s, in order to counteract the negative connotations of so much of the slang applicable here. 7 There are many other derogatory slang terms: ‘blabbermouth’, ‘fink’, ‘narc/nark’, ‘rat’, ‘sneak’, ‘squealer’, ‘stoolie/stool pigeon’, ‘turncoat’, ‘weasel’. 8  The Godfather, Part II, directed by FF Coppola, 1974.

The Role of Whistleblowing and Leniency 99 III. CONTEXTS

Evidently, there are a number of contexts in which it may be meaningful to talk about somebody within an organisation informing on internal activities to the world outside, in fact as many contexts as there are kinds of organisation. But it may be helpful for purposes of the present discussion to identify three main contexts for whistleblowing, which appear to be significant in contemporary life and which may be useful for purposes of comparison and normative evaluation: government and public bodies; organised crime; and business. Each gives rise to significant legal issues, and the first two may be usefully compared with whistleblowing in the context of business activity and economic crime. Whistleblowing is not a term which should apply to any act of informing about any matter arising within organisational activity. The assumption in each case should be (a) that the inside activity is wrongful, or damaging to other interests, or both, and (b) that there is then correspondingly a legitimate interest for those on the outside to be aware of the inside state of affairs. Put another way, there is a sense that an act of reporting will be in some way part of a broader public interest, which would be damaged by the wrongful, morally objectionable, illegal or criminal nature of the insider activity. The outsider’s or public interest and right to know is based on an illegality or on risks arising from the inside act and its continuation. There is also, in this main whistleblowing sense, a particular internal role on the part of the informant, often bound up in a relationship of employment, leading to an obligation of loyalty, which will be compromised by the act of informing.9 In each of these three main contexts, there are well known historical examples which can serve to illustrate the discussion. In the context of government and public bodies there are cases such as those of Clive Ponting,10 Katherine Gun,11 Sarah Tisdall,12 Marta Andreasen13 and the more recent notorious example of

9 

See the discussion in Kleinig, ‘Loyalty’(n 5). was a senior official in the UK Ministry of Defence who revealed documents relating to the ordering of the sinking of the Argentinian ship Belgrano during the Falklands conflict; see RN Taylor, The Ponting Affair (Cecil Woolf, 1985); C Ponting, The Right to Know: The Inside Story of the Belgrano Affair (Sphere Books, 1985). Famously, prosecuted for a criminal offence, Ponting was acquitted by the jury in the face of the judge’s instruction to convict. 11  Gun was working as a translator at the UK Government Communications Headquarters (GCHQ) and leaked documents relating to a plan to bug the United Nations Security Council offices ahead of the 2003 invasion of Iraq. She was not subsequently prosecuted. 12  Tisdall, working in the UK Foreign and Commonwealth Office, in 1983 sent anonymously to The Guardian newspaper documents concerning the sending of nuclear missiles from the US to the UK. Legal action against the newspaper compelled the handing over of the documents and Tisdall’s subsequent identification, conviction and sentence to a prison term. 13  Andreasen was a senior accountant at the EU Commission, who in 2002 reported her concerns that the Commission’s internal accounting system was open to fraud; she refused to sign off the 2001 accounts and was subsequently suspended and then dismissed from her position. Her appeal against dismissal was subsequently unsuccessful: Case T-17/08 P Marta Andreasen v Commission, EU:T:2010:374, 9 September 2010. 10  Ponting

100  Christopher Harding Edward Snowden.14 Most of these cases gave rise to a range of legal proceedings and all provoked considerable debate concerning the political, ethical and legal aspects of such whistleblowing. In relation to informants from organised crime groups, there are revealing examples both actual (for instance Henry Hill)15 and fictional (for instance Frank Pentangeli),16 but raising issues of the public interest in effective criminal law enforcement through proof of serious criminal activity. In the context of business activity, there are diverse examples, again giving rise to a rich range of legal and ethical issues: cases such as those of Jeffrey Wigand,17 Stanley Adams,18 Ivan Boesky,19 Mark Whitacre20 and Virgin Atlantic.21 This latter group comprises instances of economic crime or wrongdoing on the part of corporate actors, but also a range of motivation in whistleblowing, from the more altruistic kind in the case of Wigand and Adams, to the more self-interested dealing with law enforcement authorities in the case of Boesky and Virgin to receive lesser sanctions or gain immunity from prosecution, more akin to the category of organised crime whistleblowing mentioned just above. (Whitacre’s case may be more difficult to categorise in this way.) One main purpose of providing a survey across these three contexts is to illustrate the diversity of motivation in whistleblowing, as being on the whole more altruistic and less self-serving in cases involving government and public bodies, and often more strategic and ­self-­serving in the

14  Snowden was a computer professional who released information from the US National Security Agency in 2013 to mainstream media. 15  Hill was a New York Mafia member who provided evidence to the FBI. For biographical details; see N Pileggi, Wiseguy: Life in a Mafia Family (Simon and Schuster, 1986), which was the basis for the film Goodfellas (directed by M Scorsese, 1990). 16  Pentangeli, a fictional character in Godfather Part II (see n 8), partly inspired by the real life Joe Valachi, who had similarly appeared before Senate Committee hearings. Pentangeli in the film decides not to testify at the last moment, reminded and persuaded of his Sicilian obligation of omertà. 17  Wigand was the former vice-president for research and development for the US cigarette manufacturer Brown & Williamson. In 1996 he reported that the company had secretly manipulated its tobacco blend, adding the amount of nicotine, and was subsequently subject to measures of legal harassment and also death threats. This became the subject of the film The Insider (directed by Michael Mann, 1999). 18  Adams was an early whistleblower in the EU context. As a former employee of the Swiss company Hoffmann-la Roche, he supplied information to the EC Commission regarding the company’s anti-competitive practices. He was later prosecuted for offences under Swiss law and also brought a claim for damages against the Commission for allowing his identity to be revealed (Case 145/83 Adams v Commission [1985] ECR 3539). His autobiographical account was published as S Adams, Roche versus Adams (Jonathan Cape, 1984). 19  Boesky was an American financier prosecuted for and convicted of insider trading in 1986. As part of a plea bargain, he informed against other financiers, so as to receive a lesser prison term. See JB Stewart, Den of Thieves (Simon and Schuster, 1991). 20  Whitacre is a notorious US cartelist, who provided evidence to the US authorities in relation to the operation of the Lysine Cartel. For a more detailed account of his case, see C Harding and J Edwards, Cartel Criminality: The Mythology and Pathology of Business Collusion (Ashgate, 2015) 155 et seq; K Eichenwald, The Informant: A True Story (Portobello Books, 2009). The later was adapted into a film of the same name: The Informant (directed by S Soderbergh, 2009). Whitacre served a prison term for other criminal offences, but was not prosecuted for the antitrust offence. 21  As a corporate member of a Fuel Surcharges Cartel, Virgin Atlantic reported the cartel to competition authorities in order to gain immunity from sanctions in 2006; see further the discussion below.

The Role of Whistleblowing and Leniency 101 case of organised crime and business crime informing, and this will be ­discussed further below.

IV.  RISK AND THE EMERGING FRAMEWORK OF REGULATION

Another important point to emerge from such examples concerns the risk to the informant or whistleblower, but these risks may also be of different kinds, in particular the risk to the informant arising from the whistleblowing act, on the one hand, and then the risk to the informant arising from not providing the information, on the other hand. This difference in risk broadly corresponds to the distinction between altruistic and self-serving motivation. Essentially, the altruistic whistleblower may face preventive or retaliatory action from the organisation betrayed in this way—such as dismissal from employment, legal action of a restraining or retributive kind, or threat to personal security—such as to raise arguments that the informant requires legal protection, either to encourage a public service or in return for serving a public good. On the other hand, the selfserving or strategic whistleblower, being also implicated in the offending conduct being reported, is typically seeking to avoid or mitigate the risk of legal sanctions perhaps being applied to him or herself (although in some cases there may also be the risk of retaliation from the organisation, especially in the context of organised crime). In such cases, the argument for legal intervention on behalf of the informant is both protective in some instances (for instance, the provision of ‘witness protection’ for criminal gang informants), but also in the nature of a reward (typically legal immunity or sentencing discount) for the favour done to the interest of law enforcement. In this way an increasingly complex legal framework has emerged to accommodate different kinds of whistleblowing. Again, it may be useful to describe this legal framework broadly under some main headings, indicating the kind of interest being served by the regulation of whistleblowing activity.

A.  Legal Defence Since in practice many whistleblowers are in a legal relationship of employment with the organisation being informed upon, it is that relationship which may form the basis for threatened or actual retaliatory action and therefore protective law has emerged to a large extent within the framework of national employment law, to guard against such measures as dismissal from employment.22 Examples of such protective legislation include the Whistleblower Protection Act 1989 and the

22  See generally DB Lewis (ed), A Global Approach to Public Interest Disclosure: What Can We Learn from Existing Whistleblowing Legislation and Research? (Edward Elgar, 2010).

102  Christopher Harding subsequent Whistleblower Protection Enhancement Act in the US, and the UK Public Interest Disclosure Act 1998,23 supplemented by further provision in the Equality Act of 2010. There is criticism of such protective legislation as being slow to appear, patchy in its extent, and subject to restrictive interpretation by courts (including the US Supreme Court).24 In the European context, the Parliamentary Assembly of the Council of Europe adopted a Resolution and Recommendation on the Protection of Whistle Blowers in 2010 (Resolution 1729),25 urging stronger and more consistent protection, but in 2013 Transparency International published a critical stocktaking report in relation to EU Member States,26 classifying only four countries (the UK, Luxembourg, Romania and Slovenia) as having ‘advanced legal protection’. In addition to employment risks there may in some cases be the risk of aggressive formal legal action, including criminal prosecution, the latter especially in the context of security and ‘official secrets’ legislation—Ponting, Tisdall, Snowden, Wigand and Adams are notable examples of such legal reprisal from the list above. The Council of Europe Resolution represents a legislative blueprint, urging a review of legal provision in order to ensure comprehensive and reliable protection, based on a set of clearly articulated principles which recognise both the value and risk inherent in reporting on illegal, corrupt and abusive organisational practices, while also encouraging a ‘cultural’ review of attitudes regarding organisational loyalty.27

B.  Legal Security and Witness Protection The term ‘security’ is used here to indicate literally the need to ensure in some cases the personal and physical safety and protection of the informant. The most obvious context of such a need is that of informing against crime or other illegal organisations, when such refuge may be provided as part of a law enforcement deal and often described under the heading ‘witness protection’. Such witness protection is provided for in legislation or in formal criminal justice agency

23  See Judge J McMullen, ‘Ten Years of Employment Protection for Whistleblowers in the UK: A View from the Employment Appeal Tribunal’, in Lewis (ed), A Global Approach (n 22). 24  Garcetti v Ceballos, 547 US 410 (30 May 2006); the Supreme Court ruled that government employees do not have protection from retaliation by their employers under the First Amendment, when they had been speaking on the basis of their official role. 25  Parliamentary Assembly of the Council of Europe, ‘Resolution and Recommendation on the Protection of Whistle Blowers’ (Resolution 1729), 2010; see the commentary by D Lewis, ‘The Council of Europe Resolution and Recommendation on the Protection of Whistle Blowers’ (2012) 39 Industrial law Journal 432. 26  Transparency International, Whistleblowing in Europe (2013); this provides a valuable and critical source of information. 27  In an important and perceptive observation Resolution 1729 states, at point 7: ‘The Assembly stresses that the necessary legislative improvements must be accompanied by a positive evolution of the cultural attitude towards whistle-blowing, which must be freed from its previous association with disloyalty and betrayal.’

The Role of Whistleblowing and Leniency 103 a­ rrangements in some jurisdictions,28 but, as may be expected, the position is variable. More recently, the question of witness protection has come to the forefront in the context of international criminal law, especially in relation to the adoption of such measures in legal proceedings arising from the conflict in the former Yugoslavia.29 Typically such measures may comprise anonymity for witnesses and informants, reporting restrictions, hearings in camera, and relocation and change of identity for informants. Any critical discussion of such arrangements has to be set in the context of possible tension and conflict between, on the one hand, the principle of openness and transparency in criminal proceedings and respect for defence rights (‘the right to public trial’), and, on the other hand, any humanitarian need for witness and informant security and the need to pursue justice and ensure enforcement of law.30

C.  Legal Reward This is likely to prove the most controversial element of whistleblower treatment: even while conceding a public interest in effective law enforcement, there are practical and ethical differences as between inducement to inform via the provision of legal protection and inducement to inform via giving a reward. Typically such a reward will take the form of immunity from legal process or some kind of lenient treatment when the potential informant is implicated in the illegality being reported, and will effectively comprise a trade-off: immunity or ‘amnesty’ in return for otherwise difficult-to-obtain evidence.31 In one perspective, such a strategy may be justified as a part of a wider principle of defendant co-operation, whereby a legal defendant is rewarded for helping the legal process—it is a wellestablished principle and practice to mitigate penalties, in order to encourage such co-operation leading to a more expeditious and effective legal process (‘sentencing discounts’ in return for pleas of guilty and the provision of valuable evidence). This utilitarian and instrumental approach to criminal law enforcement has

28  For instance, in the US there is federal legislation dating back to the nineteenth century (the Ku Klux Klan Act 1871) and more recently the Organised Crime Control Act 1970, while some US States have their own legislation. In the UK, there is provision in s 82 et seq of the Serious Organised Crime and Police Act 2005. 29 See, for instance, PM Wald, ‘Dealing with Witnesses in War Crime Trials: Lessons from the ­Yugoslav Tribunal’ (2002) 5 Yale Human Rights and Development Law Journal 217; OSCE Mission to Bosnia and Herzegovina, Witness Protection and Support in BiH Domestic War Crimes Trials: Obstacles and Recommendations a Year after the Adoption of the National Strategy for War Crimes Processing, January 2010. 30  See, for instance, Wald’s argument in ‘Dealing with Witnesses’ (n 29), which is critical of what is perceived as over-generous provision of witness protection, compromising both defence rights and the need to have a full and accurate public record of mass atrocity. 31  There is a varied vocabulary of reward, in particular: ‘immunity’, ‘leniency’ and ‘amnesty’, sometimes with a certain technical meaning in some systems; all three of these terms are employed in the context of anti-cartel enforcement.

104  Christopher Harding achieved greater acceptance in common law systems than in continental European legal systems: such plea bargaining and ‘negotiated justice’ is a significant and wellembedded element in American criminal justice,32 but the compromise of retributive values has resulted in a greater European wariness of such an approach, based on concerns about coercion of vulnerable defendants, the compromise of defence rights and the presumption of innocence, and historical association with the use of torture.33 But in so far as such an approach is adopted, it will operate within a legal framework, which may be embodied in for instance sentencing guidelines or, as in the case of EU anti-cartel enforcement, soft law ‘notices’ regarding immunity from fines and reduction in the amount of fines.34

D.  Determining the Public Interest via Constitutional Debate Some reference has already been made to the way in which discussion of the value of whistleblowing, and its legal control, regulation and possible encouragement has been located in a broader context of constitutional law and human rights protection debate. This, indeed, is the main way in which final answers may be given to questions concerning the desirability of insider reporting, its possible public interest value, and the degree to which the competing interests of the organisation being reported upon should be accommodated. This route of discussion enables the balancing of a number of interests, both public and private. There may be a range of public or more broadly societal interests at stake, which may themselves to some extent be in conflict with each other: public or State security, public health and safety, the pursuit of justice and effective law enforcement, a democratic interest in openness and transparency, freedom of information and speech both in governance and in the administration of criminal law. On the other hand, there are more private or organisational interests, both substantive (for instance, privacy or the protection of property and commercial interests) and procedural (for instance, defence and fair trial rights). Thus, the European Court of Human Rights has been faced with the task of balancing interests in effective law enforcement and rights of legal defence and equality of arms in a case such as

32  For a more detailed account of the development and significance of plea bargaining in the US context, see G Fisher, Plea Bargaining’s Triumph: A History of Plea Bargaining in America (Stanford University Press, 2003); M McConville and Chester L Mirsky, Jury Trials and Plea Bargaining: A True History (Hart Publishing, 2005). 33  For some recent legal and constitutional evaluation of plea bargaining and its compatibility with human rights protection norms, see E Hoven, C Safferling and A Mosbacher, ‘Plea Bargaining in G ­ ermany’ (2014) 15 German Law Journal 1, considering the ruling of the German Federal Constitutional Court of 19 March 2013; judgment of the European Court of Human Rights in Natsvlishvili and Togonidze v Georgia (App no 9043/05) ECHR, 29 April 2014, considering the compatibility of the operation of plea bargaining in Georgia with fair trial rights under the European Convention on Human Rights. 34  European Commission, ‘Commission Notice on Immunity from Fines and Reduction of Fines in Cartel Cases’, OJ C 298/2006, at 17.

The Role of Whistleblowing and Leniency 105 ­ atsvlishvili and ­Togonidze v Georgia35 and freedom of expression, the protection N of ­journalist sources as against the interests of criminal law investigation in a case such as Tillack v Belgium.36 Overall, therefore, there is now a developed framework of legal regulation and assessment of whistleblowing issues, complex and variable across a number of jurisdictions, and at both national and supranational levels. The legal issues which arise from whistleblowing activity often involve an interaction of criminal procedure, public and constitutional law, and basic rights protection, and generally prompt a reflection on the relation between and balancing of the interests of powerful organisations and a wider public or societal interest. It is within this legal framework that the specific phenomenon of whistle blowing in the context of economic crime should be considered and tested.

V.  ECONOMIC CRIME AS THE DOMAIN OF THE STRATEGIC WHISTLEBLOWER AND THE EMERGENCE OF LENIENCY PROGRAMMES

To a large extent, economic crime and delinquency is likely to be the domain of the self-serving rather than the altruistic inside informant, as those concepts have been explained above. Admittedly, there are some instances of altruistic and ethically motivated reporting from the inside—for instance, the cases of Wigand and Adams mentioned above. Stanley Adams, for example, by his own later autobiographical account, was motivated by a sense of personal outrage at the commercial practices of his employer, the Swiss pharmaceutical company, Hoffmann-La Roche. ‘I had seen the effects of the drug companies’ policies. I had seen so much poverty in the world and seen people unable to buy medicines and vitamins because of the price. I had also seen that within Roche, when news came in of an influenza epidemic in, for instance, India, instead of putting vitamin C out in greater quantities and reducing the price, we would control the quantities going out to the market and usually increase the price … To me this was a callous abuse of power. It made me angry, and uneasy. As I looked around I became more and more aware of the arrogance of Roche, of its impertinence in believing that it could do what it liked, break its competitors commercially if they got in the way, destroy as it liked because it had power and money and wanted more of both.’37

35 

European Court of Human Rights, Application no. 9043/05, judgment of 29 April 2014. Hans-Martin Tillack v Commission (App no 20477/05) ECHR, 27 November 2007; Hans-­Martin Tillack was an investigative journalist reporting on the EU Commission’s investigation of fraud through its Anti-Fraud Office, OLAF, and had received some information from somebody within OLAF. The latter asked the Belgian authorities to carry out a search of Tillack’s office and home and some documents were impounded. Tillack argued that his right as a journalist to protect his sources and not reveal the identity of his informant had been violated by the action of the Belgian authorities. The Court of Human Rights held that protection of journalistic sources was necessary for press freedom and that the search amounted to a violation of Art 10 of the European Convention on Human Rights, guaranteeing freedom of expression. 37 Adams, Roche versus Adams (n 18) 17–18. 36 

106  Christopher Harding But in the context of present day competition policy and regulation, the Adams case would not appear typical: there is much significant whistleblowing taking place, but predominantly there is a very different motivation. As the regulation of commercial and economic activity has become more extensive and incursive, so the risk of business actors being implicated in and perhaps sanctioned for illegal activity has also become much more significant, especially as an increasing number of business practices have become criminalised as a strategy for their legal control. This has transformed a number of companies and individual business persons into something comparable to participants in organised crime, with a self-serving motive of guarding against the risks of criminal prosecution. At the same time, much economic delinquency and criminal behaviour has a complex evidential and technical character, presenting difficulties regarding collection of evidence and its legal presentation for purposes of securing a conviction. Naturally enough, in such a context a mutual interest in doing a deal may arise—the supply of evidence from an implicated party on the inside in return for some legal mitigation, in the form of a sentencing discount or even complete immunity. The case of Ivan Boesky provides a good example in the context of conventional financial crime, as a defendant who provided valuable evidence in relation to other insider dealing cases and then as part of a plea bargain received a relatively light prison sentence in relation to his own offences.38 Such cases, well embedded in the American criminal law culture of plea bargaining, then provided a ‘carrot and stick’ model for business cartel regulation in the field of competition governance through the emergence of leniency programmes as a favoured device for regulators. Since the early 1990s leniency programmes have become a dominating feature of anti-cartel enforcement; after being pioneered in the US system by the Department of Justice, this approach has been adopted in numerous jurisdictions around the world and the operation of leniency has become a major component of the work of competition authorities.39 As a regulatory tactic this enforcement strategy was very much a response to problems of proof in relation to business cartels—a combination of the increasingly furtive behaviour of such businesses and the economic and evidential issues associated with establishing a convincing case of collusion. In a European context for example, an outcome of

38  See n 19. Boesky’s case has provided the inspiration for a number of high profile fictional accounts of financial wrongdoing and criminality, such as, for instance, the central character in the film Wall Street (directed by O Stone, 1987). In cultural terms, Boesky’s lecture in 1986 at the University of California School of Business on the theme that ‘greed is good’ provides some criminological insight into such business delinquency. 39  For an overview of the development and typical operation of leniency programmes in the context of anti-cartel enforcement, see the discussion in C Harding and J Joshua, Regulating Cartels in Europe, 2nd edn (Oxford University Press, 2010) ch 8. For a penetrating and detailed critical analysis of leniency, see the collection of papers edited by C Beaton-Wells and C Tran (eds), Anti-Cartel Enforcement in a Contemporary Age: The Leniency Religion (Hart Publishing, 2015).

The Role of Whistleblowing and Leniency 107 the seminal Wood Pulp Cartel litigation before the European Court of Justice40 was a strong need for regulators to penetrate behind an evidentiary veil, in that it became legally confirmed that a resort to circumstantial market evidence and easy deductions of collusive intent from such evidence was not permissible, and the realisation that reliance on the fruit of surprise inspections and searches, or ‘dawn raids’, was likely to prove insufficient.41 The ‘carrot and stick’ strategy embodied in leniency programmes was quickly seen as a solution to this evidentiary dilemma, so that it has now become difficult to envisage business cartel regulation without the resort to leniency. In this way the leniency whistleblower has become a significant phenomenon in the contemporary domain of business and its regulation. Leniency is based upon whistleblowing, but assumes, rather than a motivation and mind set of working towards a public and moral good, the psychology of an insecure and self-serving wrongdoer. In broader ethical terms, an altruistic whistleblower, such as Jeffrey Wigand, might be characterised as brave, but the typical applicant in a competition policy leniency programme is running scared, or, as will be argued later, cunningly manipulative. Leniency is intended to exploit the nervousness, insecurity and fractiousness seen as characteristic of business cartel collusion, where the individual cartelist-conspirator inhabits a world of prisoner’s dilemma—can I afford not to cheat and report now, lest another member of the cartel does so ahead of me and wins the sole prize of immunity? The purpose and method of this enforcement strategy is evident in the films now being issued by regulators to educate business actors regarding the legal risks of cartel involvement, and in effect encourage whistleblowing, such as The Marker42 in Australia and Kom Forst (Be the First to Tell: A Film About Leniency)43 in Sweden, with the message ‘report now or regret later’. As the agonising recruit to a cartel is told by a friend in The Marker: ‘It sound like you’re in a cartel, mate—you need to get out of it.’ Leniency programmes have become practically and legally very significant, but they are essentially a device for rewarding a strategic and nervous self-interest, rather than any public-­ spirited altruism.

40  For a summary account of the EC proceedings against the wood pulp suppliers, see Harding and Joshua, Regulating Cartels in Europe (n 39) 133–36 and 160–66; The judgments of the Court of Justice are reported in Cases 89/85 etc, Ahlstrőm Oy and Others v Commission [1988] ECR 5193; Cases C 89/85 etc, Ahlstrőm Oy and Others v Commission [1993] ECR I-1307. 41  The judgment of the Court may be seen as a victory in favour of hard legal evidence of contact and communication between the alleged cartelists and in that sense a crucial moment in the history of anti-cartel enforcement. The case settled the matter for the future and set a standard of proof for regulators: the allegation, to use the terminology of English criminal law, would have to be proven beyond reasonable doubt. Evidence of that kind would require the use of investigatory methods such as the dawn raid and the insider confession, gained through leniency programmes. 42  Australian Competition and Consumer Commission (ACCC), August 2012. 43  Swedish Competition Authority (Konkurrensverket), February 2010.

108  Christopher Harding VI.  PROFILING THE LENIENCY WHISTLEBLOWER

A.  Outside the Public Gaze: The Low Profile of the Leniency Applicant An important feature of leniency whistleblowing is that it is officially encouraged and the process is in one sense initiated by an official invitation to the business world at large, via competition authority policy statements, legal instruments, informative documentation or even promotional films, as noted above. Officials and agencies of law enforcement have as much to gain as the informant and the perceived ‘enforcement gains’ are evident: in an individual case there will be the provision of crucial incriminating evidence; generally, more illegal business collusion will be revealed and a greater number of cartels are likely to be busted; again generally, there may be a destabilisation of cartels—internal nervousness will be increased, and perhaps deterrence enhanced and long term compliance developed; and then the credibility of the enforcement agencies—in terms of cases cleared up, enforcement of a tough attitude, closure of cartels, the cleaning up of heavily cartelised economic sectors—could be enhanced and a positive message thereby disseminated—rigorous and fair enforcement, stable and assured economic conditions, a good place to invest (a ‘world class economy’).44 In short, the cartelists’ self-serving fear and insecurity is promoted and reinforced by a stated official determination to expose and penalise their activity. But, at the same time, this kind of whistleblowing in itself is not a revelatory announcement to the world at large, but a very private dialogue between the informant and the regulator and one which by its nature remains largely screened from outside scrutiny. In this sense, the informant is not proud, heroic and publicly celebrated, but, rather, seeks a low profile and confidential treatment. Leniency dealing is essentially a bilateral and private negotiation, a fact that then makes ex post facto research difficult, as compared for instance to the examination and analysis of court process.45 Thus, in profiling this category of whistleblower, the starting point is an invitee to a course of dealing who is likely to wish to be outside any public gaze. And in that sense a culture of secrecy as an anti-competitive conspirator feeds into a culture of secrecy and confidentiality in law enforcement. The circumstances of leniency whistleblowing therefore inhibit its study and analysis. While altruistic whistleblowers such as Edward Snowden, Clive Ponting, Marta Andreasen and Stanley Adams are motivated to tell as many people as possible about the inside activity (and often provide detailed written accounts afterwards), corporate and individual leniency applicants are unlikely to seek p ­ ublic 44  Former UK Chancellor Gordon Brown asserted a link between a world-class British economy and the control of restrictive practices in his ‘Mansion House Speech’, 27 June 2002. 45  There is an interesting contrast in the EU process between the very full and informative reportage of all cases (including cartel cases), which are appealed to the European Courts, and the paucity of publicly available information relating to leniency applications and negotiation. The identity of a leniency applicant must be deduced from the fact that eventually no penalty was imposed on that party as a member of a cartel.

The Role of Whistleblowing and Leniency 109 notoriety, and this will be respected, for strategic reasons, in the negotiating process. In a legal account of a cartel proceeding (such as may be found in the E ­ uropean Court Reports) there will be no discussion of the reasons or circumstances of the successful leniency applicant’s decision to report the cartel, and that party’s identity will be understated (a simple reference to a zero penalty as a result of gaining immunity). From the outside researcher’s perspective, it remains a matter of speculation why company X or one of its employees decided to come forward in the case of one cartel but not another, and it is unlikely that such whistleblowers will respond revealingly to questions regarding their motivation, strategy or circumstances after the event. In short, understanding the role and character of this kind of business whistleblower is something of a research black hole.46

B.  The Leniency Applicant as a Serial Cheat While many altruistic whistleblowers may be viewed as engaging in an act of betrayal, in relation to the organisation from which they are reporting, they are often acting in a situation of divided loyalty—for instance, as between their employer or company and their outside obligation as a citizen acting in a public interest. For the typical leniency applicant, who is acting in a self-interested way, it is not so much a matter of divided loyalty, but of strategic decision-making regarding the best moment to change sides. In moral and political terms it may therefore be more appropriate to cast the leniency applicant as a cheating actor, willing to serve either a cartel or the law enforcement interest according to a judgement based on personal advantage. If the leniency applicant is characterised in this way, there may be ethical, practical and legal consequences. For instance, there is the issue of retributive compromise—the problem of rewarding an admitted and perhaps untrustworthy offender, which raises questions of fair treatment, distributive justice, the perceived legitimacy of the enforcement process, and the reliability of the evidence provided by such a party against other offenders. These are matters which may then be seen as risks for the enforcement process, arising from its instrumental resort to a strategy of leniency and dealing with a cheat as distinct from a principled betrayer as in the case of the altruistic whistleblower. 46 There are very few exceptions. For instance, Mark Whitacre, notorious as the Lysine Cartel informant and later the original for the central character in the film The Informant, was subsequently very revealing about his role as spy and informant and then being again as a good citizen, but Whitacre is probably far from representative in his maverick, unconventional and otherwise delinquent and criminal character (see n 20 above). Or again, it is clear enough that in the Art House Auction Cartel, the general legal counsel’s office at Christie’s was keen to extricate the company from the cartel as soon as it was known what had happened, but that again was not a representative business cartel, being better characterised perhaps as an ‘executive frolic’ on the part of four senior people to the exclusion of others in the two companies. See Harding and Edwards, Cartel Criminality (n 20) 167 et seq; O Ashenfelter and K Graddy, ‘Anatomy of the Rise and Fall of a Price-Fixing Conspiracy: Auctions at Sotheby’s and Christie’s’ (2005) 1 Journal of Competition Law and Economics 3; C Mason, The Art of the Steal: Inside the Sotheby’s—Christies Auction House Scandal (Putnam Publishing, 2004).

110  Christopher Harding Moreover, the leniency applicant may also be presented as a serial cheat. As Harding, Beaton-Wells and Edwards have argued,47 this kind of actor may cheat successively—first, as a furtive price fixer or otherwise anti-competitive player, duping the market and consumers; secondly, by secretly cheating on the other members of the cartel in economic terms (for instance, under-cutting an agreed fixed price),48 thirdly, by reporting the cartel and legally betraying the other members; and finally, by perhaps not adhering to the terms of the leniency agreement (for instance, not properly withdrawing from the cartel).49 In so far as there is evidence of such successive cheating, it emphasises the self-serving and amoral character of such leniency applicants as essentially business actors motivated by an overriding economic self-interest. Harding, Beaton-Wells and Edwards then conclude: On this view, the environment of business cartels may appear to be a cheater or traitor’s paradise. It might even be argued that leniency programmes work naturally to encourage such a devious and deceiving mind set, and depend if not thrive upon such a ­temperament—almost, it may be said, to the extent of encouraging dishonesty and conspiracy, the very qualities that are sometimes seen as components of the criminality in cartel offending.50

C.  The Leniency Applicant as a Turncoat A closer examination of and reflection on how leniency programmes work in practice should inform a view of the leniency applicant as a strategic and often canny actor, expertly navigating a realm of different loyalties. In the context of leniency, the whistleblowing cartel reporter dramatically shifts alliance, from collusion with competitors to co-operation with an enforcement agency. Such a ‘turncoat’ role may require the deployment of certain political skills.51 In the first place, a strategic anticipation of the possible advantage of reporting the cartel at some stage, would require the management of evidence. Contrary to the genuine and loyal cartelist’s interest in the removal and destruction of incriminating evidence, the would-be whistleblower within a cartel would need to ­carefully

47  C Harding, C Beaton-Wells and J Edwards, ‘Leniency and Criminal Sanctions in Anti-Cartel Enforcement: Happily Married or Uneasy Bedfellows?’, in Beaton-Wells and Tran (eds), Anti-Cartel Enforcement (n 39) ch 12. 48  See generally, RC Marshall and LM Marx, The Economics of Collusion: Cartels and Bidding Rings (MIT Press, 2012), in their discussion of ‘secret deviation’. 49  The most well-known example of this was the US Department of Justice’s decision to remove the leniency applicant Stolt-Nielsen from a leniency program for failing to take prompt and effective action to terminate its cartel conduct and failing to meet other leniency conditions. Stolt-Nielsen successfully challenged that decision. See United States v Stolt-Nielsen S A, 524 F Supp 2d 609. 50  Harding, Beaton-Wells and Edwards, ‘Leniency and Criminal Sanctions’ (n 47) 250. 51  For a fuller discussion of the following issues, see Harding, Beaton-Wells and Edwards (n 47) 250 et seq.

The Role of Whistleblowing and Leniency 111 but secretly ­preserve and manage incriminating evidence in relation to fellow cartelists.52 In the event of gaining leniency, such evidence acquires considerable strategic and economic value. There is also a need for an expert and informed ‘prisoner’s dilemma’ judgement regarding the optimum moment to apply for leniency and the amount of evidence to reveal to a competition policy for purposes of putting down a ‘marker’ and gaining immunity. The leniency negotiating table is a place of tactical skill and to some extent also of gambling like a card player. This scenario is further complicated by the fact that both individual executives and companies may well have roles in the leniency process, and these roles may not always be happily congruent—much may depend upon internal relations within a company, and the kind of risk faced by individuals in such a context. Marx and Mezzetti, for instance, consider the difficult position of a company executive (in the US system) who has the best access to crucial evidence and is weighing up the risks of providing such information: By cooperating, a manager promotes the prosecution of the cartel, which would potentially leave the manager labelled as someone who has engaged in illegal price fixing, fired from his or her current position, and have severe future career consequences. Furthermore, if a manager cooperates, the firm may not get leniency, or if it does, that manager may be ‘carved out’ by the antitrust authority from the corporate leniency agreement and so face criminal prosecution.53

As Harding, Beaton-Wells and Edwards note, conceptualising the would-be whistleblower as a strategic, ‘gaming’ player in the leniency environment transforms the role of the offender from a reactive defendant to a forward planning agent of information, and into the party who may be largely setting the agenda in what is a process of business-like negotiation rather than top-down interrogation. Indeed, this may be an environment in which the trickster makes the world.54

D.  The Leniency Applicant as a Business Opportunist This characterisation of the leniency applicant as a self-serving, strategic and business-like economic actor may be taken a stage further in contemplating an active 52  The usual characterisation of a cartelist assumes a need to destroy or hide incriminating evidence and indeed some individuals and companies have undertaken a special role for this purpose—for instance, Ian Norris (Carbon Products Cartel) and Peter Whittle and his company PW Consulting (Marine Hose Cartel). But then, almost counter-intuitively, any speculative leniency applicant in prisoner’s dilemma mode, will need to do the opposite—expertly preserve and manage highly incriminating evidence. As Blum, Steinat and Veltins remark, ‘[t]he firm that plans to erase competitors will set up a perfect documentation of its wrongdoings in order to later obtain absolution’. See U Blum, N Steinat and M Veltins, ‘On the Rationale of Leniency Programs: A Game Theoretical Analysis’ (2008) 25 European Journal of Economics 209, 222. 53  LM Marx and C Mezzetti, ‘Effects of Antitrust Leniency on Concealment Effort by Colluding Firms’ (2014) 2 Journal of Antitrust Enforcement 305, 317. 54  Harding, Beaton-Wells and Edwards (n 47) 253.

112  Christopher Harding exploitation of the opportunities offered by leniency programmes. What is being hypothesised here is a kind of business vision, encompassing entry into a cartel in the first place with an idea of exploiting the possibility of leniency for a purely business advantage. As Wils has argued: Successful cartels tend to be sophisticated organisations, capable of learning. It is thus safe to assume that cartel participants will try to adapt their organisation to leniency policies, not only so as to minimise the destabilising effect, but also, where possible, to exploit leniency policies to facilitate the creation and maintenance of cartels. This raises the question whether there could be features of leniency programmes that risk being exploited to perverse effects.55

Some American research, based upon a practitioner survey, confirms the reality of this kind of exploitation of leniency policy on the part of cartelists.56 Harding, Beaton-Wells and Edwards describe such possible strategies of exploitation as a series of gaming cards, to be retained or played at what is judged to be the right moment—‘retained leniency’, ‘internal discipline or hostage’, cartel bust advantage’, ‘cheat then squeal’, ‘cartel sacrifice’, ‘penalty discount’, ‘shared out or allocated advantage’57 and ‘stay silent’.58 See Figure 5.1. Such an argument, which explores the range of business advantages which may be gained, not just from cartelisation but also from engagement with various aspects of leniency programmes and associated strategies of deals for co-­ operation, is naturally difficult to substantiate in empirical terms. But it is not far-fetched, and is corroborated to some extent by circumstantial market evidence. Harding and Edwards, for instance, refer to the history of legal proceedings against some large international companies, suggesting an ‘intriguing possibility of related and repeated collusion, often with the same partners, but also serial desertion and betrayal, to gain the benefit (and economic profit) of leniency’.59

VII.  ECONOMIC DELINQUENCY, WHISTLEBLOWING AND LENIENCY APPLICANTS: THE ROAD TO MORAL AND LEGAL AMBIGUITY

The appearance and development of leniency programmes in the context of competition regulation and the legal control of business cartel activity provides 55 

WPJ Wils, Efficiency and Justice in European Antitrust Enforcement (Hart Publishing, 2008) 137. Sokol, ‘Cartels, Corporate Compliance, and What Practitioners Really Think about Enforcement’ (2012) 78 Antitrust Law Journal 201, 212: ‘Nearly all practitioners stated that the strategic use of leniency (strategic in the sense that the leniency program may be used to punish rivals and in some cases even help to enforce collusion) is a reality and the only issue was the frequency and severity of the strategic gaming. Over half of the interviewees found that strategic leniency was significant.’ 57  Perhaps the most exotic of the strategies is establishing in advance a rota of leniency applications, sharing out the advantage of reporting cartels in different or related markets, thus exploiting the economic gain of immunity arising from leniency applications as a kind of market. 58  See Harding, Beaton-Wells and Edwards, ‘Leniency and Criminal Sanctions’ (n 47) 254 et seq for a more detailed discussion. 59  Harding and Edwards (n 20) 214. 56  D

The Role of Whistleblowing and Leniency 113

Leniency Actual output Agreed output

The retained leniency card.

The internal discipline or ‘hostage’ card.

The cartel bust advantage card.

The cheat then squeal card.

The cartel sacrifice card.

The discount card.

The shared out or allocated advantage card.

The stay silent card.

Figure 5.1:  Cartel Gaming Cards Source: Edwards, Aberystwyth Cartel Biographies Project, 2014. Used with permission.

an instructive example of whistleblowing activity in a contemporary context. Undoubtedly it is reporting from the inside of an organisation, but as such it has a particular motivation and policy context which should be taken into account in conceptualising the character of this kind of informant in the field of economic and business delinquency.

A.  Moral Character and Consequent Legal Entitlement Much of the developing framework of legal regulation of whistleblowing tends to assume a certain moral character on the part of the informant, as a betrayer of powerful organisational interests for reasons of the public good or to the benefit of wider society. This leads to strategies of legal protection for the whistleblowing party, such as that now embodied in much of the developing ‘whistleblower legislation’. Yet, it has to be asked whether such legal entitlement is appropriate for informants in the context of economic crime and especially those involved in competition policy leniency programmes. In this context, brave and voluntary reporting is replaced for the most part by informing which has been invited and induced, and the immediate legal consequence is reward rather than protection. Leniency applicants in particular are not ethical crusaders in the mould of

114  Christopher Harding Wigand or Adams but are likely to be motivated for the most part by their own business interests. Whether their accommodation with competition authorities springs from being in a tight corner or from forward planning and exploitation of systemic opportunities, it is generally based on a business-like protection and advancing of own interest. The resulting questions then reflect the political and moral ambiguity of this situation—is it appropriate to reward offenders in this way and to what extent, is the evidence provided trustworthy for legal purposes, and what kind of message does such a strategy send out, both to potential violators and to society in a wider sense? Up to a point such questions have been addressed, for instance, in limiting the availability of leniency for bullying or ringleader cartelists.60 But, this has happened only to a certain extent, and arguably the moral and legal ambiguity in this situation requires further consideration of this kind of whistleblower entitlement.

B.  Systemic Risks The systemic risks have been outlined just above. Leniency-induced whistleblowing, especially in relation to large corporate actors, is perhaps not wholly analogous to plea bargaining in the US legal system, although they share assumptions and projected outcomes—an easier task for the prosecution and presumed law enforcement gain in return for immunity or mitigation of penalty. But there are differences, for example relating to legal culture and the kind of offender-informant being dealt with. Moreover, in the case of leniency programmes, much remains unclear about the outcome. Despite official claims, it is still possible to argue about the effectiveness of the leniency strategy in terms of law enforcement.61 No doubt, more violations are proven and in that sense a greater number of cartels are busted, but it is not certain what this may mean as a matter of overall enforcement and any level of desistance62 following from the use of leniency as a regulatory strategy. It is arguable that there may be an appearance of short-term gain and effectiveness as a matter of clear-up rate, but that there is a question in the longer term whether the number of violations will have been reduced. Moreover, there is a certain amount of evidence that a number of corporate actors are responding robustly to any threat emanating from the use of leniency, even to the extent of some ‘reverse exploitation’ of the strategy as an extra kind of business opportunity. 60  See, for instance, the provision in the EU leniency programme, as laid down in European Commission, ‘Commission Notice on Immunity from Fines and Reduction of Fines in Cartel Cases’, (2006) OJ C298, and generalised through much of Europe via the European Competition Network (ECN) Model Leniency Programme. For a critical discussion, see Harding and Joshua, Regulating Cartels in Europe (n 39) 250–52. 61  On this important question, see the range of discussion contained in Beaton-Wells and Tran (eds) (n 39). 62  See some of the conclusions offered by Harding and Edwards (n 20).

The Role of Whistleblowing and Leniency 115 In so far as there are such questions concerning the character, role and tactics of whistleblowing parties in this context, some care should be taken in discussion of such insider reporting as ‘whistleblowing’, since (as noted above) this latter term tends to connote for the most part approval of the reporting role. What is urged therefore is a more critical and probing consideration of whistleblowing in the context of economic violations, to consider carefully the extent to which such informants should be viewed as confessors in search of moral and legal absolution,63 good citizen allies of law enforcement, or cynical and exploitative business actors deftly realising the value of information and evidence and how the supply and release of the latter may prove to be good business. If this last characterisation is at all persuasive, then the earlier comment by Harding and Joshua on leniency should be recalled: ‘Criminal law may have colonized competition law, but the methods of business appear to be influencing this newly colonized domain.’64

63  On this interpretation of the motivation and role of the leniency applicant, see Harding and Joshua, Regulating Cartels in Europe (n 39) 252–54. 64  ibid 255.

116 

6 Negotiated Justice—Balancing Efficiency and Procedural Safeguards SABINE GLESS AND NADINE ZURKINDEN

I. INTRODUCTION

‘W

HO RUNS THE world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin?’1 These questions were asked by The Economist magazine in an editorial in summer 2014, which ultimately sided with corporations over US law enforcement. It went on, stating: If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company.2

In fact, the threat of criminal prosecution and—almost unavoidably—‘negotiating justice’ has become a solid part of ‘everyday business’ for corporations, and CEOs—not only in the US. Today, global corporations will hire more than a thousand lawyers, when some decades ago 40 were enough.3 When the Swiss UBS and other major banks were confronted with alleged manipulation of foreign exchange markets in 2014, a rating agency stated that ‘uncertainty over fines and possible restrictions is “one of the biggest risks” for banks …’.4 The Swiss UBS announced that it is negotiating with multiple authorities

1 

The Economist, 30 August 2014, 10. The Economist (n 1) 10. 3  H Schöchli, ‘Wenn 1000 Hausjuristen Nötig Sind’, Neue Zürcher Zeitung (4 March 2015), available at http://www.nzz.ch/wirtschaft/wenn-1000-hausjuristen-noetig-sind-1.18494738, accessed 1 April 2015. 4  ‘UBS Sees Risk of Material FX Fines as Part of Settlement Talks’, available at http://www.swissinfo. ch/eng/bloomberg/ubs-sees-risk-of-material-fx-fines-as-part-of-settlement-talks/40805634, accessed 1 April 2015. 2 

118  Sabine Gless and Nadine Zurkinden but ‘it can’t predict if a settlement would be reached or [on what terms]’.5 Yet, US officials have indicated that they might do away with special settlements for corporations that allegedly engaged in criminal activity, because—according to the reported statement of a top Justice Department official—such settlements do not keep corporations from becoming repeat offenders.6 Faced with such statements one wonders what the negotiation techniques are, or rather what the models and standards are, which lead to settlements in economic and financial crimes? And what is their effect on procedural safeguards? Providing answers to these questions will require two steps: first, some parameters important for understanding ‘negotiated justice’ will be sketched; subsequently, the following questions are addressed: can negotiated justice serve as a tool to settle a dispute among counterparts (albeit unequal ones)? Under what circumstances does negotiated justice run the risk of either being tantamount to extortion or of letting big business off the hook too easily? Different models of negotiated justice will be tested. Finally, the chapter will conclude with a query. It should be noted that this chapter will not reach a final solution for the dilemma of efficiency versus fairness, but will rather be a starting point for further debate. Furthermore, it does not touch on mediation techniques.

II. TERMINOLOGY

A.  What Is Justice? Complex questions, like what is justice in substance or how can it ultimately be achieved, cannot be addressed in the limited framework of this chapter. For the purpose of this chapter it is accepted that prosecutors and other law enforcement authorities do engage in dealing in (big) white collar crime, including negotiating settlements of charges, realising that such deals are met with c­ riticism.7 Against this background, justice is—rather pragmatically—defined as the result of a non-arbitrary process through which allegedly criminal conduct is assessed and settled, possibly by a sanction.8 Accepting this frame of reference,

5 ibid.

6  J Zarroli, ‘For Banks “Too Big To Jail”, Prosecutors Count On A Promise To Behave’, available at http://www.npr.org/2015/03/24/394897368/not-prosecuting-companies-if-they-promise-to-behave, accessed 1 April 2015; B Wolf, ‘U.S. warns banks it may revoke some money-laundering settlements’, available at http://www.reuters.com/article/2015/03/16/us-banks-moneylaundering-idUSKBN0MC1ZE20150316, accessed 1 April 2015. 7  See, for example, BL Garrett, Too Big to Jail (Harvard University Press, 2014); DM Uhlmann, ‘Deferred Prosecution and Non-Prosecution Agreements and the Erosion of Corporate Criminal Liability’ (2013) 72(4) Maryland Law Review 1294. 8  See definition of ‘justice’ in the Merriam-Webster Dictionary, available at http://www.merriamwebster.com/dictionary/justice, accessed 1 April 2015.

Negotiated Justice—Balancing Efficiency and Procedural Safeguards 119 justice can be achieved even if the classic criminal proceedings are bypassed, inside and outside of the courtroom.9

B.  What Is Negotiated Justice? In fact, ‘justice’ is achieved by negotiations in jurisdictions all over the world, meaning ‘negotiated justice’ comes in many shapes and sizes. Although negotiated justice does not have one fixed meaning, there is a common understanding of the term: ‘negotiated justice’ is the result generated by an exchange process of reciprocal concessions replacing the classic criminal trial.10 Thus, ‘justice’ is not achieved through a strictly top-down approach in which a court renders a decision after a contested trial and allocates a penalty. However, whether negotiated justice is in fact a countermodel to handing down a court decision or a softer form of imposing a verdict that is open for discussion is yet another question, which certainly depends on the bargaining power and skills of each side. It should be noted, though, that the actual achievement of ‘justice’ does not appear as a primary goal in the various legal systems. Rather, the goal of negotiating justice is seen in the possibility of simplification of procedures in order to make them more efficient by settling a case quicker and with fewer resources than a contested trial.11

C.  What Is Efficiency? Efficiency normally describes the ability to do something or produce something without wasting a certain resource.12 The relevant resources deployed when engaging in negotiated justice are time, money, peace of mind of the defendant, and the reputation of the criminal justice system. For the purpose of this chapter, efficiency is defined in relation to the time and effort on the part of the participants in regular court proceedings.13

9  See definition of ‘justice’ in The Free Dictionary, available at http://www.thefreedictionary.com/ justice, accessed 1 April 2015. 10  See also F Tulkens, ‘Negotiated Justice’ in M Delmas-Marty and JR Spencer (eds), European Criminal Procedures (Cambridge University Press, Cambridge, 2002) 644 and 673. 11  G Ellscheid, ‘Noch einmal: Der “Strafbescheid” als Alternative zum Deal?’ (2000) KritV Sonderheft 37; G Duttge, ‘Die Urteilsabsprache als Signum einer Rechtlichen Steuerungskrise’, in R Hefendehl, T Hörnle and L Greco (eds), Festschrift für Bernd Schünemann, zum 70. Geburtstag am 1. November 2014 (Berlin, 2014) 887 with further references. 12  See the definition of ‘efficiency’ in the Merriam-Webster Dictionary, available at www.merriamwebster.com/dictionary/efficiency, accessed 1 April 2015. 13  A ‘criminal justice system efficiency programme’ in the UK wishes to shorten proceedings and ‘to reduce duplication between … agencies and unnecessary attendance at court and remove on the need for inefficient paper processes; see https://www.gov.uk/government/publications/criminal-justice-­ system-efficiency-programme, accessed on 1 April 2015.

120  Sabine Gless and Nadine Zurkinden A number of factors have contributed to a demand for more efficient pro­ cedures. Among them are an increase of criminalised conduct, a growing caseload, and increasingly complex offences, the prosecution of which possibly involves ­various domestic and foreign authorities.14 Negotiated justice is generally expected to meet the demands of being more efficient than a courtroom trial, since both sides cooperate and have—as a general rule—an interest in swift proceedings. Thus, at least theoretically, it is a win-win situation for those actually involved in the process; neither side is weighed down by the procedural drawbacks of the top-down approach of classic criminal proceedings. However, this does not mean that the quickest mode of resolution can be selected. For instance, a judge who would offer a game of ‘rock, paper, scissors’ to a prosecutor and defendant in order to decide on a charge and thus possibly on the punishment would, in the eyes of most people, not only look foolish or desperate, but arguably incompetent and reckless. It can be assumed that even those who do not want justice to be negotiated (or who do not believe that justice can be negotiated) would agree that if such a thing as ‘negotiating justice’ were to be allowed, there would have to be set rules prior to entering into negotiation to ensure that each side gets a rational chance for a ‘fair shake’. Or phrased differently: efficiency of the procedure must be balanced with procedural safeguards.

D.  Endangered Procedural Safeguards Procedural safegards are the rules protecting individual rights when confronted with the state’s ius puniendi and securing fair chances of the defendant, namely through (a) the presumption of innocence and (b) the right to a public trial, during which the defendant has (c) the right to remain silent (privilege against selfincrimination) with the burden of proof on the prosecution and (d) the right to equal treatment, including the prohibition of arbitrary detention. The use of these rights, specifically through the challenge of a fact or point of law, or the silence of a defendant, slows down the process of settling the case. Therefore, ‘negotiated justice’ will by nature give more weight to efficiency, with a tendency to submit itself to as few rules as possible, on the one hand.15 On the other hand, if one wants to achieve justice in a negotiation process, there must be rules that ensure each side has a fair chance: Even behind closed doors, ‘rock, paper, scissors’ is not an option when negotiating a possible punishment.

14  See also T Weigend and J Iontcheva-Turner, ‘The Constitutionality of Negotiated Criminal Judgments in Germany’ (2014) 15(1) German Law Journal 81, 84. 15  See, for example, Tulkens, ‘Negotiated Justice’ (n 10) 652.

Negotiated Justice—Balancing Efficiency and Procedural Safeguards 121 III.  BALANCING A SHAKEDOWN SYSTEM?

Negotiated justice is a reality in many jurisdictions.16 It is either explicitly provided for by law or informally done—even if the law does not provide for it. Apparently the more it has become a part of criminal law practice, the more the system of criminal justice has become dependent on it, as it is deemed much more efficient than a contested trial.17 In the US it is predicted that ‘the criminal justice system will grind to a halt if the settlement of criminal cases is barred, so that all cases must be litigated to final judgment’.18 This might be the reason why it has proved so persistent despite the critique from various sides.19 The question remains how efficient negotiations and procedural safeguards can be balanced in a system that must give priority to a pragmatic solution. The editorial published in The Economist mentioned at the beginning of this article is sceptical, as it explains: The amounts [gained by negotiations] are mind-boggling. So far this year, Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and other banks have coughed up close to $ 50 billion for supposedly misleading investors in mortgage-backed bonds. BNP Paribas is paying $ 9 billion over breaches of American sanctions against Sudan and Iran. Credit Suisse, UBS, Barclays and others have settled for billions more, over various accusations. And that is just the financial institutions.20

A.  Laying Out the Ground Does negotiated justice lead to ‘mind-boggling’ results in the field of economic and financial crimes? Is it different if used against corporations and white collar

16  For a comparative analysis, see, for example, D Brodowsky, ‘Die verfassungsrechtliche Legitimation des US-amerikanischen “plea bargaining”—Lehren für Verfahrensabsprachen nach § 257c StPO?’ (2013) ZStW 733–77; T Laliashvilli, Abspracheverfahren im deutschen, US-Amerikanischen und georgischen Strafverfahrensrecht in Vergleichender Sicht (Europäische Hochschulschriften, Oxford, Peter Lang, 2012); for a general overview with comparative aspects, see Tulkens (n 10) 641–87. 17  On the dependence of the US criminal system on plea-bargaining, see Santobello v New York, 404 US 257, 260 (1971). Weigend and Turner, for example, notice in respect of a decision of the German Federal Constitutional Court: ‘After decades of negotiating judgments, the German system of criminal justice has become so dependent on the practice that an outright ban would have had unforeseeable and unmanagable consequences’: Weigend and Iontcheva-Turner, ‘Constitutionality of Negotiated Criminal Judgments’ (n 14) 81. 18  RA Epstein, ‘Deferred Prosecution Agreements on Trial: Lessons from the Law of Unconstitutional Conditions’, in AS Barkow and RE Barkow (eds), Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct (New York University Press, New York, 2011) 39. 19  On such critique see, for example, P Darbyshire, ‘The Mischief of Plea Bargaining and Sentencing Rewards’ (2000) Criminal Law Review 895; Duttge, ‘Die Urteilsabsprache als Signum einer Rechtlichen Steuerungskrise’ (n 11) 875–890; Garrett, Too Big to Jail (n 7); Uhlmann, ‘Deferred Prosecution’ (n 7). 20  The Economist (n 1) 10.

122  Sabine Gless and Nadine Zurkinden suspects than if used in petty crimes or in international criminal law settling a case of war crimes?21 It is easy to imagine that the bargaining power of a petty thief or a person caught with a smoking gun over a dead body is different from, and more difficult than, that of a bank CEO heading the foreign trade implicated in an investment fraud or rigging system. But is the latter worse off, as suggested by The Economist? Basically three features seem to be crucial: —— criminal provisions aiming at white collar crimes are becoming increasingly vague; —— white collar suspects tend to have better resources for an efficient (or from the perspective of law enforcement, conflicting) defence, and are more sophisticated in negotiation techniques; —— white collar suspects are more fearful because even just an indictment— regardless of the outcome of the procedure—can ‘be tantamount to a death sentence for business entities’.22 If found guilty, white collar criminals today face the risk of harsher penalties, certainly when compared with 20 years ago. Maximum criminal penalties for economic crime have gone up and judges are willing to hand out such penalties.23 These features may affect the negotiating process, putting white collar suspects in a disadvantaged position from the outset. The vagueness of criminal provisions gives prosecutors a rather easy tool to start investigations, in theory. At the same time, law enforcement authorities often face difficulties as soon as they look for ‘hard’ evidence: there is no ‘smoking gun’ or ‘dead body’. Sometimes there is no tell-tale evidence at all for an economic or financial crime, only rumours. ­Furthermore, evidence to substantiate a suspicion might have to be gathered in a high social class of inner circle corporate and bank industry. Looking for information, the prosecution authorities must always keep in mind that, at least in theory, in the end they must have valid information capable of establishing an accusation beyond a reasonable doubt in court. At first glance, this scenario may look like it creates a strong incentive for the prosecution to enter into negotiations if factual or legal points are hard to prove, after many hours of investigation resources. Thus, the alleged white collar criminal could sit back and wait, and if no good deal presents itself, go to trial with little to fear. At the same time, however, it appears

21  For a critical review on negotiated justice in cases of war crimes, see A Petrig, ‘Negotiated Justice and the Goals of International Criminal Tribunals’ (2008) 8 Chicago-Kent Journal of International and Comparative Law 1. 22  PJ Larkin Jr, ‘Funding Favored Sons and Daughters: Nonprosecution Agreements and “Extraordinary Restitution” in Environmental Criminal Cases’ (2013) 47 Loyola Law Review New Orleans 1, 18, available at http://digitalcommons.lmu.edu/llr/vol47/iss1/1, accessed 1 April 2015. 23  LE Dervan, ‘White Collar Over-Criminalization: Deterrence, Plea Bargaining, and the Loss of Innocence’ (2013) 110 Kentucky Law Journal 723, 745.

Negotiated Justice—Balancing Efficiency and Procedural Safeguards 123 that in the corporate world of today, a settlement is often believed to be the better solution. The prevailing notion seems to be that if a company or their managers were to opt for the courtroom, they risk being convicted and sentenced with even harsher punishment.24 Furthermore an indictment is likely to be accompanied by large collateral consequences such as customers and investors who abandon the firm. A conviction can lead to the loss of licences necessary for the business in question, resulting in huge financial losses that might even result in bankruptcy, bringing about substantial harm to innocent shareholders, employees, and pensioners. Such consequences cannot be undone anymore even if an appellate court later overturns the conviction.25 These can be strong incentives for companies as well as for allegedly wrongdoing individuals to resort to negotiation and forego the public, contested trial to which they are entitled. A further reason why companies tend to opt for a negotiated settlement is that in any given economic crime, there are quite often at least two defendants: the company and the individual wrongdoer. Thus rather than oppose government investigations, a corporation may decide to help build the case against the individual defendant, hoping at the same time to settle the claim against the corporation itself. US corporations conduct rigorous internal investigations and require their officers and employees to cooperate, because it is generally to the corporation’s advantage to inform the government of the relevant information and negotiate a settlement that avoids or minimises the entity’s criminal liability and limits damage to the company’s reputation.26

B. Examples In the following four examples of negotiated justice—two from the US jurisdiction of common law, two other from the German system in continental Europe will be introduced. The four examples depict opposing models of how justice can be negotiated and how they can have different effects on bargaining over the settlement of allegations in the economic and financial sector. Although negotiated justice is common all over the world today, the US is still the criminal justice system with the most visible negotiation techniques. The courts have accepted negotiating justice as ‘an essential component of the administration of justice’,27 and seen to it that the parties complied with agreements.

24 

ibid, 745. AS Barkow and RE Barkow, ‘Introduction’ in Barkow and Barkow (eds), Prosecutors in the Boardroom (n 18) 2. 26  SH Duggin, ‘Internal Corporate Investigations: Legal Ethics, Professionalism and the Employee Interview’ (2003) Columbia Business Law Review 859. 27  Santobello v New York, 404 US 257, 260 (1971). 25 

124  Sabine Gless and Nadine Zurkinden 1.  Deferred Prosecution Agreements and Guilty Pleas in the US a.  Deferred Prosecution Agreements For many people in Europe, the classic form of negotiated justice is a guilty plea— the US way. With regard to white collar crime, however, lately in the US more and more cases have been settled with deferred prosecution agreements (DPA).28 A DPA is a deal between a prosecutor and a potential criminal defendant which imposes a provisional deferral of ongoing litigation. It allows a corporation to avoid both an indictment and a conviction.29 As opposed to plea bargains, a DPA is not a final settlement of the case. Instead, the defendant must comply with the terms of the agreement, otherwise the criminal proceedings will be resumed. The sword of Damocles thus remains hanging over the defendant. Only upon full compliance with the terms agreed to in the DPA will the prosecution finally be terminated.30 A corporation that allegedly committed various offences, for example, might consent to a DPA in which it agrees to pay restitution, implement corporate reforms and fully cooperate with the investigation. DPAs are meant to achieve several purposes. Among them are the avoidance of significant collateral consequences of a corporate conviction for innocent third parties, the promotion of compliance with applicable law, the prevention of recidivism, and the attainment of prompt restitution for victims.31 It is expected that DPAs ‘can help restore the integrity of a company’s operations and preserve the financial viability of a corporation that has engaged in criminal conduct, while preserving the government’s ability to prosecute a recalcitrant corporation that materially breaches the agreement’.32 Information charging the offence and the DPA are filed with, and must be approved by, a federal district court.33 However, American scholars claim that courts only cursorily review DPAs and that no court has ever rejected a DPA.34

28  Since 2000, the United States Department of Justice has entered in more than 300 publicly disclosed DPAs and Non-Prosecution Agreements (NPAs) and it is thought that there have been others that were not publicised; Gibson, Dunn & Crutcher LLP, ‘2014 Year-End Update on Corporate NonProsecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs)’ (6 January 2015), available at http://www.gibsondunn.com/publications/pages/2014-Year-End-Update-CorporateNon-Prosecution-Agreements-and-Deferred-Prosecution-Agreements.aspx, accessed 1 April 2015. 29  BL Garrett, ‘Globalized Corporate Prosecutions’ (2011) 97(8) Virginia Law Review 1776, 1778. 30  RA Epstein, ‘Deferred Prosecution Agreements on Trial’ (n 18) 38. 31  United Staes Attorneys’ Manual, Title 9-28.1000, available at http://www.justice.gov/usao/eousa/ foia_reading_room/usam/title9/28mcrm.htm#9-28.1000, accessed 1 April 2015. 32 ibid. 33  Gibson, Dunn & Crutcher LLP, ‘2009 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements’ (7 January 2010), available at http://www.gibsondunn.com/publications/ pages/2009YearEndUpdateCorpDeferredProsecutionAgreements.aspx, accessed 1 April 2015. 34  Uhlmann (n 7) 1328, citing BL Garrett, ‘Structural Reform Prosecution’ (2007) 93 Virginia Law Review 853, 893.

Negotiated Justice—Balancing Efficiency and Procedural Safeguards 125 b.  Guilty Pleas Apparently DPAs are only supposed to be available to corporations domiciled in the US while foreign corporations typically appear to plead guilty and receive a conviction.35 The options, however, certainly also depend on the severity of the charges. After investigations against BNP Paribas for having violated US sanctions against Sudan, Iran and Cuba,36 the prosecutors sent the message that no bank is immune from criminal charges, despite lingering concerns that financial institutions have grown so large and interconnected that they are ‘too big to jail’. BNP Paribas was not exempted from punishment, but pleaded guilty and apparently agreed to pay nearly $9 billion. Again, The Economist published an article entitled: ‘Capital punishment’.37 What is the legal framework of such guilty pleas? In the US framework, at least according to the law on the books, guilty plea negotiations take place in a regulatory framework. Either the prosecution or the defence initiates a negotiation, which may aim at either bargaining on the charge, on the facts or on the sentence. During a fact or charge bargaining the parties agree on certain facts or points of law and thus determine the action that could be the subject of a prosecution to begin with. During a sentence bargaining the parties negotiate on a certain penalty if the defendant pleads guilty, but the prosecution determines and establishes the charge. The prosecutor recommends the negotiated penalty to the judge(s). However, the judge(s) are not bound by it, because sentencing is in their sole responsibility. Arguably, judges in the US approve the negotiated penalty.38 Guilty pleas result in convictions and thus courts are involved in the plea-­ bargaining process.39 However, guilty pleas generally require an admission of guilt to the charge. This statement relieves the court of the responsibility to ‘seek the truth’ (or rather to check the facts), but also ‘relieves’ it of any power or responsibility with regard to the outcome of a guilty plea. c.  ‘Shakedown Risk’: Balancing Efficiency Versus Procedural Safeguards? White collar suspects have become a steady clientele for negotiated justice. As indicated above, the reasons identified by scholars are manifold, but basically embrace the following arguments: On the one hand, the US ‘over-criminalisation’ has hit the field of economic criminal law after the Enron scandal and the financial crises with (a) increased 35 

Garrett, ‘Globalized Corporate Prosecutions’ (n 29) 1779. J Ax, A Viswanatha and M Nikolaeva, ‘U.S. imposes record fine on BNP in sanctions warning to banks’, available at http://www.reuters.com/article/2014/07/01/us-bnp-paribas-settlement-idUSKBN0F52HA20140701, accessed 1 April 2015. 37 ‘Capital punishment’, available at http://www.economist.com/news/finance-and-economics/ 21606321-frances-largest-bank-gets-fined-evading-american-sanctions-capital-punishment, accessed 1 April 2015. 38 G Gilliéron, Strafbefehlsverfahren und Plea Bargaining als Quelle von Fehlurteilen (Schulthess ­Verlag, Zürich, 2010) 63–64 with further references. 39  Larkin Jr, ‘Funding Favored Sons and Daughters’ (n 22). 36 

126  Sabine Gless and Nadine Zurkinden maximum criminal penalties for white collar offences and (b) the creation of vague and overlapping criminal provisions in areas already criminalised.40 On the other hand, internal investigations very often bring in the necessary information.41 That this may have an effect on negotiating justice seems plausible: The vagueness of criminal provisions gives prosecutors an easy tool to start investigations. The burden on the prosecution when proving an accusation is facilitated if the internal investigation brings to light possible wrongdoing of individuals. Furthermore, the recent increase in gravity of possible punishments42 may give an incentive for defendants to resort to a DPA or a guilty plea and forego a contested trial. As discussed at the start of this chapter, The Economist has claimed that the US system of ‘negotiated justice’ with corporations and/or white collar suspects is ‘the world’s most lucrative shakedown operation’. One crucial difference between a shakedown and a criminal trial concerns procedural safeguards granted to the defendant. However, if a defendant negotiates justice in the US, he or she forgoes classic procedural safeguards, such as the presumption of innocence with the possibility of being acquitted, and the right to a public trial, during which he or she has the right to remain silent with the burden of proof on the prosecution. Albeit, these rights may be useless anyway, in cases in which the ‘competition of two defendants’—corporate and individual—render them void by way of an ‘internal investigation’. On balance, all the defendant may get is a swift trial, while also avoiding the risk of collateral damages and the risk of incurring a harsh(er) punishment. Furthermore rapid procedures save public resources and provide certainty for defendants quite quickly, which can be added as a ‘plus’. But they often take place behind closed doors, and probably beyond the formal rules. With the loss of classic procedural safeguards, the balance rather tips to the shakedown side. In theory the US model of negotiated justice allows for an opportunity for both sides to meet in the middle. But in practice, it appears that companies, banks and white collar suspects pay the price. Even if some scholars argue that they get off cheaply because the terms of negotiated deals are only vaguely defined and there is no independent monitoring over their fulfilment,43 other scholars point out that the agreements negotiated by prosecutors: abound with regulations that go far beyond simple commands to companies to stop disobeying the law or to pay for prior violations. These agreements insist on new business 40 

Dervan, ‘White Collar Over-Criminalization’ (n 23) 745. See, for instance, I Zerbes, ‘Unternehmensinterne Untersuchungen’ (2013) ZStW 551–72 and the examples provided by H Silverglate, Three Felonies a Day: How the Feds Target the Innocent (Encounter Books, New York, 2009) 90, 116, 144. 42  Madoff received 150 years in prison for his Ponzi scheme, where potential investors were wooed with promises of unusually large returns, wrongly attributed to Madoff ’s skill. However, the returns were paid out of new investors’ principal, not from profits. This worked out as long as new investors lined up with cash and old investors did not try to withdraw too much of their money at once. 43  Garrett (n 7); Uhlmann (n 7). 41 

Negotiated Justice—Balancing Efficiency and Procedural Safeguards 127 models and practices, and they have contained regulations that have covered everything from personnel decisions to the rates companies charge customers.44

2. The German Examples: ‘Negotiated Agreement’ and ‘Provisional Terminations of Proceedings’ a.  Negotiated Agreements In Germany, negotiating justice is provided for by § 257(c) of the German Code of Criminal Procedure, entitled ‘Negotiated Agreement’.45 The relevant German law was introduced in 2009, when the parliament finally aimed at legalising a negotiation practice in the criminal justice system, which had been widespread and uncontrolled. More than 25 years before the German lawmaker addressed the problem, a defence lawyer—signing the anonymously written article in a law journal with ‘Detlef Deal’—depicted the state of affairs between the prosecution and defence lawyers as the ‘wild wild West’ with friendly fire hitting defendants and victims alike.46 The introduction of § 257(c) into the German Code of Criminal Procedure was objected by many scholars and still is an issue of controversy.47 The German Constitutional Court upheld the constitutionality of this provision in 2013, emphasising that the search for truth, the proportionality of punishment and transparency of negotiation proceedings must be respected even in the context of such negotiated agreements.48 § 257(c) of the German Code of Criminal Procedure allows that ‘in suitable cases’ the court reaches an agreement with the participants on ‘the further course and outcome of the proceedings’. In doing so, the court must still ‘search for truth’, or put differently: it must still check the facts. According to ­German law, there is no bargaining on the facts or charge: the ‘subject matter of [any] agreement may only comprise the legal consequences that could be the content of the judgment’. If negotiations take place, the court will announce what content the negotiated agreement could have, and it will indicate an upper and lower sentence limit.

44  RE Barkow, ‘The Prosecutor as Regulatory Agency’, in Barkow and Barkow (eds), Prosecutors in the Boardroom (n 18) 177. 45  For an English translation of this article, see http://www.gesetze-im-internet.de/englisch_stpo/ englisch_stpo.html#p1718, accessed 1 April 2015. 46  HJ Weider, ‘Detlev Deal aus Mauschelhausen, Der strafprozessuale Vergleich’ (1982) StV 545–52. 47  See, for example, Meyer-Gossner, ‘Was nicht Gesetz werden sollte’ (2009) ZRP 107–09; U Murmann, ‘Reform ohne Wiederkehr? Die gesetzliche Regelung der Absprachen im Strafverfahren’ (2009) ZIS 526–38; B Schünemann, ‘Ein deutsches Requiem auf den Strafprozess des liberalen Rechtsstaates’ (2009) ZRP 104–07. 48  See Weigend and Iontcheva-Turner (n 14) 82, citing paras 67, 95–96, 104–05 of the decision of the German Federal Constitutional Court of 19 March 2013, BVerfG, 2 BvR 2628/10, BvR 2883/10, 2 BVR 2155/11.

128  Sabine Gless and Nadine Zurkinden The latter must be proportionate to the blameworthiness of the defendant. The participants have the opportunity to make submissions. The negotiation is completed when the defendant and the prosecution agree to the court’s proposal. However, the defendant retains the right to appeal the judgment, as it cannot be waived. The court is not bound to the agreement, if a legal (!) or factual circumstance has been ‘overlooked’ and therefore the prospective sentencing range appears ‘no longer appropriate’ to the gravity of the offence or the degree of guilt. In such a case, a confession made by the defendant cannot be used as evidence. One can have some doubt as to whether this is of actual value for the defendant, as evidence derived from the defendant’s confession is admissible and the same judges who had participated in the failed negotiations will judge the case in court.49 The legislator strived to spell out all conditions of a binding agreement in 2009; a study conducted in 2012, however, found that in practice a substantial number of judges deviated from the legal rules. Although the study’s focus is not on economic crime, but on everyday criminal proceedings in German courtrooms, it sets the scene for understanding how negotiating justice works in judges’ minds: According to the information provided by the judges, only half of the agreements entered into had been negotiated following the law; the rest were conducted ‘informally’.50 The study did not include information on how judges proceed when not following the rules. Maybe they could have played rock, paper, scissors as well? In the agreements that had been negotiated following the law, in hardly any of these cases did the judges challenge the confessions of the defendants. If they did, they mostly relied on the content of the file without making any further effort to search for the truth.51 In most cases, the court will tell the defendant what penalty it is willing to hand out if a confession is provided right away, and what sanction awaits the defendant if found guilty after a classic criminal trial.52 In doing so, the judge opens a ‘sanction spread’ (Sanktionsschere) marking the difference between the sanction that would result following a confession and no contested trial as opposed to what would follow if no confession were made and a full trial resulting in a guilty verdict took place. The latter might disturb the principle of proportionality between the defendant’s blameworthiness and the punishment imposed: reducing the punishment in the sole interest of achieving a swift proceeding or increasing it just because the defendant chooses to insist on a full trial is highly problematic, because such punishment does not reflect the blameworthiness of the defendant.53 Clearly, rational defendants will weigh their chances of success at trial and may confess to crimes they did not commit.

49 

See ibid 91–92. Altenhain, F Dietmeier and M May, Die Praxis der Absprachen in Strafverfahren (Nomos, Baden-Baden, 2013) 36–37. 51  ibid 98–106. 52  ibid 122–36. 53  Weigend and Iontcheva-Turner (n 15) 85. 50 K

Negotiated Justice—Balancing Efficiency and Procedural Safeguards 129 b.  Negotiating Justice with the Aim of Dropping a Case—the German Example More than 40 years ago, the German legislature introduced the possibility of provisional terminations of proceedings in § 153(a) of the German Code of Criminal Procedure. If it is applied, proceedings for a formal ‘negotiation agreement’ (§ 257(c) of the German Code of Criminal Procedure) do not come into play at all. § 153(a) of the German Code of Criminal Procedure provides for a discretion for prosecutors and courts to drop misdemeanour cases. With this type of outcome of the procedure, there is no ruling on guilt or innocence, but prosecutors or courts can agree to terminate proceedings in exchange for a payment (to the state or a charitable organisation), service of a non-profit nature, reparations or other conditions ‘if the degree of guilt does not present an obstacle’. Bernie Ecclestone’s ‘settlement’ of his bribery case for $100 million is probably the most prominent example of 2014,54 with the dropping of Sebastian Edathy’s case also gaining much media attention. Sebastian Edathy, a former member of the German parliament (Bundestag), faced allegations of possession of child pornography. The case was dropped after he paid €5,000 Euro (about $5,400) to a youth fire department association. The fact that such ‘settlements’ do not involve an admission of guilt was important to Ecclestone and Edathy: Ecclestone had acknowledged that he made an illegal payment, but claimed he did so under duress. Edathy had admitted that he downloaded images of naked minors but claimed that the images were not illegal.55 There are no legal rules governing the negotiations prior to dropping a case. Judges are involved in such settlements, though prosecutors can initiate the provisional termination of proceedings. If that is the case, it is the prosecutors who determines the specific conditions and requirements that have to be met in order to drop the proceedings.56 In the Ecclestone case, the $100 million figure emerged from negotiations between Ecclestone’s lawyers and prosecutors, and was endorsed by the judges hearing the case. There is neither set formula on how much a defendant pays, nor any figure to reflect the degree of possible guilt. In Ecclestone’s case, the judges believed that $100 million represented ‘a significant portion’ of his wealth without overburdening him. Many questions have been discussed after the Ecclestone decision in Germany: can rich white collar defendants buy their way out of legal troubles in Germany, and dealing in this way only serves their self-interest? Or do they help preserve common resources by admitting guilt and agreeing to accept a certain penalty? Are white collar suspects even in a vulnerable position after all?

54 ‘F1 boss Bernie Ecclestone pays to end bribery trial’, available online at http://www.bbc.com/ news/world-europe-28656050, accessed 1 April 2015. 55  “Wrong, but legal,” says ex-German lawmaker Edathy, facing child porn trial’, available online at  http://www.dw.de/wrong-but-legal-says-ex-german-lawmaker-edathy-facing-child-porn-trial/ a-18139310, accessed 1 April 2015. 56 SK-StPO-Wesslau, § 153a Rn. 6, 27. Aufbau-Lfg. (August 2002).

130  Sabine Gless and Nadine Zurkinden c.  ‘Shakedown Risk’: Balancing Efficiency versus Procedural Safeguards? The Economist has not denounced the German system, yet. The basic question whether the offer to close down a criminal case can grow into a ‘lucrative shakedown operation’ may look like an obvious concern in all criminal justice systems. The manifest risk, however, differs greatly depending on the details of the respective framework. In contrast to the US plea-bargaining system, the German negotiated agreement and the provisional terminations of proceedings neither bypass the court nor all proceedings on the merits. Thus, depending on the legal basis of the negotiations (§ 153(a) or § 257(c) German Code of Criminal Proceedings) not all of the classic procedural safeguards are given up. Negotiated agreements (§ 257(c) German Code of Criminal Procedure) between the accused and the prosecution are initiated by the court.57 Thus, in contrast to the US Model, the court, or rather the professional judge, plays a central role in German negotiated agreements. However, the prosecutor retains a vetoposition: only if the prosecutor (and the accused) agrees to the court’s proposal does the negotiated agreement come into existence.58 The court can also indicate the maximum and minimum sentencing, which is often displayed as a concrete Sanktionsschere, ie a reference to the difference of sanctions looming with a confession and no contested trial. Such a Sanktionsschere must not be palpably disproportionate.59 The negotiations often take place before or beyond the course of the main hearing and hence without the public and without a serious trial.60 Thus, the defendant has disposed of (a) the right to a public trial, as well as the right to remain silent. In most cases, a concession to the Sanktionsschere infringes on the right to remain silent; (b) since the defendant has not entirely disposed of the presumption of innocence, leaving some burden of proof on the prosecution insofar as the court must check all facts, challenge a confession and evaluate evidence, at least in theory.61 Provisional terminations of proceedings (§ 153(a) German Code of Criminal Procedure) need the consent of the court (and the accused) but the prosecutors may initiate them.62 They take place without the public and there is no contested trial.63 Thus the defendant has disposed of (a) the right to a public trial as well as the possibility of being acquitted or rather of not incurring a sanction at all. There is (b) furthermore a risk that fundamental rights such as equal treatment and prohibition of arbitrariness are not safeguarded, because there are no restrictions

57 HK-GS-König/Harrendorf, §

257c Rn. 17, 3. Aufl. Baden-Baden 2013. C Roxin and B Schünemann, Strafverfahrensrecht, 28. Aufl. 2014, § 44 Rn. 62. 59  Meyer-Gossner/Schmitt § 257c Rn. 19, 57. Aufl. München 2014. 60  Altenhain, Dietmeier and May, Die Praxis der Absprachen in Strafverfahren (n 50) 61–65. 61  C Roxin and B Schünemann, Strafverfahrensrecht, 28. Aufl. 2014, § 44 Rn. 64. 62 HK-GS-Pfordte, § 153a Rn. 9, 3. Aufl. Baden-Baden 2013. 63  For a critical assessment of the ‘veil of secrecy’, see W Kargl and S Sinner, ‘Der Öffentlichkeitsgrundsatz und das öffentliche Interesse in § 153a StPO’ (1998) Jura 231. 58 

Negotiated Justice—Balancing Efficiency and Procedural Safeguards 131 on the possible conditions and instructions that the defendant must fulfil for the case to be dropped.64 The defendant, however, has not disposed of his right to remain silent as a confession is not required. Rather the burden of proof remains with the prosecutors. It is required that the degree of suspicion rose to a level that warrants indictment. In theory a case cannot be dropped according to § 153(a) of the ­German Criminal Procedure Code if there is doubt about the evidence of the case. Practice shows, however, that § 153(a) of the German Criminal Procedure Code is applied nevertheless in complex cases when proof is difficult to establish.65 Overall, the German models leave less room for a bargain when settling charges of economic and financial crime, especially because charge bargaining is not an option, or rather not an official option, since the court must check the facts. There is, however, leeway in practice, as long as the criminal statutes are vague, and the evidence presented does not point to one specific direction. Furthermore, the German model may hold another plus for companies and white collar suspects: the bargaining takes place according to the underlying notion of the ‘professional trial’ if negotiations are not successful, in contrast to the US where a jury trial represents the courtroom alternative. However, it is unclear whether professional judges are more likely to decide in favour of defendants in cases of alleged economic or financial crimes after a negotiation process has failed.

IV.  CLOSING REMARKS

It appears clear that the ‘shakedown risk’ is biggest when a defendant must negotiate in a framework without rules binding on the prosecution, or on the courts. It would probably be too far-reaching to claim that in such situations the defendant is not fair game, but instead an unprotected species. The Economist in its editorial stated that: [i]n many cases, the companies deserved some form of punishment: … but justice should not be based on extortion behind closed doors. The increasing criminalisation of corporate behaviour in America is bad for the rule of law and for capitalism.66

In order to meet the challenges posed by ‘negotiated justice’ to companies and white collar defendants, it appears necessary: —— to provide a convincing regulatory framework: adequate regulation must ensure that negotiated justice is neither a carte blanche for the prosecutor’s convenience67 in punishing alleged crimes, nor a ticket for big corporations to buy their way out; and

64 SK-StPO-Wesslau, §

153a Rn. 17, 27. Aufbau-Lfg. (August 2002). 153a Rn. 25, 27. Aufbau-Lfg. (August 2002). 66  The Economist (n 1) 10. 67  Weigend and Iontcheva-Turner (n 15) 96–97. 65 SK-StPO-Wesslau, §

132  Sabine Gless and Nadine Zurkinden —— to ensure that defendants will not lose all procedural safeguards when entering a negotiation. The court’s obligation to check facts before giving a green light to a ‘negotiated agreement’ (which is the case in Germany, for instance) preserves some of the protection for the defendant provided by the presumption of innocence, and thus appears superior to US plea bargaining. However, this is a product of Continental European procedure, and perhaps cannot be transplanted to other jurisdictions. Interestingly, all models share one flaw: the lack of transparency of negotiations for the public, along with the exclusion of individual and collective ‘victims’ in general. Lack of transparency of negotiations also means that the defendants have no references to other negotiation proceedings and the public (including the press) cannot observe them.68 Therefore, the best way to ban the suspicion that criminal justice systems have established lucrative ‘shakedown operations’ on the one hand, or that the big fish get away with too little real punishment on the other hand, would perhaps be to open the doors and let the public consider for itself whether efficient negotiations and procedural safeguards are in fact balanced. Indeed, transparency of the process of negotiation is the very first step needed to conduct further research on how to balance negotiated justice with procedural safeguards. Whether opening the doors would be a step to building confidence in this alternative mode of settling criminal charges is yet another question. It may well be that quite a few stakeholders will find—for their very own reasons—that negotiations in criminal proceedings must remain behind a curtain of opacity in order to be accepted as a binding deal by all.

68 

Tulkens (n 10) 680.

Part III

Challenges with Respect to Multi-agency Cooperation and Multi-disciplinary Investigations

134 

7 Cooperation Between Administrative Authorities in Transnational Multiagency Investigations in the EU: Still a Long Road Ahead to Mutual Recognition? LOTHAR KUHL1

I. INTRODUCTION

U

NDER THE EU Treaty the protection of the financial interests of the EU is the shared responsibility of the EU and the Member States. The EU Commission’s competences to investigate fraud have been entrusted with the European Anti-Fraud Office (OLAF). OLAF is an independent European administrative anti-fraud investigation authority. Anti-fraud cooperation aims at defending the European interests. However, OLAF is highly reliant on Member States’ close and regular cooperation to fight fraud and corruption. It does not have the resources for systematic intervention, but does it rather in an exemplary fashion. Member States exercise primary competence for anti-fraud investigations. Their anti-fraud mission extends to administrative and to criminal investigations in their respective territories. Fraud affecting the EU financial interests, however, presents a clear European dimension, which is often reflected in a need to collect evidence in more than one Member State. In such situations Member States can fight fraud only by acting together. But their cooperation remains a challenge, in many respects. This is last, but not least, also a problem of incomplete legal instruments which serve as a framework for assistance. With the Lisbon Treaty, additional options are provided to address these needs. A legal basis has been introduced to set up a European Public Prosecutor’s Office (EPPO) for investigating, prosecuting and bringing to justice perpetrators of

1  The opinions expressed in this chapter are strictly personal and by no means bind the European Commission and OLAF. The author wishes to thank Delphine Langlois for the comparative table included in this chapter (see Table 7.1).

136  Lothar Kuhl fraud. Motivating its proposal on the establishment of the EPPO, the Commission has stated that: tackling cross-border fraud cases would require closely coordinated and effective investigations and prosecutions at European level, the current levels of information exchange and coordination are not sufficient to achieve this, despite the intensified efforts of Union bodies, such as Eurojust, Europol and the European Anti-Fraud Office (OLAF). Coordination, cooperation and information exchange face numerous problems and limitations owing to a split of responsibilities between authorities belonging to diverse territorial and functional jurisdictions. Gaps in the judicial action to fight fraud occur daily at different levels and between different authorities and are a major impediment to the effective investigation and prosecution of offences affecting the Union’s financial interests.2

But anti-fraud cooperation challenges need to be addressed before the EPPO is established. It is therefore, in principle, to be considered a first step towards that aim that, based on Art 82(1) of the Treaty on the Functioning of the European Union (TFEU), judicial cooperation in criminal matters in the EU is to be organised on the basis of the principle of mutual recognition. Indeed, antifraud cooperation requires and comprises mutual legal assistance. The Directive on the European Investigation Order (EIO) provides that, in the future, the EIO will be a judicial decision issued or validated by a judicial authority of a Member State (‘the issuing State’), to have one or several specific investigative measure(s) carried out in another Member State (‘the executing State’), to obtain evidence in accordance with the Directive and that Member States will execute an EIO on the basis of the principle of mutual recognition in accordance with the Directive.3 However, while the EIO will apply horizontally on any matter of judicial cooperation between the national authorities of the Member States and, therefore, also on matters of criminal offences affecting the EU interests, the objectives in the area of the cooperation against fraud affecting the EU involve more complex cooperation challenges, across a great variety of authorities. This cooperation involves not only the managing authorities, the paying agencies, the audit authorities, but also specific sectorial authorities, like customs and tax authorities. In addition, it requires coordinated action by horizontally mandated administrative authorities, like financial intelligence services, but also the police, criminal investigation and prosecution authorities. In brief, an entire panoply of anti-fraud authorities will be acting in accordance with their respective competences and mandates under national law. Effective EU anti-fraud investigations necessitate, however, not only horizontal cooperation between different types of national (administrative and

2  Commission (EC), ‘Proposal for a Council Regulation on the Establishment of the European Public Prosecutors Office’, COM (2013) 534 final, 17 July 2013. 3  Directive 2014/41/EU of the European Parliament and of the Council of 3 April 2014 regarding the European Investigation Order in criminal matters, [2014] OJ L130/1, Art 1.

Cooperation in Transnational Multi-agency Investigations in the EU 137 judicial) authorities, but also vertical cooperation between these national authorities and OLAF. In other words, successful cooperation in EU anti-fraud cases depends on the interaction of the responsibilities, decisions and legal powers of the participating authorities. These fall, in part, outside the scope of judicial cooperation in criminal matters and belong to administrative issues (such as arrangements to pay agencies, authorising offices, customs and tax) and police cooperation. The concept of joint responsibility and mutual solidarity in the achievement of objectives under the EU Treaty provides the legal framework for interaction between judicial, administrative and police responsibilities. Further to that, Art 325 TFEU stipulates that the measures adopted shall be effective, proportionate and shall act as a deterrent, meaning that they must produce equivalent performance, quality and impact. In sum, the Treaty simply requires equivalent protection of EU interests throughout the Member States as well as close and regular cooperation between Member States’ authorities, acting loyally in the achievement of the Treaty objectives. But the Treaty does not expressly refer to a general principle of mutual recognition of decisions, which would apply in civil, criminal and administrative matters.4 Neither does it refer to a specific normative concept which is supposed to overcome differences in the national systems. The Treaty adds to Member States’ action the integrated exercise of certain powers by the Commission (OLAF), which will be supported by the EPPO in the future. Nevertheless, the legal modalities of the cooperation between competent national authorities and the rules of secondary EU instruments on transnational evidence are largely left to the discretion of national legislators and are simply governed by the general duty of all Member States to effectively achieve the objectives of the Treaty. The Treaty does not in itself provide a legal basis for national authorities to collect evidence in other Member States. The purpose of this contribution is to analyse the main components of an EU multi-disciplinary anti-fraud framework and its functioning principles, as well as how cooperation at a European and transnational level is currently organised, including competences entrusted with the European bodies. The fight against fraud affecting the EU financial interests builds on an array of different investigation and cooperation provisions enshrined in different pieces of EU legislation. Without prejudice to the primary responsibilities of Member States’ authorities, anti-fraud cooperation does of course involve OLAF and is, thus, vertical. It can also be transnational between Member States’ authorities only, not involving the Commission and OLAF and, thus, being horizontal.

4  Article 67(3) and (4) TFEU refers to mutual recognition, but applied to criminal and civil matters only.

138  Lothar Kuhl II.  VERTICAL COOPERATION BETWEEN OLAF AND NATIONAL AUTHORITIES IN THE FIGHT AGAINST FRAUD

A.  Cooperation in OLAF Investigations with the Competent Authorities OLAF’s investigation mandate is applicable throughout the EU. It may be exerted on the Member States’ territory in accordance with the scope of the Treaty, as specified in Art 52 TEU. OLAF may, however, require assistance by national authorities to this end, and with its investigations, OLAF may support the investigations of national authorities. Pursuant to Art 325 TFEU, evidence collected by OLAF in one Member State may, without further recognition and authorisation, be presented in the administrative and criminal proceedings of another EU Member State, where its use is deemed necessary for the purposes of that Member States’ anti-fraud action. 1.  OLAF Investigations Under EU Law in a Comparative Perspective In this section, a comparison between OLAF’s investigative powers and those of other administrative investigation bodies of the EU, such as DirectorateGeneral Competition (DG COMP) and European Securities and Markets Authority (ESMA), will be provided, and OLAF’s powers will then be assessed in the framework of the EPPO proposal. a. Regulation 883/2013 Concerning Investigations Conducted by the European Anti-Fraud Office (OLAF) The former Regulation applicable to OLAF was replaced in 2013. Under Regulation 883/2013,5 which is based on Art 325 TFEU, OLAF exercises autonomous EU-wide administrative powers to investigate economic operators, including natural persons. These powers allow evidence to be collected about suspected illegal activities and fraud liable to result in criminal proceedings. OLAF’s investigative prerogatives enable the gathering of evidence and comprise inter alia the following means: collecting documents and information in any format which can be used as evidence; gathering evidence in the framework of operational meetings; taking statements from any person able to provide relevant information; carrying out fact-finding missions in Member States; and taking samples for scientific examination.

5 Regulation (EU, Euratom) 883/2013 of the European Parliament and of the Council of 11 S­ eptember 2013 concerning investigations conducted by the European Anti-Fraud Office (OLAF) and repealing Regulation (EC) 1073/1999 of the European Parliament and of the Council and Council Regulation (Euratom) 1074/1999, [2013] OJ L248/1 (‘Regulation 883/2013’).

Cooperation in Transnational Multi-agency Investigations in the EU 139 The more intrusive investigative measures require ex ante authorisation by the Director-General of OLAF.6 Members of the investigation unit may carry out specific investigative activities, only upon production of the Director-General’s written act showing their identity and capacity, as well as the investigative activity that they are authorised to carry out. These are: conducting interviews with persons concerned or witnesses; carrying out inspections of premises; carrying out onthe-spot checks;7 carrying out digital forensic operations; and carrying out investigative missions in third countries.8 As indicated above, all OLAF investigative measures apply EU-wide. Economic operators subject to an OLAF investigation are obliged to cooperate and to grant access to their premises.9 However, OLAF prerogatives do not comprise enforcement powers. OLAF has no powers to adopt sanctions in case of refusal by economic operators to give access to their premises. It is allowed to hear any person concerned or any relevant witness and invite them for interview,10 but it has no powers to summon witnesses for interviews. Moreover, OLAF has no access to banking information held by financial institutions. The debate on the reform of OLAF’s investigative framework, which led to the adoption of Regulation 883/2013, has largely emanated from the concern to secure a fully efficient basis for investigations, while guaranteeing the effective protection of procedural rights and providing instruments of governance and control over the independent investigative function of OLAF.11 Accordingly, the reformed regulation clearly specifies the conditions for the opening and the conduct of OLAF’s investigations; OLAF’s information duties; procedural guarantees of the persons concerned;12 the institutional provisions on the role of the Supervisory Committee of OLAF; the exchange of views with the institutions; as well as the specific duties of the Director-General to adopt guidelines and put in place internal control and legality checks.13 The administrative investigation powers of OLAF have remained nearly unchanged compared to the old Regulation 1073/1999. However, to some extent, the question needs to be raised whether the existing prerogatives grant a sufficient ambit of investigative means to an anti-fraud service which is supposed to uncover evidence of financial offences and irregularities, thereby adding value to the means of action already available to managing services in the framework of their audits.

6 

Regulation 883/2013, Art 7. Council Regulation (Euratom, EC) 2185/96 of 11 November 1996 concerning on-the-spot checks and inspections carried out by the Commission in order to protect the European Communities’ financial interests against fraud and other irregularities [1996] OJ L292/2 (‘Regulation 2185/96’). 8  OLAF, ‘Guidelines on Investigation Procedures for OLAF Staff ’, available at http://ec.europa.eu/ anti_fraud/documents/gip/gip_18092013_en.pdf, accessed 23 June 2015 Art 11. 9  Regulation 2185/96. 10  Regulation 883/2013, Art 9(2). 11  Commission, ‘Proposal’ (n 2). 12  See in particular Regulation 883/2013, Arts 5 and 9. 13  ibid Arts 15, 16 and 17. 7 

140  Lothar Kuhl For instance, financial transactions often cannot be investigated effectively unless access to banking information is available. At a time where the Commission has already made new proposals for additional decision layers, including the establishment of an external controller of procedural rights, it is interesting to note that certain other European administrative investigative bodies exercise powers which may to some extent go beyond the powers granted to OLAF.14 Therefore, the following sub-sections will compare the powers of DG COMP and ESMA. b.  Regulation on the Implementation of the Rules on Competition DG COMP’s investigative powers15 include the possibility of sealing business premises and inspecting other premises including the private homes of directors and staff of an economic operator—the latter measure requiring national judicial authorisation. In addition, the Commission enjoys important sanctioning powers in the field of competition comprising the power to issue injunctions and to impose fines of up to 10 per cent or periodic payments of up to five per cent of the average daily turnover.16 OLAF does not have any sanctioning power. Specific guarantees and control mechanisms in the field of competition appear to be justified by the scope of DG COMP’s investigative and sanctioning powers and achieve the necessary balance between the objectives of efficiency of the investigation and protection of citizens’ fundamental rights. The Hearing Officer, responsible for safeguarding the procedural rights throughout competition proceedings, acts usually on request by a complainant and after the request has first been lodged with DG COMP. The scope of his mandate is defined in Decision 2011/695/EU17 and does not provide for the intervention of the Hearing Officer before an investigative measure is taken (no ex-ante control). Furthermore, his control exclusively concerns the effective exercise of the right to be heard and the respect of the legality, it does not extend to control over the proportionality of the investigative measure.

14  Commission (EC), ‘Commission Staff Working Document: Analysis of Impacts Accompanying the Document Proposal for a Regulation of the European Parliament and of the Council Amending Regulation No 883/2013 as regards the Establishment of a Controller of Procedural Guarantees’, COM (2014) 340 final, 11 June 2014. 15  Council Regulation (EC) 1/2003 of 16 December 2002 on the Implementation of the Rules on Competition laid down in Articles 81 and 82 of the Treaty, [2003] OJ L 1/1 (‘Regulation 1/2003’), Arts 17–22. 16  ibid Arts 23 and 24. 17  Decision 2011/695/EU of the President of the European Commission of 13 October 2011 on the function and terms of reference of the hearing officer in certain competition proceedings, [2011] OJ L275/29.

Cooperation in Transnational Multi-agency Investigations in the EU 141 c.  Regulation on Credit Rating Agencies The investigative powers that ESMA enjoys towards credit rating agencies may provide a further example for the balance between investigative powers and control mechanisms over the exercise of these powers at EU level. In order to fulfil its mandate, ESMA has been granted more developed powers, regarding both investigative and sanctioning powers. Regarding its investigative powers,18 ESMA can perform on-site inspections, access any business premises and seal business premises, as well as books and records relevant to the investigation. It can also request records of telephones and data traffic.19 ESMA can summon the persons concerned to provide information and apply fines of up to three per cent of the average daily turnover20 if it is provided with incorrect or misleading answers. It has the same powers regarding ‘related third parties’, ie persons who are not directly concerned by an investigation but have a close link with the person concerned. To offer a complete picture of ESMA’s powers, it is necessary to mention the important sanctioning powers at its disposal: withdrawal of registration, temporary prohibition to issue credit ratings, fines and other sanctions. By contrast, OLAF does not have any sanctioning power. It can only make recommendations to the EU institutions and bodies or to national judicial authorities. As far as control over ESMA is concerned, a hearing procedure aimed at ensuring the respect of the right to be heard of the persons subject to the proceeding is formalised in the relevant Regulation. ESMA’s Board of Supervisors grants the right to be heard on ESMA’s findings before ESMA takes any sanctioning decision. In addition, ESMA’s decisions may be appealed before the Board of Appeal, which is a joint body of the European Supervisory Authorities, including in addition to ESMA, the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA). d.  Reform Initiatives: The EPPO Proposal and OLAF Reform II The Commission’s 2013 EPPO proposal21 outlines a new office which would be responsible for anti-fraud EU criminal investigations and prosecutions. In contrast to the two current administrative EU authorities (DG COMP and ESAM), the proposal builds on a judicial approach to protect the EU’s financial interests. Safeguarding evidence is here very clearly made subject to the respect of defence

18  Regulation (EC) No 1060/2009 of the European Parliament and of the Council on Credit Rating Agencies, [2011] OJ L 143/57 (‘Regulation 1060/2009’), Arts 23b–23d. 19  Judicial authorisation is necessary to access records of telephones and data traffic, if provided so by national legislation. 20  Regulation 1060/2009, Art 36b. The amount of a fine may be of up to three per cent of the average daily turnover of the company or of up to two per cent in the case of a natural person. Fines are imposed on a daily basis and cannot be imposed for more than six months. 21  Commission (n 2).

142  Lothar Kuhl rights.22 The proposal does not follow the administrative law approach in these two policy areas, where investigative powers would be somewhat more extensive than those of OLAF and accompanied by sanctioning powers. The investigative powers of the EPPO are defined in Art 26 of the proposed Regulation. Article 26 distinguishes two types of investigative measures and requires a judicial authorisation only for the first type of measures.23 The second type of investigative measures foreseen for the EPPO are considered to be less intrusive and, therefore, would not require judicial authorisation at EU level.24 Other investigative measures need not to be ordered in writing and would, thus, not require any judicial authorisation.25 OLAF’s investigative powers can, at the most, be compared with the second type of EPPO’s proposed investigative powers (eg access to premises and seizure of objects needed as evidence), which would not require, at EU level, any judicial authorisation. OLAF’s investigative measures are administrative by nature, are not enforceable as such and, therefore, cannot be compared to ‘searches’, which is a wording characteristic of judicial bodies having the power to enforce their decisions. Besides, inspections of professional premises of EU staff or copying of their professional working tools, such as computer or other data medium, can be considered

22  In its Communication ‘Proposal for a Council Regulation on the Establishment of the European Public Prosecutors Office’ (see n 2 above), the Commission has also committed itself to considering ways to further improve OLAF’s governance and reinforce procedural safeguards in investigations, as a step-by-step approach to accompany the establishment of the European Public Prosecutor’s Office, even before the EPPO is established. This assessment should be inspired by the procedural safeguards in the Commission’s proposal on the establishment of a European Public Prosecutor’s Office, in as much as they can be transposed to OLAF’s administrative investigations and enacted, even before the EPPO is established. It appears therefore advisable to analyse and take stock of the mechanisms of procedural safeguards under the EPPO proposal. 23  Defined in points (a)–(j) of the proposed Art 26(1), these measures are the most intrusive ones and include searches of private premises and personal property or computer system (Art 26(1)(a)), order for production of any relevant document or of stored computer data including traffic data and banking account data (Art 26(1)(b)), sealing of premises, interception of telecommunications including e-mails (Art 26(1)(e)). The remaining EPPO’s investigative powers which require a prior judicial authorisation according to Art 26(1) of the EPPO proposal are the freezing of the proceeds of crime, real-time surveillance of telecommunications traffic data, monitoring of financial transactions, freezing of future financial transactions, surveillance in non-public places including covert video and audio surveillance and covert investigations. However, stakeholder consultations on the EPPO proposal show that a number of them are concerned by a possible new requirement since their Member State does not currently require judicial authorisation for all the investigative powers foreseen in Art 26(1). 24  They are defined in points (k)–(t) of the proposed Art 26(1) and include summoning of witnesses (Article 26(1)(k)) and access to premises (Art 26(1)(n)). The latter must be understood as access to public premises since access to private premises requires judicial authorisation under Art 26(1)(a). 25  They include identification measures (taking of photos, visual recording and recording of a person’s biometric features), seizure of objects needed as evidence, tracking and control of persons, tracking and tracing of objects, targeted surveillance in public places of the suspected and of third persons, access to national and EU public registers as well as registers kept by private entities in a public interest. The recent negotiation draft of the Council Presidency provides for a much shortened list of investigative measures. Member States need to make them available to the EPPO under their national laws, see Council Document 9372/15, 12 June 2015, Arts 25 and 26.

Cooperation in Transnational Multi-agency Investigations in the EU 143 only to a limited extent to be an intrusion into their privacy, since these professional tools are not their personal property, but the property of the institution. As the owner of these professional tools and employer of the member of the staff concerned by an investigation, the institution is entitled to access these tools and OLAF, as an internal inter-institutional administrative body responsible for investigating possible breaches of their obligations by EU staff, derives its power to access these tools from the institution itself. The Commission’s right of access, even in the absence of the person concerned, to an EU official’s computer held in his office and used for professional purposes, has been confirmed by the Court of Justice.26 Table 7.1 analyses the availability of certain investigative measures to EU bodies listed and the requirement of prior authorisation.27 2. Requests for Information and Assistance by OLAF in Its Investigations (Art 7 para 7) Cooperation with OLAF in investigations is an obligation for Member States. Member States need to provide OLAF with any document or information they hold which relates to an ongoing investigation by OLAF.28 In particular, they need to offer OLAF the assistance required to perform its on-the-spot checks. National authorities need to offer the necessary support to the OLAF investigators, particularly in the case of a refusal by economic operators to allow OLAF to conduct an on-the-spot check.29 Where necessary, they must take, at the Office’s request, appropriate precautionary measures under their national law, in particular to safeguard evidence.30 The operational efficiency of the Office depends greatly on cooperation with the Member States and their authorities. There is a need for the Member States to identify the competent authorities which will be able to provide the Office with the assistance needed in the performance of its duties. If the Member State has not set up a specialist department at national level with the task of coordinating the protection of the financial interests of the Union and the fight against fraud, an ‘anti-fraud coordination service’ (AFCOS) should be designated to facilitate effective cooperation and exchange of information with the Office. To step up cooperation between OLAF and the competent authorities of the Member States, Regulation 883/2013 has introduced a requirement to designate in each Member State an authority which may fulfil the function of AFCOS, in order 26  Case C-191/98 P Tzoanos v Commission [1999] ECR I-8223; the Court has also ruled that such access does not violate the right of defence. 27  Note that the authorisation requirement refers to authorisation by an external body; internal, hierarchical, authorisation is not relevant for the purpose of Table 7.1. 28  Regulation 883/2013, Art 8(2); see also Case T-193/04, Hans-Martin Tillack v Commission of the European Communities, recital 72, General Court. 29  ibid, Art 11(3); see also Regulation 2185/96, Art 9. 30  Regulation 883/2013, Art 7(7).

Body responsible Investigative measure

OLAF

DG COMP

ESMA

2013 EPPO proposal

Request for information from economic operators/ undertakings/ creditrating agencies.

Yes No authorisation needed. It can be done in the context of an onthe-spot check [Regulation (2185/96, Art. 5, third indent].

Yes No authorisation needed. Reinforced by the possibility to apply fines in case of incorrect, incomplete or misleading answers [Regulation 1/2003, Art. 18(2) and 18(3)].

Yes No authorisation needed. Reinforced by the possibility to apply fines in case of incorrect, incomplete or misleading answers in response to a decision requiring the supply of information [Regulation 1060/2009 Art. 23b para 3(e)(f)].

Yes No authorisation needed.

Summoning1 of persons concerned

No

Yes See Art. 20 para 2 (e) and para 3 Regulation 1/2003.

Yes Also, it may request competent authorities to perform the measure on its behalf [Regulation 1060/2009, Art. 23c para 1(c) and Art. 23d. para 6].

Yes Authorisation needed, depending on the applicable national law for powers of summons [EPPO proposal, Art. 26 para 1 (k) and para 5].

144  Lothar Kuhl

Table 7.1:  Investigative Powers and Restrictions at EU Level: A Comparative Perspective

Table 7.1:  (Continued ) OLAF

DG COMP

ESMA

2013 EPPO proposal

Interviewing of persons concerned

Yes [Regulation 883/2013, Art. 9 para 2].

Yes No authorisation needed. Reinforced by the possibility to apply fines in case of incorrect of misleading answers [Regulation 1/2003, Art. 20 para 3].

Yes No authorisation needed. Reinforced by the possibility to apply fines in case of incorrect of misleading answers or lack of answer [Regulation 1060/2009, Art. 23c para 1(c) and Art. 23c para 2].

Yes No authorisation needed [EPPO proposal, Art. 26 para 1 (t)].

Interviewing of witnesses

Yes No authorisation needed [Regulation 883/2013, Art 9 para 2].

Yes Upon consent of the person interviewed [Regulation 1/2003, Art 19 para 1].

Yes Upon consent of the person interviewed [Regulation 1060/2009, Art. 23c para 1(d)].

Yes No authorisation needed [EPPO proposal, Art. 26 para 1(t)].

Access to telephone and data traffic

No No direct access, but only through exchange with competent national authorities.

No

Yes If judicial authorisation is needed it must be applied for [Regulation 1060/2009, Art. 23c para 1 (e) and 23c para 5].

Yes Judicial authorisation [EPPO proposal, Art. 26 para 1 (f)].

(Continued)

Cooperation in Transnational Multi-agency Investigations in the EU 145

Body responsible Investigative measure

Body responsible Investigative measure

OLAF

DG COMP

ESMA

2013 EPPO proposal

On-the-spot checks and inspections on IBOAs2 —immediate and unannounced access (access to information in databases and computers)— internal investigations

Yes3 No authorisation needed [Regulation 883/2013, Art. 4 para2 (a)].

Not applicable

Not applicable

Yes No authorisation needed, subject to immunity lifting [EPPO proposal, Art. 26 para 1(n) and Art. 19 para 2].

On-the-spot checks and inspections on economic operators (including access to information in databases)— external investigations

Yes No authorisation needed (Regulation 883/2003, Art. 3).

Yes No authorisation needed. Consultation of national competition authority [Regulation 1/2003, Art. 20 para 4].

Yes No authorisation needed [Regulation 1060/2009, Art. 23d para1].

Yes No authorisation needed [EPPO proposal Art. 26 para 1(n)].

146  Lothar Kuhl

Table 7.1:  (Continued )

Table 7.1:  (Continued ) OLAF

DG COMP

ESMA

2013 EPPO proposal

Enforcement of on-the-spot checks and inspections (searches), including, as the case may be, private premises — external investigations

No According to Art. 9 Regulation 2185/96 OLAF can request national authorities for assistance.

Yes If judicial authorisation is necessary, it must be applied for [Regulation 1/2003, Art. 20 para 6]. For private premises, prior authorisation by national judicial authority. However, the national judicial authority may not call into question the necessity of the inspection [Regulation 1/2003, Art. 21 para 1and 3].

Yes If judicial authorisation is necessary, it must be applied for [Regulation 1060/2009, Art. 23d para 7 and 23d para 8].

Yes Authorisation needed for searches [EPPO proposal Art. 26 para 1 (a)].

Sealing of premises

No4

Yes No authorisation needed [Regulation 1/2003, Art. 20 para 2 (d)].

Yes No authorisation needed [Regulation 1060/2009, Art. 23d para 2].

Yes Judicial authorisation [EPPO proposal, Art. 26 para 1(c)]. (Continued)

Cooperation in Transnational Multi-agency Investigations in the EU 147

Body responsible Investigative measure

Body responsible Investigative measure Seizure

1

OLAF

No5

DG COMP

No6

ESMA

No

2013 EPPO proposal

Yes No authorisation needed [EPPO proposal, Art. 26 para 1 (m)].

Specific power to enforce an invitation for interview, imposing penalties in case of non-compliance. Institutions, Bodies, Offices and Agencies of the European Union. 3 OLAF exercises its mandate on the basis of the administrative autonomy of all institutions and within the limits of Regulation 833/2013. That means it has the right of immediate and unannounced access to premises and information but no enforcement powers (in case of need, it may ask for assistance from the relevant security officers of the institution, and not the national police). 4 According to Art 7(7), Reg. 883/2013, where necessary, it is for the competent authorities of the Member States, at OLAF’s request, to take appropriate precautionary measures under their national law for the safeguarding of evidence. 5 Exceptionally, assuming of custody is possible only in internal investigations and in certain circumstances (danger of disappearance of documents or data); see Art 4(2)(a), Reg. 883/2013. 6 If DG COMP and the undertaking under investigation disagree on the status of a certain document (privileged or not), they can agree to send the document to the Hearing Officer in a sealed envelope, in order to have it examined by the latter. The Hearing Officer decides on the status of the document. 2

148  Lothar Kuhl

Table 7.1:  (Continued )

Cooperation in Transnational Multi-agency Investigations in the EU 149 to assist OLAF in its cooperation with all competent national authorities.31 It does not mean that a new authority needs to be set up. It is essential, though, that the AFCOS can serve horizontally as a national partner service of OLAF achieving effective communication and bilateral cooperation with OLAF and coordination at the level of the respective Member State between different competent management, audit, police and customs authorities. The designation of the AFCOS by nearly all Member States32 is a specific aspect of the general duty of loyalty, allowing for the effective implementation of the objectives under Art 4 TEU and for close and regular cooperation under Art 325(3) TFEU. However, OLAF has no powers to give instructions to national authorities, including AFCOS, nor is it entitled to issue a decision which would need to be recognised and executed by AFCOS or require AFCOS to give such instructions to competent national authorities. 3.  Investigative Support by OLAF to National Criminal Investigation Authorities OLAF needs to provide national authorities with information collected in the course of its investigations, or may open a new investigation to offer cooperation to national authorities. It transmits to the competent Member States’ authorities information, reports and documents obtained in the course of external investigations, so that Member States take appropriate action in accordance with their national law. Upon request, national authorities send information on action taken to OLAF.33 These competent authorities include the criminal investigation and prosecution authorities, when information transmitted indicates facts liable for criminal sanctions. Any information and documents which OLAF has collected in the framework of its investigations and which is available in OLAF’s investigation file needs to be shared with the judicial authorities34 if this is necessary for the purposes of the protection of the EU’s financial interests in the proceedings before the national judicial authorities on the infringements of the EU rules to establish the relevant facts.35 The final case report is to be sent to the competent national authorities, including judicial authorities.36 OLAF may also transmit information obtained in the course of an investigation in due time, so as to enable (judicial) authorities

31 

ibid, Art 3(4). OLAF, ‘The OLAF Report 2014’, available at http://ec.europa.eu/anti_fraud/documents/reportsolaf/2014/olaf_report_2014_en.pdf, accessed 23 June 2015. 33  Regulation 883/2013, Arts 11(6) and 12(3). 34  OLAF findings of fraud, liable to result in criminal proceedings, are in practice submitted to the prosecutor or, as the case may be, the competent investigative judge, and not to the criminal investigative police services. It is for the judicial authorities to appreciate whether the evidence collected by OLAF supports an indictment, or whether additional criminal investigative action is needed. 35  Case C-2/88 Imm Zwartveld and Others [1990] ECR I-3365, recitals 10, 11 and 18–22. 36  Regulation 883/2013, Art 11(3). 32 

150  Lothar Kuhl to take appropriate action in accordance with their national law.37 This includes reports of any suspicions relating to illegal activities which have come to OLAF’s notice in the course of an on-the-spot check or inspection.38 The support to criminal investigation authorities may, however, also require the collection of information and evidence, which is not yet readily available to OLAF. This is possible only within an ongoing OLAF investigation.39 If OLAF’s investigation has already been completed, a new OLAF investigation would need to be opened. The specific and autonomous objectives for such an investigation will need to be met. OLAF is, however, not entitled to investigate, ie conduct interviews of witnesses and persons concerned and on-the-spot verifications on behalf or in support of the judicial authorities, as an auxiliary of justice. It cannot execute a decision of the national authorities in accordance with the national legal framework and in the implementation of the objectives specific to the national judicial criminal proceedings. There is no such recognition of national decisions by OLAF. This is in accordance with the autonomous nature of OLAF’s investigation activities. OLAF applies the EU framework only. OLAF can, conversely, act in all Member States on its own behalf. Its investigative decisions do not need ‘recognition’ as EU law is an integral part of the Member States’ legal orders. Legal acts of OLAF under EU law are, therefore, within the limits of its powers, self-executing in each of the national legal orders of the Member States. But OLAF may open investigations acting on its own initiative or following a request from the authority of a Member State.40 If compatible with the general objectives of the anti-fraud cooperation under the Treaty, the results of such an investigation may, indeed, be ultimately shared with national judicial authorities, as far as compatible with national judicial procedural provisions. If this way of proceeding does not aim at or result in the circumvention of defence rights provided for in national proceedings, and in particular of the principle nemo tenetur, it may be a means for collecting evidence which is available beyond the territorial jurisdiction of the judicial authorities presenting a request and which other­ wise would require, if relevant conditions are met, a request for international legal assistance, or, in the future, the issuing of an EIO addressed to the competent national judicial authorities. 4. Admissibility of Information Collected by OLAF in Evidence in National Criminal Proceedings Without further recognition, reports drawn up by OLAF constitute admissible evidence in administrative or judicial proceedings, like national administrative 37 

ibid Art 12(1). Regulation 2185/96, Art 2. 39  Regulation 883/2013, Art 3. 40  ibid Art 5(2). 38 

Cooperation in Transnational Multi-agency Investigations in the EU 151 reports drawn up by national administrative inspectors. OLAF may provide evidence in proceedings before national courts and tribunals, in conformity with national law.41 Upon the request of the national judicial authorities, OLAF has the duty to cooperate in good faith, which is imposed on all EU institutions and the Commission in particular, and, thus, to allow its investigators to offer witness testimony and experts opinions and to authorise its officials to give comprehensive evidence in the national proceedings.42 Testimony is, in practice, very frequently presented in criminal court at trial to facilitate the evidentiary use of OLAF’s final case reports. An OLAF investigator’s testimony may serve to introduce the content of the reports at trial and allow it to constitute, under the same conditions as administrative reports drawn up by national administrative inspectors, admissible evidence in judicial proceedings of the Member States in which their use proves necessary.43

B. Assistance and Coordination Support in Cooperation with National Authorities Outside OLAF Investigations OLAF may also cooperate with competent Member States authorities outside the exercise of its investigative mandate providing assistance in organising close and regular cooperation.44 The Second Protocol of the Convention on the Protection of the European Communities’ Financial Interests45 (Second PIF Protocol) also provides that national criminal investigation authorities may exchange relevant information with OLAF, with a view to establishing the facts and to afford efficient action against fraud, corruption and money laundering affecting the EU financial interests.46 OLAF is also mandated to facilitate the coordination of national criminal investigations initiated by competent judicial authorities. 1. Legal Basis Under the Treaty and Under ‘Third Pillar’ Legislation (Second Protocol) Art. 325 TFEU invites close and regular cooperation between all competent national authorities of the Member States, so as to counter fraud. But the multi-disciplinary challenge of this cooperation duty is not reflected appropriately and in a detailed manner at the level of the regulatory legal instruments of the EU. The competence of the EU to regulate aspects of criminal law protection was controversial

41 

ibid Art 12(4). Case C-2/88 (n 35), recitals 18–22. Regulation 883/2013, Art 11(2), 2nd sentence. 44  See Art 325(3) TFEU and in particular Regulation 883/2013, Art 1(2). 45  Council Act of 19 June 1997 drawing up the Second Protocol of the Convention on the Protection of the European Communities’ financial interests, [1997] OJ C 221/11. 46  ibid Art 7(2). 42  43 

152  Lothar Kuhl until the Lisbon Treaty. Outside the context of OLAF investigations, it was therefore required to have recourse to conventional instruments, such as the PIF Convention and its Protocols, when necessary to provide a framework that would be sufficiently specific and precise to allow for concrete vertical and transnational information exchange on operations and national judicial case information, in compliance with requirements of professional secrecy and data protection. With respect to the role of the Commission (OLAF) in assisting cooperation between criminal judicial authorities in their investigations, the Second PIF Protocol is a Treaty which has been ratified by the Member States and provides for technical and operational support by the Commission (OLAF) to national judicial authorities (prosecutors, investigative judges).47 It further requires Member States and the Commission to cooperate with each other in the fight against fraud, active and passive corruption, and money laundering. Not only Member States, but also the Commission, have a role to play with respect to cooperation in criminal matters in the fight against fraud, active and passive corruption and money laundering. The Commission’s role is not confined to its specific responsibilities and obligations in respect of the implementation of the budget, but also extends to its responsibilities for combating fraud against the European Union’s financial interests under Art 310(6) and Art 325 TFEU. Article 7 of the Second PIF Protocol further specifies the rules governing data transfers, which are vital for the effective cooperation between the Member States and the Commission.48 OLAF and the competent judicial authorities take into account requirements of judicial secrecy. Specific conditions may be issued for the exchange and the use of information subject to judicial secrecy. As a matter of principle, however, the transmission of information by national criminal investigation services to OLAF in the framework of national judicial procedures and the request addressed to OLAF to offer its technical expertise (eg for specific computer forensic analysis), are covered by the legal basis of the Second Protocol.49 The legal value of the Second PIF Protocol is that of a binding international law treaty. It is superior even to national procedural criminal law. Nevertheless, it is only applicable to cooperation between the Commission (OLAF) and national judicial authorities. It does not provide a basis for similar exchanges and assistance between competent national administrative anti-fraud authorities and the judicial authorities, which act on the basis of the criminal law prerogatives. The role conferred on the Commission is clearly without prejudice to the exercise of powers conferred on Member States’ judicial authorities in criminal

47 

ibid Art 7. Council, ‘Explanatory Report on the Second Protocol to the Convention on the Protection of the European Communities’ financial interests’, [1999] OJ C 91/8. 49  Cour de Cassation, Chambre Criminelle, 16 January 2013, Eurotrends Kic Systems, no T 12-84.221 FS-D No 7525, Légifrance.gouv.; see also Cour de Cassation, Chambre Criminelle, 27 January 2010, Fléchard, no 09-81693 F-D (no 257). 48 

Cooperation in Transnational Multi-agency Investigations in the EU 153 matters. Member States’ authorities have access to the full range of national and international legal instruments, including instruments based on the principle of mutual recognition of judicial decisions, such as the EIO, so as to enable them to act against fraud, particularly where organised financial crime is involved. No change is made to the national and international legal instruments themselves. However, the Second PIF Protocol allows Member States to resort to the Commission’s assistance in their implementation.50 2. Mutual Assistance and Exchange of Information Between OLAF and National Authorities Judicial authorities exchange information with OLAF even where there is no OLAF investigation open. In order for this function of coordination and assistance to be effectively exercised, the Second PIF Protocol provides for the possibility of mutual requests for exchange of information between OLAF and national judicial authorities. National authorities exchange information with OLAF to allow the latter to exercise its specific role of assistance and coordination. Alongside Member States’ primary responsibility for investigations and prosecutions,51 Art 7(1) confers a technical and operational role on the Commission (OLAF). This is required under the concept of partnership in the fight against fraud, which here concerns fraud in the criminal sense. Article 7(2) provides for the exchange of information, subject to the protection of the confidentiality of investigations and of personal data. In principle, there must be no barriers to the exchange of information between Member States and the Commission (OLAF), including between Member States via the Commission (OLAF). The information exchange presupposes a flow of information in two directions. The aim of the information exchange is to facilitate evidence on the facts of a case and preventive or enforcement measures in cases of fraud, active and passive corruption and money laundering. Given the wide range of cooperation situations that may arise, information needs relate to a whole series of practical possibilities depending on the individual case. The concrete nature of the information depends on progress in investigations at the time when cooperation commences and, of course, on the specific features of the case in which information is required as a basis for further action. The information exchanged under para 2, for instance, concerns the nature of the fraud and its legal context, the modus operandi, the persons or bodies corporate involved, as well as personal data for evidentiary use more generally. Information exchanges need to respect data protection and confidentiality of investigations. Each individual situation needs to be assessed on the basis of the

50  51 

Council, ‘Explanatory Report’ (n 48). Convention on the protection of the financial interests of the EU, [1995] OJ C316/48, Art 6.

154  Lothar Kuhl circumstances. Specific provisions of the Second Protocol (Articles 8–11) refer to the protection of personal data in the information exchange process. The national law of each Member State applies to the confidentiality of investigations. A Member State authority which supplies information may set specific conditions concerning the use of the information, whether by the Commission (OLAF) or by another Member State to which the information may be passed. A Member State may, for example, set out for its competent authorities general or specific provisions on the protection of individuals with regard to the processing of personal data consistent with the provisions of European and national law. However, in so doing, Member States should take account, on a case-by-case basis, of the specific features and requirements of transnational investigations regarding the EU financial interests.52 3. OLAF Support to the Performance of National Criminal Investigation and Enforcement The role conferred on the Commission (OLAF) is defined as ‘assistance’. The objective is to reinforce the investigation of the facts, as well as prosecution and conviction, when the case is referred to the national authorities, by ensuring that the necessary skills and knowhow are available. The concept needs to be interpreted in the broad sense, without restrictions. Assistance may cover two forms: technical and operational. Technical assistance corresponds to the value added by the Commission in all areas governed by EU rules. It is not, strictly speaking, limited to assistance which may in itself constitute evidence in national proceedings. The documentary and logistical expertise which OLAF can make available in the fight against fraud are to be understood in a broad sense, including the full range of its strategic data which can be used to identify current trends regarding fraudulent activities, the typology of fraud perpetrators, both individuals and organisations, as well as the risk analyses prompted by the vulnerability to fraud of certain areas of activity. In logistical terms, the judicial and prosecuting authorities may need access to the Commission’s databases relating to potentially relevant business activities; they cannot consult these without the assistance of the Commission (ie OLAF). Technical assistance embraces also legal matters extending to information on national systems. All prosecuting authorities have, for instance, access to OLAF’s expertise to help them prepare requests to be addressed to the judicial authorities of one or more other Member States. Even more relevant in the current context is operational assistance. As opposed to technical assistance, operational assistance relates specifically to on-the-ground activities to combat fraud, corruption and money laundering. It covers all the contributions that OLAF can make to enhance the effectiveness of enforcement activities

52 

Council (n 48).

Cooperation in Transnational Multi-agency Investigations in the EU 155 and to facilitate coordination of investigations undertaken by the national authorities. Criminal investigations and prosecutions in the areas referred to in Art 7 are a matter for Member States’ own competent (judicial or other) authorities. However, the Commission’s (OLAF’s) operational assistance may provide valuable assistance for the sound performance of investigations, particularly as OLAF can: —— offer technical forensic support and assistance to national law enforcement; —— be present during searches,53 even if, of course, OLAF investigators do not perform any criminal investigative acts under their own authority; —— identify and contact the relevant authorities and establish relations for the purposes of information and operations, thus linking the administrative and the criminal investigations; —— establish or facilitate direct contacts between the relevant authorities involved; —— organise meetings between the relevant authorities, on request or when the need arises; —— provide information for the purpose of the preparation of requests for judicial cooperation; —— facilitate requisite contacts with the relevant authorities in cases of organised international fraud, so as to promote the application of Art 6(2) of the Fraud Convention (centralisation of prosecutions).54 4.  Status of OLAF and Status of the Commission in National Criminal Proceedings As a body functionally independent from the Commission, OLAF may offer evidence and intervene as an impartial expert in national criminal proceedings,55 even if the Commission represents the victim as a civil party. OLAF is a service of the Commission, but it is functionally independent with respect to its investigative mission. Its mandate provides the duty to investigate in an inquisitorial manner in favor and against. OLAF is obliged to verify and value all factual elements whether of a nature to confirm the allegations or to invalidate them. OLAF does not represent the interests of the victim. When offering its assistance in court, OLAF investigators act as ‘professional’ witnesses or expert witnesses involved in the establishment of truth.

53  Eurotrends Kic Systems (n 49); however, the presence of OLAF investigators during searches is made subject to authorisation by the prosecutor. 54  Council (n 48). 55  Regulation 883/2013, Art 12(4); see section II.A.4. on the admissibility of OLAF investigative acts as evidence in national proceedings.

156  Lothar Kuhl III.  HORIZONTAL TRANSNATIONAL COOPERATION BETWEEN COMPETENT NATIONAL ADMINISTRATIVE AUTHORITIES

The instruments of mutual administrative assistance which are currently available have been developed in the field of customs cooperation and refer to the objectives of free movement of the internal market and of the European Union. Specific antifraud instruments for mutual assistance would need to cover competent authorities of all relevant disciplines and mandates.

A. Customs Cooperation Under the TFEU: Administrative (Art 33) and Enforcement (Art 87(2)) The TFEU provides two distinct legal bases for customs cooperation (Art 33) and police cooperation (Art 87(2)). The latter functionally also comprises customs enforcement cooperation. The current secondary law instruments are Regulation 515/9756 on mutual assistance in matters of customs, and the Naples II Convention (1998).57 Customs cooperation is not only linked with the Treaty objective to fight fraud and protect the financial interests of the European Union. Article 33 TFEU is also intrinsically intertwined with the objective of the free movement of goods and the related need to extend customs cooperation. Regulation 515/97 therefore focuses on the need to develop information exchange by further developing preexisting concepts of mutual assistance to complement the customs union. Unlike Art 82 TFEU, which provides for the principle of mutual recognition of judicial decisions, Art 87 TFEU concerning police cooperation focuses on information collection, storage and processing in a cooperation between law enforcement services, as currently addressed in the Naples II Convention, and not on the decision-making at national level and the extension of its effects to the whole Union. 1. Mutual Administrative Assistance in the Field of Customs Under Regulation 515/97 Regulation 515/97 covers requests for information exchange and mutual assistance between customs authorities. The objectives of the information exchange and

56  Council Regulation (EC) 515/97 of 13 March 1997 on mutual assistance between the administrative authorities of the member states and cooperation between the latter and the commission to ensure the correct application of the law on customs and agricultural matters, [1997] OJ L82/1, as last amended by Regulation (EU) 2015/1525 of the European Parliament and of the Council of 9 ­September 2015 (‘Regulation 515/97’). 57  Council Act 98/C 24/01 of 18 December 1997 drawing up, on the basis of Article K3 of the Treaty on European Union, the Convention on mutual assistance and cooperation between customs administrations (Naples II), [1998] OJ C 24/1 (‘Naples II Convention’).

Cooperation in Transnational Multi-agency Investigations in the EU 157 assistance do not exclusively aim at providing evidence in national proceedings, but at broader operational objectives, ie the objective to ensure compliance with the provisions of customs or agricultural legislation and in particular to ensure the effectiveness of the collection of EU customs duties and agricultural levies. In procedural terms, Regulation 515/97 does not refer to any concept of mutual recognition of customs decisions. Assistance is rather granted in accordance with the general principle of assimilation and loyal cooperation under the Treaty, whereby the requested authority shall ‘carry out, or arrange to have carried out, the appropriate administrative enquiries concerning operations (which constitute breaches) … as though acting on its own account or at the request of another authority in its own country’ and ‘communicate the results of such administrative enquiries to the applicant authority’.58 Subject to an agreement, ‘officials appointed by the applicant authority may be present at the administrative enquiries’ which shall, however, ‘at all times be carried out by staff of the requested authority. The applicant authority’s staff may…, however, have access to the same premises and the same documents as the latter …’. Upon request of the applicant customs authority, the requested partner authority shall transmit to it any information which may enable it to ensure compliance with the provisions of customs or agricultural legislation.59 In order to obtain the information sought, the requested authority or the administrative authority to which it has recourse will proceed as though acting on its own account or at the request of another authority in its own country.60 Assistance by the requested authority also includes ‘supply … with any attestation, document or certified true copy of a document in its possession or obtained…’61 and ‘notify (ing) the addressee or have it notified of all instruments or decisions which emanate from the administrative authorities …’.62 Assistance further includes preventive and operational investigation measures. The requested authority ‘shall as far as possible keep a special watch or arrange for a special watch to be kept within its operational area: (a) on persons, and more particularly their movements …(b) on places where goods are stored in a way that gives grounds to (suspicion) … (c) on the movements of goods indicated as being the object of potential breaches … and (d) on means of transport, where there are reasonable grounds for believing that they are being used to carry out operations in breach of customs or agricultural legislation’.63 The requested authority must make available any information concerning operations detected or planned which constitute breaches.64

58 

Regulation 515/97, Art 9(1). ibid Art 4(1). 60  ibid Art 4(2). 61  ibid Art 5. 62  ibid Art 6. 63  ibid Art 7. 64  ibid Art 8. 59 

158  Lothar Kuhl Regulation 515/97 specifies that in so far as national provisions on criminal proceedings reserve certain acts to officials specifically designated by national law, the applicant authority’s staff shall not take part in such acts. In any event, they shall not participate in particular in searches of premises or the formal questioning of persons under criminal law. They shall, however, have access to the information thus obtained.65

Regulation 2015/1525 has recently amended Regulation 515/97, in particular to ensure that evidence obtained through (administrative) mutual assistance can be considered as admissible in proceedings before the administrative and judicial authorities of the Member State of the applicant authority.66 In national proceedings information, including documents, certified true copies of documents, attestations, all instruments or decisions which emanate from administrative authorities, reports and any intelligence obtained by the staff of the requested authority and communicated to the applicant authority in the course of the assistance … may constitute admissible evidence in the same way as if they had been obtained in the Member State where the proceedings take place (a) in administrative proceedings … (b) in judicial proceedings of the Member State of the receiving authority.

The principle of assimilation is applicable both to information and evidence provided by Member States authorities and by the Commission (OLAF).67 Information that needs to be obtained by means of measures which may be implemented only with the authorisation of a judicial authority may be communicated as part of the administrative cooperation under the Regulation, but only with the prior authorisation of the judicial authority.68 The assistance under the Regulation does not apply for the purpose of criminal investigations. Indeed, the Regulation does not affect the application of rules of criminal procedure and mutual assistance in criminal matters.69 However, the restrictions which require the requesting authority to make use of the information and documents obtained for no purposes other than those provided for in the Regulation ‘shall not preclude the use of information obtained under (the) Regulation in any legal action or proceedings subsequently initiated in respect of failure to comply with customs or agricultural legislation’.70

65 

ibid Art 9(2). (EU) 2015/1525 of the European Parliament and of the Council of 9 September 2015 amending Council Regulation (EC) No 515/97 on mutual assistance between the administrative authorities of the member states and cooperation between the latter and the commission to ensure the correct application of the law on customs and agricultural matters, [2015] OJ L243/1 (‘Regulation 2015/1525’), recital 2. 67  Regulation 515/97 as last amended by Regulation 2015/1525, Arts 12 and 16. 68  ibid Art 3. 69  ibid Art 51. 70  ibid Art 45(3). 66  Regulation

Cooperation in Transnational Multi-agency Investigations in the EU 159 2.  Customs Cooperation in Criminal Matters Under the Naples II Convention As distinguished from the Regulation, the Convention on customs cooperation is applicable if the request for information exchange or for mutual administrative assistance is issued outside areas of material EU competence or for the purpose of customs criminal investigations.71 Under the Convention, mutual criminal administrative assistance will be granted ‘with a view to preventing and detecting infringements of national customs provisions, and prosecuting and punishing infringements of Community and national customs provisions’.72 The Convention does not refer to a mutual recognition of customs decisions. However, with respect to the extent of measures taken, ‘the (requested) customs administrations shall apply (the) Convention with the limits of the powers conferred upon them under national provisions. Nothing in (the) Convention may be construed as affecting the powers conferred under national provisions.’73 With respect to the relationship of the Convention with the mutual assistance provided by the judicial authorities, the Convention provides that ‘where a criminal investigation is carried out by or under the direction of a judicial authority, that authority shall determine whether requests for mutual assistance or cooperation in that connection shall be submitted on the basis of the provisions applicable concerning mutual assistance in criminal matters or on the basis of (the Customs) Convention’.74 In addition to the forms of cooperation which are mentioned also in the Regulation, such as requests for information, the Naples II Convention provides for requests for surveillance (special watch), requests for enquiries, requests for notification,75 special forms of ‘cross-border’ cooperation like hot pursuit, cross-border surveillance, controlled delivery, covert investigations and joint special customs investigation teams, all for the purpose of criminal investigations and for establishing evidence in criminal proceedings.76 However, currently, even in the area of customs, there is no instrument which applies to multi-disciplinary cooperation. Multi-disciplinary exchange of information between administrative and judicial authorities remains therefore subject to specific approval by the competent judicial authorities, according to the individual circumstances.

71 

Naples II Convention. ibid Art 1(1). 73  ibid Art 2. 74  ibid Art 3(2). 75  See ibid Arts 10–13. 76  See ibid Arts 20–24. 72 

160  Lothar Kuhl B. Competent Authorities of the Member States for Anti-fraud Cooperation: Proposal for Multi-disciplinary Transnational Cooperation Instruments Article 325 TFEU on the protection of the EU financial interests against fraud would allow, for this purpose, to adopt legislation on cooperation between (all) competent authorities of the Member States and between them and the Commission (OLAF). However, currently, there is a lack of a horizontal mutual assistance instrument covering the full scope of cooperation duties under Art 325 TFEU. The Commission however, proposed in 2004,77 and amended in 2006, an initiative for a Regulation on (multi-disciplinary) mutual assistance and information exchange for anti-fraud purposes,78 including on matters of value added tax (VAT).79 The proposed Regulation would establish the legal framework for mutual administrative assistance cooperation including, in particular, the exchange of information between the competent authorities of the Member States and between those authorities and the Commission, in order to ensure equivalent and effective protection of the financial interests of the EU against fraud and any other illegal activities. 1. Objectives of the Cooperation Between Competent Authorities Under the (Amended) Proposal The fight against fraud affecting the EU financial interests is a shared competence of the EU and the Member States. In case of particularly complex transnational fraud schemes in the areas of VAT fraud, laundering of the proceeds of EU fraud and structural funds fraud, the criminal activity is carried out by organised crime, taking advantage of the freedoms provided by European integration. Under the proposed Regulation the Commission did not intend to exercise any investigative powers of its own, but put its assistance in the form of a service platform at the disposal of the Member States. However, as the proposal included cooperation on matters of fraud and illegal activities affecting EU VAT revenues, it was opposed by many Member States. In particular, the proposal was not supported by the Luxembourg Presidency in early 2005 for reasons of domestic tax 77  Commission, ‘Proposal for a Regulation on mutual assistance for the protection of the financial interests of the Community against fraud and any other illegal activities’, COM (2004) 509, 20 July 2004. 78  Commission (EC), ‘Amended Proposal for a Regulation of the European Parliament and the Council on Mutual Administrative Assistance for the Protection of the Financial Interests of the ­European Community against Fraud and Any Other Illegal Activities (presented by the Commission pursuant to Article 250 (2) of the EC Treaty)’, COM (2006) 473 final, 14 September 2006. 79  In accordance with Art 2(b), Council Decision, 26 May 2014, on the system of own resources of the European Union, [2014] OJ L 168/105, VAT, in accordance with a uniform rate valid for all Member States, constitutes own resources entering in the budget of the EU; VAT resources are therefore covered under the concept of the financial interests of the EU, see C-105/14 Criminal proceedings against Ivo Taricco and Others, EU:C:2015:555, 8 September 2015, Recital 38; C-617/10 Åklagaren v Hans Åkerberg Fransson, EU:C:2013:280, 7 May 2013, Recital 26.

Cooperation in Transnational Multi-agency Investigations in the EU 161 policy, as Luxembourg was eager to keep VAT anti-fraud cooperation within the area of unanimous EU legislation80—even if mutual assistance on matters of antifraud has fundamentally nothing to do with tax harmonisation. As a result, the EU legislator did not adopt the Commission’s proposal, but instead it adopted Regulation 904/2010 on administrative cooperation and combating fraud in the field of VAT, on the basis of Art 113 TFEU, which requires unanimity in the Council to adopt legislation after simple consultation of the European Parliament, and not on the basis of Art 325 TFEU, which would have required to involve the European Parliament as a co-legislator. The democratic legitimacy of Regulation 904/2010 is therefore questionable. Moreover, its content is not in line with the obligations under Art 325(3) TFEU, which provides for close and regular cooperation between competent national authorities together with the Commission. Indeed, if Regulation 904/2010 sets up ‘Eurofisc’ as a network for swift exchange of information on VAT fraud between Member States fiscal authorities,81 participation in this network is organised on a purely voluntary basis82 which is incompatible with Member States’ duties under the Treaty with respect to the protection of the Union’s financial interests. Furthermore, the Regulation excludes the Commission from access to any information exchanged over the ‘Eurofisc’ network and limits its role to providing technical and logistical s­ upport.83 It is, all in all, a weak compromise, complaisant towards the least cooperative Member States, and designed to cut the Commission off from participation in exchange on investigative information on VAT fraud. As opposed to the ‘Eurofisc’ Regulation, the Commission’s proposal for a regulation, which was amended in 2006, has aimed at creating a general framework for (administrative) multi-agency assistance,84 necessary to strengthen the protection of the financial interests of the EU. For this purpose, the Member States and the Commission need to cooperate, coordinate and assist each other and exchange information to allow swift investigations and appropriate action. The proposal has, however, not extended the rules on assistance to multi-disciplinary cooperation involving both administrative and judicial authorities. The Commission proposal, issued under former Art 280 TEC, specifies that the Regulation is intended to apply in cases of fraud and any other illegal activities affecting the financial interests of the EU which are of particular relevance at Union level. However, with respect to evidence in criminal proceedings it has been clarified that the proposed regulation:

80  See Regulation (EU) 904/2010 of the Council on administrative cooperation and combating fraud in the field of value added tax, [2010] OJ L 268/1 (‘Regulation 904/2010’). 81  ibid Art 33. 82  ibid Art 34. 83  ibid Art 35. 84  For a definition of multi-agency and multi-disciplinary investigations, see Ligeti and Franssen, Chapter 1 in this volume.

162  Lothar Kuhl shall not affect the application of national criminal law or of rules on mutual assistance in criminal matters or the national administration of justice. The obligation to give ­assistance … shall not cover the provision of information or documents obtained by the competent administrative authorities acting with the authorisation or at the request of the judicial authority. In the event of requests for assistance, such information or documents shall be provided if the judicial authority which is to be consulted on the matter gives its consent.85

The precise forms and methods for use of the OLAF operational analysis and assistance in the fight against fraud to the detriment of the financial interests of the EU are left for the discretion of the Member States. However, the proposal provides a legal basis for information exchange including on VAT fraud with OLAF and for the use of analysis and assistance by OLAF to support cooperation with other participating Member States’ services. The role of the Commission as regards its operational and intelligence support is that of a facilitator for the Member States’ services. 2.  General Concepts of the Proposal The proposal does not provide for the principle of mutual recognition of decisions by competent authorities. However, the requested authority would conduct the administrative enquiries as if acting on its own account.86 The information exchange under the proposed Regulation is subject to professional secrecy and data protection.87 Information exchanged may not be used for purposes other than those covered under the objectives set out by the Regulation. Nevertheless, it would allow for anti-fraud cooperation between administrative authorities of different branches and disciplines, no matter whether the respective authorities exist in the requesting Member State or benefit from the same powers. The particular added value of the proposal would consist in setting up a framework for mutual assistance and information exchange concerning fraud and illegal activities in any area of EU policies.88 More specifically, it would also cover cooperation in case of infringements of ­legislation relating to VAT, as referred to in Council Directive 2006/112/EC,89 which

85 

Commission, ‘Amended Proposal’ (n 78), Art 2(4)(5). ibid, Art 7. 87  ibid, Art 17. 88  Including ‘infringements relating to areas of revenue as well as expenditure, whether managed on a centralised basis by the institutions, by shared, decentralised or joint management, including any infringement of a provision of (European Union) law resulting from an act or omission by an economic operator, and breaches of contracts arising under provisions of EU law, which has, or would have, the effect of prejudicing the general budget of the EU or budgets managed by it, either by reducing or losing revenue accruing from own resources collected directly on behalf of the EU, or by an unjustified item of expenditure’. 89  Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, [2006] OJ L 347/1. 86 

Cooperation in Transnational Multi-agency Investigations in the EU 163 have had, or would have, the effect of diminishing the Union’s own resources, as referred to in Council Regulation 1553/89.90 Cooperation duties under the proposed Regulation would extend to ‘administrative enquiries’ including ‘all controls, checks and other action undertaken by the competent authorities in the performance of their duties with a view to establishing whether irregularities have been committed’, but ‘excluding action taken at the request of, or under a direct mandate from, a judicial authority’, and to exchange of information on fraud affecting EU financial interests, including ‘financial information’ defined as ‘information on suspicious transactions received by the competent national contact points pursuant to Directive 2015/84991 and other information that is appropriate for tracing the financial transactions linked to irregularities covered …’. The proposal has established a multi-agency approach. It covers as ‘competent authorities’ all national or EU authorities acting within the scope of their respective powers, including: the Member States’ authorities which are (1) directly responsible for the management of financial funds originating from the Union budget and designated as such by relevant Union law and national law provisions, or (2) responsible under the applicable national provisions of administrative law for the prevention of and the fight against fraud and any other illegal activities affecting the financial interests of the Union, or (3) the competent authorities listed in [Regulation (EU) No 904/2010], the respective central liaison offices and liaison departments designated pursuant to that Regulation, other investigation authorities competent to investigate VAT fraud, or (4) set up as ‘financial intelligence units’ by the Member States pursuant to Art. 32 of Directive 2015/849 to collect and analyse information received.92

IV.  CONCLUSION AND OUTLOOK FOR THE FUTURE

For the purpose of collecting evidence in criminal proceedings transnationally, it is a step forward that horizontal EU instruments on judicial cooperation in criminal matters will rely on the principle of mutual recognition of judicial decisions. Investigations of economic and financial crime against the EU interests require even more integrated multi-disciplinary responses.93 These should include:

90 Council Regulation (EEC, Euratom) No 1553/89 of 29 May 1989 on the definitive uniform arrangements for the collection of own resources accruing from value added tax [1989] OJ L 155/9; Commission (n 78) Art 3. 91  Directive (EU) 2015/849 on the prevention and the use of the financial system for the purposes of money laundering and terrorist financing, amending Regulation (EU) No 648/2012 and repealing Directive 2005/60/EC and Commission Directive 2006/70/EC, [2015] OJ L141/73. 92  Commission (n 78), Art 4. 93  See also ECORYS-ECLAN, ‘Study on Impact of Strengthening of Administrative and Criminal Procedures for the Protection of the EU Financial Interests’, JUST/A4/2011/EVAL/01, 2013, ch 6.

164  Lothar Kuhl —— autonomous EU-wide investigation powers of OLAF, extended to also include powers of enforcement and criminal investigation on behalf of a EPPO; —— beyond mutual recognition of national judicial decisions, a genuine European criminal investigation and prosecution function to adopt European judicial decisions, as foreseen in the initial EPPO proposal of the Commission;94 and —— a comprehensive multi-agency administrative framework for mutual assistance between all competent anti-fraud national authorities, as well as between them and OLAF, including exchange of information and the conduct of enquiries using, as may be necessary, national operational enforcement powers to collect evidence. The old (amended) mutual assistance proposal95 was aimed neither at exercising control over Member States’ services as regards their specific operational competences, nor at introducing general reporting obligations beyond the exchange of information on cases of particular relevance at EU level. Although the proposal does not represent an inroad to the national sovereignty of Member States, the Council has still (at the time of writing) not even adopted a first reading position. As a consequence, the EU still lacks a comprehensive horizontal legal framework for mutual assistance and information exchange under secondary EU law which would cover the full scope of Member States’ obligations under Art 325 TFEU. Putting aside the horizontal mandate of OLAF, administrative anti-fraud action by Member States authorities remains regulated on a piecemeal basis by the EU legislator in the various policy fields and lacks a multi-disciplinary framework. At national level, some anti-fraud services meanwhile exercise a horizontal mandate with respect to EU fraud. The need for a better coordination of antifraud investigations and mutual assistance across the board is notably reflected in Regulation 883/2013, which invites Member States to set up an anti-fraud coordination service (AFCOS).96 Notwithstanding the existence of horizontally competent anti-fraud investigation services in some Member States, the regulation does not require an AFCOS to be set up as a service which is itself able to execute requests for mutual assistance by all competent authorities from other Member States and by OLAF. An AFCOS does not need to offer investigative or law enforcement powers, and may merely exercise the function of a facilitator. Therefore, many of the Member States’ AFCOS do not exercise investigative powers themselves and, thus, do not have at national level a mandate to exchange investigative information. Furthermore, AFCOS powers differ considerably between Member States. Only a few exercise criminal investigative powers on behalf of the judiciary and are vested with powers of enforcement.

94 

Commisson (n 2); see also Commission (EC), ‘Commission Staff Working Document’ (n 14). See section III.B.2. on the general concepts of the (amended) Proposal in 2006. 96  Regulation 883/2013, Art 3(4). 95 

Cooperation in Transnational Multi-agency Investigations in the EU 165 A comprehensive but purpose-oriented EU framework for information exchange and cooperation with a view to collecting evidence, fighting and combating fraud affecting the EU financial interests effectively and dissuasively, would also stimulate a further approximation of the national structures to implement it. Such a legal instrument would need to encompass both administrative cooperation and legal assistance, including cooperation between criminal enforcement services. To this end, a legislative initiative to replace the old but still pending mutual assistance proposal97 should be prepared. It should: —— provide for information exchange, assistance and cooperation based on mutual recognition; —— comprise multi-disciplinary, cross-cutting cooperation between competent authorities to investigate and prosecute cases of fraud of different disciplines and in different Member States, —— include in its scope competent administrative anti-fraud authorities, law enforcement and judicial authorities; —— foresee the possibility for OLAF to issue, in cooperation with competent national authorities, summons orders to economic operators requested to contribute as witnesses and persons concerned; —— provide OLAF with the mandate to execute, under the authority of an EPPO, searches and to access relevant banking information, as well as computer and telecommunication data; and —— refer to high standards of judicial guarantees and data protection.

97 

Commission (n 78).

166 

8 Jurisdictional Issues in Transnational Multi-agency and Multi-disciplinary Investigations of Economic and Financial Crimes JOHN VERVAELE

I. INTRODUCTION

I

N THE LAST decade, companies have become a major target of financial criminal investigations and prosecutions for illegal behaviour, such as their role in the financial crisis since 2008, global money laundering operations, speculative and fraudulent behaviour with Libor, Euribor and currency rates, violations of embargos against states, bribery practices worldwide, trading in illegal goods and illegal markets (such as illegal trade in species, wood and pharmaceutical products) and illegal customs and tax constructions. The investigations and prosecutions of the suspected illegal behaviour in the economic and financial area are to a large extent triggered by regulatory and enforcement agencies and/ or classic judicial authorities (prosecutors and investigating magistrates) within the national jurisdictions, based on the seat of the corporate body, the place of the illegal conduct, or the damage. In some countries, there is also a real shift to criminal law enforcement against large companies. Former US Attorney General Eric Holder repeatedly declared that no banks are too big to be prosecuted, if they engage in criminal activity. The maxim of ‘too big to fail and too big to jail’ has clearly been set aside. Some countries use also extended criteria of jurisdiction to investigate and prosecute their interests on a global scale, which is the reason why so many European(-based) companies face criminal prosecutions in the US. It must be said that, in many European countries, with exception of the UK and Switzerland, no substantive enforcement activity can be observed at all, or it takes place at a very low level, mainly ending in modest administrative fines imposed by the regulators and without triggering criminal enforcement for the managers and their companies. The response of the enforcement communities in European countries, within and outside the EU, clearly depends largely on the regulatory

168  John Vervaele policies, tools and practices of the national jurisdictions. However, this illicit behaviour not only affects the interests and values of nation-states, but also the interests and values of regional institutions and policies, such as the EU (internal market, Area of Freedom Security and Justice) and, in some cases such as those involving corruption and UN embargos, affects global values. Most of the nationstates, to some degree under international and regional obligations, have decided to define some of these activities, such as violations of UN embargos, not only as illicit, but as illegal criminal behaviour. Yet, even in those areas, the applicable criminal laws still remain a patchwork of diverging national provisions. In the broad field of economic and financial offences, there are no international obligations or standards, with the exception of the related money laundering offences (which do not apply to all economic and financial predicate offences). This means that the extent to which enforcement authorities can investigate and prosecute this illicit behaviour depends upon the legislative policies and designs in the national jurisdictions (eg the definition of the offences, investigative tools and jurisdiction rules). A common or equivalent playing field appears to be lacking. It goes without saying that this also strongly influences ‘the law in action’. Enforcement practice currently shows many examples of concurring and overlapping investigations and prosecutions in several jurisdictions, but also of unilateral extensive use of extraterritorial investigations and prosecutions by some powerful states, such as the US. Lack of effective investigations and prosecutions go hand in hand with unilateral jurisdictional overreach of some states. From this description of the phenomenon it can be seen that there is no or very little coordinated transnational enforcement of economic and financial crimes. The multi-agency approach towards a common challenge is still very timid and weak. The multi-disciplinary approach, combining different enforcement actors (administrative authorities, such as customs and tax authorities, environmental enforcement authorities, competition authorities, market regulators, etc with police and judicial authorities) in a cross-border setting is even more underdeveloped.1 This creates three types of problems in the light of an increasing globalisation of economic and financial activities. First, nation-states and political authorities responsible for enforcement are no longer able to enforce their interests on their values on their territory, as most of the activities of the economic and financial players do not take place on their territory or go far beyond it. They are faced with complex cases of jurisdiction and gathering of evidence and also of enforcing sentences. This is also the case in strongholds of regional integration, such as the EU. Despite the existence of an internal market, with a strong integrated economic and financial market, enforcement remains largely national with no steering (normative, financial, etc) provided by the EU. The EU administrative enforcement in

1  For a definition of multi-agency and mutli-disciplinary investigations, see Ligeti and Franssen, Chapter 1 in this volume.

Jurisdictional Issues in Transnational Investigations 169 the competition area is the only exception. Second, the multiplicity of potential national enforcement authorities having jurisdiction leads to inaction (negative use of jurisdiction) and conflicts of jurisdiction, but foremost to unilateral use of jurisdiction by one powerful player defending in an extensive and overreaching way its interests and values on a global scale, even in the sphere of the EU internal market. The result is enforcement deficit, impunity and in some cases unilateral enforcement overreach or distortion. Third, it is not only the states and regional bodies such as the EU which face problems and challenges: the subjects of enforcement, perpetrators and victims, also face similar problems. Who is investigating and prosecuting what, whom and why? Can companies predict by whom and in which jurisdiction(s) they risk investigation and prosecution, based on the law or based on criminal policy priorities? Can victims of economic and financial crimes predict where they have interests and how will these be taken into account in the enforcement activities? All these questions are related to the applicable law (substantive criminal law and jurisdiction criteria) and the foreseeability of the law in the books and the law in action. In other words, they relate both to jurisdiction to prescribe, jurisdiction to enforce and even to jurisdiction to adjudicate in cases where the enforcement activity ends up in punitive trials. In order to tackle these problems, this chapter will start with a focus on ­empirical evidence in section II, analysing some concrete examples of transnational enforcement of financial crimes. The aim is to list the legal challenges. Section III will explore the approach towards these challenges within the EU (internal dimension) and section IV will review the approach towards these challenges at a global ­transnational level, first from a perspective of the EU external dimension, then from the perspective of the US and finally from the perspective of the international community. Section V concludes a discussion of possible slutions.

II.  EXAMPLES OF ENFORCEMENT PRACTICE

A.  Law Enforcement in Action For the enforcement practice, three examples linked to the financial markets have been chosen, as they are at the absolute core of the European integration process and are, at the same time, globally relevant. Financial integration is closely related to the internal market, and many other common EU policies. EU directives and regulations show high levels of the harmonisation of the applicable norms, often even excluding any national leeway or possibilities for ‘goldplating’. This section will look at how this high-level prescriptive framework for citizens and other economic actors functions when it comes to its enforcement dimension (such as common offences and jurisdiction). Obviously, national authorities have responsibility for the enforcement of obligations under EU law. This responsibility not only covers ‘internal’, ie purely national situations, but the abolishment of internal borders has also made national authorities, to a certain extent, jointly responsible

170  John Vervaele for the enforcement of the EU framework. Member States are under an obligation to cooperate with each other, and also with EU bodies. The enforcement side of EU financial market integration moreover has a clear internal EU side, but also an external one to the extent that EU-based companies may be faced with investigative and prosecutorial measures from (mainly) the US, or vice versa. 1.  Fortis Bank: Market Abuse In 2007, Banco Santander, Fortis Bank and the Royal Bank of Scotland obtained control over ABN AMRO bank through a hostile takeover. Fortis Bank had problems in financing its part of the takeover and decided to go to the capital market for fresh capital and, thus, to offer new shares. The operation was widely advertised. Due to the subsequent financial meltdown, and the nationalisation and dismantling of Fortis Bank, doubts were very soon raised about the financial integrity of the company and about the information given to existing and new shareholders at the time of the capital extension. The rules on market abuse, a part of hard-core European law on the financial markets,2 apply in all EU Member States. Those rules have been given wide extraterritorial effects.3 In case of overlapping competences, Art 16(3) of the 2003 Market Abuse Directive requires that the competent authorities of the various Member States must consult each other on the proposed follow up to their actions. Nonetheless, the enforcement of these rules in the Fortis case was almost completely driven by the national enforcement design and national enforcement agendas, as the European rules leave much discretion to the Member States. Infringements of the EU market abuse rules are administrative irregularities and criminal offences, both in Belgium and Luxembourg, as well as in the Netherlands. Moreover, legal persons can be criminally liable in the three countries for these types of offences. However, in Luxembourg no action was undertaken at all by the administrative or judicial authorities, although Luxembourg was involved in the later (partial) nationalisation of Fortis. In the Netherlands, administrative enforcement authorities opened investigations against the former Fortis Bank concerning suspicions of market abuse. In Belgium, both administrative as well as judicial authorities opened investigations against the former Fortis Bank and against its CEOs. This led to concurring and parallel investigations and proceedings in ­Belgium and the Netherlands, but to no investigations at all in Luxembourg. In 2012, the Dutch Financial Services Authority (Autoriteit ­Financiële Markten—‘AFM’), the administrative enforcement agency, was the first

2  At that time, Directive 6/2003/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse), [2003] OJ L 96/16, was in force (‘Directive 6/2003/EC’). 3  See Directive 6/2003/EC, Arts 9 and 10. Put briefly, Art 9 defines the territorial scope of the directive, whereas Art 10 defines the rules on which Member State (authority) is responsible for implementation and enforcement.

Jurisdictional Issues in Transnational Investigations 171 to ­conclude proceedings and imposed four fines4 of €144,000 each on the two legal entities that constituted the Fortis Bank corporation/holding, as they were found guilty of market abuse. The imposition of the administrative fines by the AFM on the legal entities constituting the holding of Fortis Bank had undoubtedly been coordinated with the Dutch judicial authorities. In the Netherlands, the legal framework imposes a duty upon the administrative and judicial enforcement authorities to choose, at a certain stage, one of the two enforcement regimes: in other words, to opt either for administrative sanctions or criminal prosecution (the so-called una via principle).5 However, this did not preclude criminal proceedings against the ­former CEOs. The Dutch Public Prosecution Service has not given formal notice of any ongoing judicial investigation in that sphere.6 It is not known and difficult to guess if the authorities took into account the transnational dimension of the case, when deciding to opt for administrative enforcement, rather than the criminal law route. However, what is clear is that we can talk about unilateral action by the Dutch authorities, without coordination with the Belgian administrative and judicial authorities, despite Art 16(3) of the 2003 Market Abuse Directive. In 2012, the Belgian administrative enforcement agency, the Financial Services and Markets Authority (FSMA), found evidence that the company had distributed misleading information and imposed fines of €500,000 on the former Fortis Bank and fines of up to €400,000 against the CEOs. Finally, in 2013, the Belgian judicial authorities decided to prosecute seven former CEOs for misleading information, market abuse, forgery of documents and deception, but decided not to prosecute the former Fortis Bank or BNP Paribas Fortis (the new owner of the bank). 2.  Libor/Euribor: Interest Rate Rigging Scandal In 2012, it came to light that the Libor7 and Euribor8 panels had been deliberately manipulating the interest rates since 1991, in order to increase bank profits. Both Libor rates and Euribor rates are the daily reference rates for mortgages, consumer lending products, futures, options, swaps and other derivative fi ­ nancial

4  See www.afm.nl/~/media/files/boete/2010/fortis-besluit-nv.ashx and www.afm.nl/~/media/files/ boete/2010/fortis-besluit-sanv.ashx, accessed 21 August 2015. 5  This means that the administrative and criminal enforcement authorities have to decide at a ­certain stage in the investigation to opt for either administrative sanctioning or criminal prosecution. 6  The Dutch Public Prosecution Service does not, in general, publish communications on the opening or not opening of financial judicial investigations or on ongoing financial judicial investigations. In Belgium, however, this is the current practice. 7  The London Interbank Offered Rate (Libor) is the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks. It is calculated for 10 currencies, including the USD and the Euro. Almost 20 world leading banks participate in the Libor panels. 8  Euribor is the Euro Interbank Offered Rate. The Euribor rates are based on the interest rates fixed by panels of around 40 to 50 European banks.

172  John Vervaele i­nstruments and, thus, have significant effects on consumers and the financial markets worldwide. Several European banks faced cumulative investigations and proceedings, both in the US and in European countries. Banks had not only to deal with civil damages claims (mostly in the US) but also with proceedings by administrative enforcement agencies (financial regulators and competition a­ uthorities)9 and judicial authorities. One of the banks that was active in both Libor and Euribor panels was Rabobank, a financial services corporation with its headquarters being located in the Netherlands. Most of the alleged conduct by bank employees took place in London and New York. In the period 2005–2010, certain Rabobank swaps traders requested Rabobank’s Libor and Euribor panel members to submit higher, lower or unchanged rates for particular tenors and currencies, which would benefit the traders’ trading positions. The swaps traders made these requests via electronic messages, telephone conversations and face-to-face conversations. The Libor and Euribor submitters agreed to accommodate, and did, indeed, accommodate the swaps traders’ requests for favourable Libor and Euribor submissions on numerous occasions. In 2012, the Dutch Central Bank (De Nederlandsche Bank—‘DNB’) and the Dutch AFM started administrative investigations.10 At that time, however, the US Department of Justice (DOJ) had already opened criminal investigations against Rabobank, which were concluded in 2013 with a deferred prosecution agreement between the Fraud Section of the Criminal Division and the Antitrust Division of the DOJ and Rabobank for the amount of $325 million as a criminal penalty.11 Together with approximately $740 million in criminal and regulatory penalties imposed by other agencies in actions arising out of the same conduct—$475 million by the Commodity Futures Trading Commission action, $170 million by the UK Financial Conduct Authority and approximately $96 million by the Dutch Public Prosecution Service—the total amount to be paid by Rabobank is more than one billion dollars. The Libor case, thus, triggered the jurisdictions of three states, including the US, the UK and the Netherlands. In his comments on the case, the Dutch ­Minister of Security and Justice indicated that he was very satisfied with this so-called ‘global settlement’.12 Nonetheless, these laudable comments do not do away with the fact that no insights were given on the division of labour between the authorities involved. The Minister stressed that coordination with foreign authorities took

9  The European Competition Authority and the Swiss Competition Authority commenced proceedings for cartel behaviour. 10  See http://www.rtlnieuws.nl/economie/dnb-en-afm-onderzoeken-manipulatie-libor-rente, accessed 21 August 2015. 11  See http://www.justice.gov/opa/pr/rabobank-admits-wrongdoing-libor-investigation-agrees-pay-325million-criminal-penalty, accessed 21 August 2015, for the press release, the text of the DPA and the statement of facts. 12  Kamerstukken II 2013/14, 33 803 no 6 p 26. In the Deferred Prosecution Agreement the US authorities explicitly thanked the Dutch Prosecution Office for its cooperation.

Jurisdictional Issues in Transnational Investigations 173 place, but that all authorities determined the level of their sanctions autonomously and independently.13 The agreement with the Dutch Public Prosecution Service was not made public. Therefore, important questions arise, such as why the Dutch authorities left the matter in the first instance to the US,14 and how prosecutorial overreach and excessive sanctioning were avoided, if at all, in this case. By contrast, many Dutch parliamentarians seem to have been concerned mainly with the questions of whether Rabobank was indeed sufficiently punished, whether the fines that were paid should be tax deductible, whether a total financial sanction of this amount would ultimately lead to another bail-out of a Dutch bank at the cost of Dutch tax payers, and why the US Treasury obtained the greatest (financial) gain from the penalties.15 3.  BNP Paribas Bank: Violations of State Embargos BNP Paribas, a global financial institution with its headquarters in Paris, agreed in 2014 to enter a guilty plea with the US Attorney of New York for conspiring to violate the US International Emergency Economic Powers Act, the US Trading with the Enemy Act and the US Economic Sanctions Act, by processing billions of dollars of transactions through the US financial system on behalf of Sudanese, Iranian and Cuban entities subject to US economic sanctions. The agreement by the French bank to plead guilty is the first time a global bank has agreed to plead guilty to large-scale, systematic violations of US economic sanctions. The plea agreement16 provides that BNP will pay total financial penalties of $89,736 billion, including the forfeiture of $88,336 billion and a fine of $140 million. According to the plea, BNP Paribas knowingly and willfully moved more than $8.8 billion through the US financial system on behalf of sanctioned entities in the period 2004–2012. The bank engaged in this criminal conduct through various sophisticated schemes, not mentioning the names of sanctioned entities or involving third parties, designed to conceal from the US regulators the true nature of the illicit transactions. The Cuban embargo is a unilateral US decision, but the ­Iranian and Sudanese embargos are also linked with UN embargos by the Security ­Council. Moreover, in the case of Sudan, the clients of BNP Paribas are also under investigation at the International Criminal Court for international crimes against humanity and war crimes. Therefore, those sanctions partly enforce common global standards. Nonetheless, the tough approach of the US criminal enforcement authorities differs strongly from the inactivity of the French administrative and judicial enforcement agencies.

13 

Kamerstukken II 2013/14, 33 803 no 6 p 30. As stressed by a number of Dutch parliamentarians in Kamerstukken II 2013/14, 33 803 no 6. See the debate in Kamerstukken II 2013/14, 33 803 no 6 p 26; Handelingen II 2013/14, 36 pp 1–6. 16  See http://www.justice.gov/opa/documents-and-resources-june-30-2104-bnp-paribas-pressconference, accessed 21 August 2015, for press release, guilty plea agreement and statement of the facts. 14  15 

174  John Vervaele B.  Evaluation of Law Enforcement in Action What can we conclude from these enforcement examples in a policy area where the EU substantive law on financial markets and products is said to be highly harmonised? Despite the close links between standard setting, on the one hand, and law enforcement, on the other, enforcement practice shows that we are currently far away from an integrated EU enforcement model. First, there are many apparent instances of a lack of coordination. In the Fortis case, although it involved, exceptionally, the harmonisation of administrative enforcement and comparable criminal offences in the three states, this did not lead to a coordinated use of administrative and criminal jurisdiction in the internal market and the EU Area of Freedom, Security and Justice (AFSJ). In the Netherlands and Belgium, there have been concurring enforcement activities. In Luxembourg, no enforcement jurisdiction has been triggered at all. From an overall point of view, the result is a patchwork with some overactivity and some underactivity, or indeed no activity at all. Much is left to chance. The result is poor cost efficiency and legal problems with, for instance,17 double jeopardy, weak criminal enforcement protection and very little protection for the victims. In the Libor and Euribor cases, there was initially no EU enforcement at all and the Member States left most matters to selfregulation and enforcement by the financial sector.18 There were difficulties and doubts in several EU countries as to the existence, at that time, of specific offences for this type of behaviour. Second, it can be seen that in most cases national authorities are pursuing mainly national interests. Consecutive proceedings, conflicts of jurisdiction or double punishment are not perceived as a problem for which they are responsible. Instead, it is often maintained that by crossing borders, companies and individuals subject themselves to the risk of multiple excessive punishment and contradictions in their legal position. Therefore, the existence of a level playing field seems to stop once common norms are in place, and does not (yet) influence the law in action (eg regulatory policies, tools and practices). In light of the creation of common EU policies, this is a surprising approach. There is a clear contradiction in the position that while promoting the free movement of goods, services, capital, workers and citizens, the adverse consequences of such free movement are not a concern for national authorities, but for the citizens and companies themselves.19 Third, the EU in many cases takes a backseat to the US authorities. Several ­regulators, mostly under the lead of US regulators or the DOJ/Attorney General,

17  The cross-border dimension is not limited to double jeopardy, but extends to the transnational protection of fundamental rights, such as the principle of legality, fair trial standards, including the right to silence, the privilege against self-incrimination etc, as well as in relation to the combination of punitive administrative and criminal enforcement. 18  See C Gomez-Jara Diez, Crisis Financiera y Derecho Penal (Lima, Ara Editores, 2013) 82. 19  See for more detail, Luchtman, Chapter 9 in this volume.

Jurisdictional Issues in Transnational Investigations 175 conclude Non Prosecution Agreements or Deferred Prosecution Agreements (NPAs or DPAs) with the companies in question.20 These US out-of-court settlements are in reality the result of US-led criminal investigations, based on extended territoriality claims, with the ad hoc assistance of regulators in EU countries. In many cases, European judicial authorities, responsible for criminal prosecutions, do not seem to be involved. There seems to be no or very little coherent enforcement strategy between the enforcement authorities in the EU, something that contrasts with the policy in the US. The triggering of enforcement jurisdiction and adjudicative jurisdiction is, to a large extent, dependent upon a fragmented patchwork of prescriptive jurisdiction in every single jurisdiction of every Member State. Enforcement models have lagged behind financial globalisation and the reality of integrated financial markets, both within and outside the EU, despite the coordination obligations under the EU directives. This is astonishing, certainly now that enforcement policies and strategies play a very important role in ­achieving the goals of the EU AFSJ and the internal market. The cases discussed above therefore illustrate that the creation of a level playing field for a multi-agency and multi-disciplinary approach has three dimensions. There is a strong national dimension, as the main enforcement actors are national and will remain so. There is also a dimension of regional integration, as for instance in the EU. Finally, there is a global dimension, linked to global interest, but also linked to extraterritorial use of enforcement worldwide. Extraterritoriality can be defined as the enactment and enforcement (including adjudication) of regulations abroad, thus overriding the power of the foreign territorial sovereign to regulate the same course of conduct.

III.  APPROACH TO CHALLENGES WITHIN REGIONAL INTEGRATION FRAMES: THE EXAMPLE OF THE EU

A. Challenges Nation-states exercise authority over their population in a certain territory. Traditionally they have competence to define the legal framework and rules for the functioning of society (prescriptive jurisdiction); the competence to enforce these rules (jurisdiction to enforce); and the competence to hold (legal) persons liable in case of non-compliance (jurisdiction to adjudicate). These triple jurisdictions include the nation-states’ monopoly over the use of power, including the power to punish (ius puniendi). The use of this power is granted by law, but also subject to the command and control by law. This control-restraint is the very essence of the rule of law and the Rechtstaat, as the nation-state has to guarantee both the liberty and security of citizens. It is clear from this picture that open ­borders

20 

See for more detail on NPAs and DPAs, Zagaris, Chapter 2 in this volume.

176  John Vervaele and functional European territoriality do not automatically lead to a redesign of the jurisdictions and applicable law of regulatory and enforcement agencies. The question remains to what extent the horizontal regulatory and enforcement cooperation between Member States and the vertical governance and enforcement model (Europol, Eurojust, etc) have really reshaped the nation-state based authority-people-territory concept, or in other words if and if so, to what extent, can the horizontal and vertical regulatory and enforcement agencies be defined as authorities with proper jurisdiction over their addressees (legal persons, citizens) in a new transnational territory? In the affirmative case, this raises the question of whether and how core values of the rule of law, including the human rights protection of the European Charter of Human Rights (ECHR) and the EU Charter of Fundamental Rights (EUCFR), relate to this new political-legal reality of transnational authority. The core values, based on the rule of law, are necessary for the to impose restraint on the use of transnational enforcement authority and for the attribution of rights and remedies to the persons concerned. In a political, economic and legal integration model, such as the EU, important competences of the nation-state are transferred to the supranational level. The EU has been empowered through the EU Treaties with functional aspects of the three mentioned jurisdictions. The EU is based upon an integrated legal order and, thus, upon integration law, a composite of European supranational law and (harmonised) national law.21 The result is that we can speak of an integration model that is based on shared sovereignty and shared governance. It is clear from this picture that open borders and functional European territoriality do not automatically lead to a redesign of the jurisdictions and applicable law of regulatory and enforcement agencies. The question remains as to what extent the horizontal regulatory and enforcement cooperation (second dimension) and the vertical governance and enforcement model (third dimension) have really reshaped the national authoritypeople-territory concept, or in other words if and if so, to which extent can the horizontal and vertical regulatory and enforcement agencies be defined as authorities with proper jurisdiction over its addressees (legal persons, citizens) in a new transnational territory? In the affirmative case, we have to address the question if and how core values of the rule of law, including the human rights protection of the ECHR and the EUCFR, relate to this new political-legal reality of transnational authority. The core values, based on the rule of law, are necessary for the controlrestraint on the use of transnational enforcement authority and for the attribution of rights and remedies to the persons concerned. In the EU setting, based on the existence of an common integrated (financial) market, free movement of persons, goods, services and capital, and common financial policies and regulations on banks, insurance and companies, it is logic that the question of criminal enforcement of these substantive policies has a strong EU dimension. Although EU Member States have tried as far as

21 

LFM Besselink, A Composite European Constitution (Groningen, Europa Law Publication, 2007).

Jurisdictional Issues in Transnational Investigations 177 possible to keep enforcement powers under domestic control, under the ­Amsterdam Treaty (1999) an AFSJ has been defined as one of the main objectives of the EU, including policies to fight crime. In that frame, common standards have been developed in areas such as terrorism, organised crime and trafficking in human beings. However, only with the entry into force of the Lisbon Treaty in 2009 was a clear legal basis22 created, so as to provide for criminal law enforcement of harmonised policies in the internal market and for preventing and solving conflicts of jurisdiction between the Member States.23 Taking into account the common interest at stake in the internal market and the AFSJ, have Member States and the EU, meanwhile, elaborated a criminal legislative policy, in order for violations of economic and financial regulations merits to be criminally enforced? What would the communalities of this enforcement harmonisation be? Have Member States and the EU, confronted with overlapping investigations and prosecutions not triggering the jurisdiction in some states and extraterritorial use of investigative and prosecutorial power by the US in relation to EU companies, elaborated a criminal ­jurisdiction policy? Concerning the harmonisation of substantive applicable law related to economic and financial crimes, the European Commission has used the Lisbon Treaty to take a proactive stand on the topic of criminal legislative policy. The European Commission published in 2011 a Communication titled ‘Towards an EU Criminal Policy—Ensuring the Effective Implementation of EU Policies through Criminal Law’, dealing specifically with the criminal harmonisation of harmonised policies. The Commission elaborates this communication as guidance on the policy choices regarding whether to use criminal law as an enforcement tool or to use it in addition to other enforcement tools, such as the administrative one. Relevant criteria for the choice are lack of effective enforcement or significant differences among Member States leading to inconsistent application of EU rules. The Commission indicates in this Communication the fields which will be the priority for criminal law harmonisation: the financial sector, eg concerning market manipulation and insider trading; the fight against fraud affecting the financial interests of the EU; and the protection of the euro against counterfeiting. The Commission mentions, furthermore, a set of areas (not an exclusive list) in which criminal law enforcement might play a role: illegal economy and financial criminality; road transport; data protection; customs rules; environmental protection; fisheries policy; and internal market policies (eg counterfeiting, corruption and public procurement). The Commission has implemented its policy plan of 2011 by submitting proposal directives on criminalisation of market manipulation and insider ­

22 

Art 83(2) TFEU. 82(1)(b) TFEU provides for a specific legal basis to adopt binding measures to prevent and settle conflicts of jurisdiction between Member States. Art 85(1)(c) TFEU contains also a legal basis to give to Eurojust binding decision power to prevent and solve jurisdiction conflicts. 23  Art

178  John Vervaele trading, fraud affecting the financial interest of the EU and counterfeiting of the Euro. In 2014, the Directive on the protection of the euro by criminal penalties and sanctions was adopted.24 In the same year, the Regulation on market abuse25 and the Directive on criminal sanctions for market abuse26 were also adopted as a common regulatory framework.27 The Directive on the fight against fraud against the EU’s financial interests by means of criminal law is, at the time of writing, still under negotiation.28 Concerning the other policy areas that were mentioned in the 2010 Commission communication, such as financial criminality, customs enforcement and road protection, neither the Commission nor groups of Member States have submitted legislative proposals. These legislative texts contain substantial harmonisation of substantive criminal law (definitions of actus reus, mens rea and applicable sanctions) and jurisdiction obligations. However, they do not deal with overlapping and conflicting jurisdictions within the EU and between the EU and third countries.29 Concerning the issue of overlapping and conflicting jurisdiction, Art 82(1)(b) TFEU provides for a specific legal basis to adopt binding measures to prevent and settle conflicts of jurisdiction between Member States. Neither the Commission nor a group of Member States have used this legal basis in order to elaborate a legislative proposal. Article 85(1)(c) TFEU also contains a legal basis, so as to give to Eurojust binding decision-making powers for the prevention and resolution of jurisdictional conflicts, but in the reform proposal on Eurojust30 this has not been included as a new tool. Overall, it has become clear that the EU has not yet been able to achieve an EU criminal justice policy. The harmonisation of substantive criminal law came to a political standstill and the policy agenda of the European Commission became frozen. In relation to jurisdictional issues, the potential of the TFEU has not been used at all. This is not only due to the lack of political strength of the EU

24  Directive 2014/62/EU of the European Parliament and of the Council of 15 May 2014 on the Protection of the euro and other currencies against counterfeiting by criminal law, and replacing Council Framework Decision 2000/383/JHA, [2014] OJ L 151/1. 25  Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on Market abuse (‘Market Abuse Regulation’) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/ EC, OJ [2014] OJ L 173/1. 26  Market Abuse Regulation. 27  For an in depth analysis, see MJJP Luchtman and JAE Vervaele, ‘Enforcing the Market Abuse Regime: Towards an Integrated Model of Criminal and Administrative Law Enforcement in the ­European Union?’ (2014) 5(2) New Journal of European Criminal Law 192. 28  European Commission, ‘Proposal for a Directive of the European Parliament and of the Council on the Protection of the Financial Interests of the European Union by Criminal Law’, COM (2012) 363 final, 11 July 2012. The proposed directive is based on Art 325(4) TFEU. 29  For an in depth analysis, see JAE Vervaele, ‘The European Union and Harmonization of the Criminal Law Enforcement of Union Policies: in Search of a Criminal Law Policy?’, in M Ulväng and I Cameron (eds), Essays on Criminalization & Sanctions (Uppsala, Iustus Förlag, 2014) 185–225. 30  ‘Proposal for a Regulation of the European Parliament and of the Council on the European Union Agency for Criminal Justice Cooperation (Eurojust)’, COM (2013) 535 final, 17 July 2013.

Jurisdictional Issues in Transnational Investigations 179 i­nstitutions, but also to the attitude of many Member States, as they did not take any legislative initiatives. B.  Solutions at EU Level31 It is quite clear that the solution can only consist in a common level playing field not only with respect to the legal framework as such (eg a common definition of offences, rules on jurisdiction, procedural law and laws on cooperation), but also with regard to the law in action (eg carrying out investigations, prosecution, coordination of actions and settlement of conflicts of jurisdiction). Such a level playing should define who is investigating and prosecuting what, whom and why and thus be predictable and foreseeable for all involved actors (prosecutors, judges, perpetrators and victims). The harmonisation track of the common level playing field should consist in putting on the legislative agenda further initiatives to harmonise economic and financial offences, including certain aspects of criminal procedure (gathering of evidence, ie an investigative measure). Both are possible under Arts 82 and 83(2) of the TFEU. The track of coordination of enforcement actions, preventing and solving conflicts of jurisdiction is a more innovate and complicated one. If Member States do agree, as they have done in the TFEU, that certain European-wide interests deserve criminal law protection and enforcement in the internal market and AFSJ, what are then the consequences for the choice of jurisdiction? Jurisdiction rules are mechanisms to define when criminal justice actors may/must (depending on the legal regime) trigger criminal justice in order to investigate, prosecute and adjudicate (potential) suspects of crime. As is well known, in criminal matters there is quite a strict relationship between the applicable law (here substantive criminal law and criminal procedure) and jurisdiction. When a Member State triggers its criminal justice system, its jurisdictional competence is mainly based on locus delicti or active nationality. The ‘when’, thus, triggers also the ‘where’. As there might be many ‘when’s’ there may be concurring jurisdictions in action, or no action at all, in the internal market and AFSJ. The fact that the EU has or is aiming at harmonised criminal-law policies in the common territory of the Member States does not mean only that it has, or is aiming at, an equivalent playing field for criminal justice, but also that this playing field is based on common interests and values that merit criminal law protection and which are related to the achievement of the policy goals of the AFSJ,

31  For a more in depth analysis, see JAE Vervaele and MJJP Luchtman, “Criminal Law Enforcement of EU Harmonised Financial Policies: the Need for a Shared Criminal Policy’, in F De Jong et al (eds), Overarching Views of Crime and Deviancy. Rethinking the Legacy of the Utrecht School (The Hague, Eleven International Publishing, 2015); MJJP Luchtman, ‘Choice of Forum in an Area of Freedom, Security and Justice’ (2011) 7(1) Utrecht Law Review 74.

180  John Vervaele internal market, etc. The criminal policy choices have been made at EU level with EU-related goals in mind. The EU has not only a stake/interest in criminalisation (law in the books), but also in effective use of criminal law enforcement in practice (law in action). This means that the existence and use of criminal jurisdiction by the Member States is of crucial value for the achievement of the EU goals. As it stands, the EU has imposed upon Member States, through harmonisation, the duty to have jurisdiction. This harmonisation of jurisdiction is strong, although mostly based on locus delicti and active nationality, in the field of the European crimes (eg terrorism, organised crime and corruption), but still very weak in the field of economic and financial crimes. Both situations are leading to specific problems in a transnational EU setting. In relation to the European offences the cumulative jurisdiction systems of the Member States can, and do, lead to an increase of concurrent and overlapping use of jurisdiction and, thus, to positive conflicts of jurisdiction. The EU has not been able to impose binding mechanisms to solve conflicts of jurisdiction or to allocate cases (at the level of investigation, prosecution and adjudication). The only existing mechanisms, such as the Framework Decision of 2009,32 involve mechanisms of coordination, but cannot produce binding solutions to conflicts. In the case of criminal-law enforcement of economic and financial offences the problem of concurring use of jurisdiction does exist, but it is also possible that Member States are not able to trigger jurisdiction because of lack of jurisdiction. If banks in country A are helping a citizen of country B to set up financial products, financial and corporate structures to hide the origin of criminal assets or even the identity of the perpetrator of the predicate offences, it is clear that they are involved in money laundering. However, it is perfectly possible that country A has no jurisdiction, because the predicate offence has been committed in country B, and that country B has no jurisdiction to prosecute the banks of country A, as they are foreign banks. Although there is a clear common interest in the internal financial markets and in the AFSJ to deal with these offences, the lack of harmonised jurisdiction rules creates an enforcement deficit. Even if there was a jurisdiction equivalence in the Member States, through harmonisation, there is still a problem. If Member States use, or do not use, their jurisdiction rules in criminal matters unilaterally, even taking into account that they were harmonised by certain EU conventions, framework decisions or directives, the national jurisdiction rules are drawn up from a national perspective, not necessarily taking into account the interest of other Member States or the interest of the common areas, such as AFSJ and internal market. Moreover, the national jurisdiction rules have not been elaborated with the aim of preventing or solving conflicts of jurisdiction between Member States. They have only been elaborated

32  Council Framework Decision 2009/948/JHA of 30 November 2009 on prevention and settlement of conflicts of exercise of jurisdiction in criminal proceedings, [2009] OJ L 328/42.

Jurisdictional Issues in Transnational Investigations 181 to trigger national jurisdiction for certain crimes in certain circumstances. They are unilaterally vesting power, not distributing power in an integrated legal area. In the absence of Council of Europe or EU rules on choice of jurisdiction, most national courts are neither competent, nor able to define the most appropriate jurisdiction. If they would do so, they should have to apply a consideration/­ balancing between the several legal regimes (applicable law and jurisdiction rules) of the potential competent legal orders. As we know, the choice of the forum jurisdiction is of key importance, as it includes the choice of the applicable law (actus reus, mens rea, liability, sentencing, penalties and related procedural aspects, such as time bars, prosecutorial discretion, adversarial or inquisitorial procedure, defence rights and judicial review). There is a wide consensus that a legal framework for the prevention and settlement of conflicts of jurisdiction is essential for the functioning of a criminal justice area built on mutual recognition.33 Without it, positive and negative conflicts of jurisdiction undermine the mutual trust between Member States and their judicial authorities. There is, however, much less consensus regarding if and to what extent the common interest linked to AFSJ, internal market, customs and monetary union should play a role in this legal framework. In other words, is it limited to a horizontal scheme of preventing and solving conflicts between Member States, or does it have to take into account the common interest in integrated legal areas in the EU? Is there also a need for a vertical scheme of preventing and solving conflicts, strengthening the existing powers34 of Eurojust into binding decisions? This question can be approached from a law enforcement perspective, as well as from a legal protection perspective (suspect, victim, third party). Regarding the first perspective, if the EU decides that an offence such as trafficking of human beings, terrorism or market abuse should be criminalised and prescribes detailed rules to the Member States, then there is a common interest linked to the internal market (including financial market) and the AFSJ. To achieve the goal of s­ ecurity and effective law enforcement (in line with the rule of law) it is important that the actors of criminal justice (law enforcement community and judges) act in such a way that they can achieve the optimal results. Cases of so-called negative conflicts of jurisdiction (where no state triggers the investigation), should be tackled by Eurojust, primarily through mediation and, if impossible, through binding ­decisions. In case of multiple investigations, issues regarding exchange of information and joint operations during the investigations, and also sometimes decisions on case allocation (concentration), can come into play. Case allocation can

33  M Wasmeier, ‘The Choice of Forum by the European Public Prosecutor’, in LH Erkelens, AWH Meij and M Pawlik (eds), The European Public Prosecutor’s Office: An Extended Arm or a Two-Headed Dragon? (The Hague, Asser Press-Springer, 2015). 34  See, in particular, Art 7(2) of the Eurojust decision, available at http://www.eurojust.europa.eu/ doclibrary/Eurojust-framework/ejdecision/Consolidated%20version%20of%20the%20Eurojust%20 Council%20Decision/Eurojust-Council-Decision-2009Consolidated-EN.pdf.

182  John Vervaele happen on a horizontal basis between national authorities, through the applicable procedures of mutual legal assistance or mutual recognition, or, if necessary, by Eurojust. In case of potential multiple prosecutions, there are several reasons for building in an European approach: in some cases this will be the ne bis in idem protection, and in other cases it may be cost efficiency in relation to optimal results (ie the interest of EU criminal justice). Moreover, here we can think about horizontal solutions and if necessary, binding decisions by Eurojust. Similar arguments apply to the protection of the interests of citizens, as defendants and victims. It is well known that positive and negative conflicts may harm their interests. Several interests are at stake, sometimes even conflicting interests. Victims may, for instance, be left with no compensation in cases of negative conflicts. It is important that justice is done and that they get due compensation for damage. In the case of negative conflicts, citizens may have a clear interest that Eurojust intervenes. In cases of case allocation or choice of the forum their interests should be taken into account. It is clear that in cases such as trafficking of human beings the interest of victims in criminal cases are clearly spelled out in the relevant Directive,35 though only partly with respect to forum choices. However, also in other cases, they can play a decisive role and must comply with the victim participation Directive.36 Positive conflicts may also harm the victim’s interests; for instance, where the applicable laws of the Member States involved lead to contradictory results. From the point of view of the interests of the suspect, it is important that the suspect’s ne bis in idem rights and fair trial rights are respected and that the suspect can challenge the forum decision via judicial review. In all these instances, the question is not only what mechanisms are available to solve conflicts (horizontal, Eurojust, etc), but also what role the EU citizens should play. Are they able to seize a court for remedies and, if so, which one? Should they be able to address Eurojust? To what extent should criteria for case allocation be foreseeable? What interests of citizens may be considered to be legitimate and should be taken into account for forum choices? For all these scenarios, be it horizontal or vertical, in order to protect the common EU dimension there is need for at least a basket of criteria on which the choice of the jurisdiction can be based, and for (judicial) control and oversight. Such criteria can combine classic jurisdiction criteria, but can also include criteria linked to interest of justice (evidence) or policy interests. To conclude this part on the internal dimension of the EU, for certain areas of crime it is impossible to elaborate model rules for the choice of jurisdiction without taking into account the EU policies related to the achievement of internal

35  Directive 2011/36/EU of the European Parliament and of the Council of 5 April 2011 on preventing and combating trafficking in human beings and protecting its victims, and replacing Council Framework Decision 2002/629/JHA, [2011] OJ L 101/1. 36  Directive 2012/29/EU of the European Parliament and of the Council of 25 October 2012 establishing minimum standards on the rights, support and protection of victims of crime, and replacing Council Framework Decision 2001/220/JHA, [2012] OJ L 315/57.

Jurisdictional Issues in Transnational Investigations 183 market and AFSJ. The criminal justice area is based on a common space ­(European territoriality). Mechanisms to vest, trigger and choose jurisdiction not only protect national interests, but are inextricably related to the goals and means of the internal market and AFSJ. The Europeanisation of choice of jurisdiction in these fields should have consequences both for the EU and national legislator, the national (and European) enforcement communities, but also for the rights and liberties of the citizens.

IV.  APPROACH TO CHALLENGES AT A GLOBAL TRANSNATIONAL LEVEL

A.  The External Dimension of the EU37 This functional concept of EU territoriality does not just pertain to the regulatory and enforcement relationship between the EU and its Member States. It also has an external dimension in that the EU is often perceived as a single territorial entity on which Member States have conferred competences to act externally. The external dimension of the AFSJ38 has mainly been used to negotiate agreements with third countries on the exchange of law enforcement information, the prevention of the financing of terrorism,39 or on extradition and mutual legal assistance to obtain evidence.40 The EU has become more active in international fora to promote criminal enforcement to protect legal interests, such as, for instance, in the World Health Organisation, when it comes to the criminalisation of illegal tobacco trading or in the United Nations in relation to transnational organised crime or its participation in the Kimberley Process Certification Scheme, aiming at stemming the transnational flow of conflict diamonds. Concerning the classic global offences, such as counterfeiting, organised crime and trafficking in human beings, we can speak about global criminal standards. However, in the field of economic and financial crimes, enforcement of financial regulations global standards are lacking or are much weaker. When it comes to coordinating the use of

37  Part of this text comes from C Ryngaert and JAE Vervaele, ‘Core Values beyond Territories and Borders: the Internal and External Dimension of EU Regulation and Enforcement’, in T Van den Brink, MJJP Luchtman and M Scholten (eds), Shaping Sovereignty in a EU Legal Order—Core Values of ­Regulation and Enforcement (Antwerp, Intersentia, 2015). 38  Based on Art 216(1) TFEU; see RA Wessel, RA Marinand and C Matera, ‘The External D ­ imension of the EU’s AFSJ’, in C Eckes and T Konstadinides, Crime within the Area of Freedom, Security and ­Justice (Cambridge, Cambridge University Press, 2011). 39 Agreement between the United States of America and the European Union on the use and ­transfer of passenger name records to the United States Department of Homeland Security, [2012] OJ L 215/5; Agreement between the European Union and the United States of America on the processing and transfer of financial messaging data from the EU to the EU for the purposes of the terrorist finance tracking program, [2010] OJ L 195/11. 40  See, for instance, Agreement on extradition between the European Union and the United States of America [2003] OJ L 181/27.

184  John Vervaele administrative jurisdiction to investigate or to adjudicate competition infringements, the EU Commission and the US Government were able to sign an agreement that includes obligations not only on the exchange of information and the coordination of enforcement activities, but also on the avoidance of conflicts of enforcement activities and a related consultation procedure.41 However, in the field of criminal justice nothing similar has ever been tried, neither by the US nor by the EU. This externalisation of territoriality42 is not only effectuated through bilateral or multilateral action, but also through unilateral action whereby the EU subjects foreign economic operators to EU regulation, so as to protect the effectiveness of its internal regulation. It is well known that EU competition law and its enforcement by the Commission does not stop at the EU’s borders: the Commission has the power to bring EU competition law to bear where foreign or international cartels or mergers affect (consumers in) the EU internal market. Such problems are ideally addressed through multilateral regulation, supervision and enforcement. However, in the absence thereof, the EU may contemplate applying, within certain limits, notably via a territorial link, its internal laws to foreign activity which adversely affects the effectiveness of EU regulatory aims. This territorial externalisation takes place through the EU conditioning territorial access to EU markets on an economic operator satisfying certain standards, also when it operates abroad and by including performance abroad in assessing whether the operator meets EU regulatory targets. Territorial extension of EU law may at first sight appear rather uncontroversial as it is grounded on an indisputable territorial link. It remains no less true, however, that the EU considers this link as a trigger to allow nearly universal jurisdiction to be exercised, in that it subjects the operator’s worldwide activities, including those taking place outside the territory, to territorial law. This territorial regulator then effectively supplants regulation and enforcement by other regulators, who may in fact have a stronger nexus to the situation, such as the home state regulator of the foreign economic operator. Such regulatory intervention may then give rise to international strife. By territorially extending its own regulation through market access conditions, the EU in fact encroaches on the regulatory autonomy of third states, and in so doing, ‘exports’ its own core values, such as financial transparency, industrial safety and environmental protection, in the way that the US has done in the past.43 However counterintuitive this may sound, EU territoriality serves as a trigger to spread EU core values

41  See Agreement between the Government of the United States of America and the Commission of the European Communities regarding the application of their competition laws—Exchange of interpretative letters with the Government of the United States of America, [1995] OJ L 95/47; see related sources at http://ec.europa.eu/competition/international/bilateral/usa.html, accessed 21 August 2015. 42  J Scott, ‘Extraterritoriality and Territorial Extension in EU Law’ (2014) 62(1) American Journal of Comparative Law 87. 43  See for a critical analysis of the US legal policy in this respect, A Parrish, ‘Reclaiming International Law from Extraterritoriality’ (2009) 93 Minnesota Law Review 815.

Jurisdictional Issues in Transnational Investigations 185 extraterritorially. Or put differently, the EU challenges the horizontal structure of the international legal order, based on the sovereign equality of nations. It substitutes for an absent multilateral regulator and enforcer and thus vicariously exercises quasi-vertical power. Concurrently, it acknowledges the horizontal dimension where it defers to foreign regulatory and enforcement mechanisms, insofar as these provide equivalent protection.

B.  The US The US has a longstanding tradition of extraterritorial application of supervision and enforcement of financial markets. The Sarbanes-Oxley Act of 200244 imposed far-reaching obligations on foreign accountants45 and vested the Security and Exchange Commission with powers to obtain reports and documents under subpoena. Since the financial meltdown in 2007, the US legislator has further increased the obligations.46 Under the Dodd-Franck Act,47 numerous restrictions have been imposed not only upon foreign operations by US-based banks, but also on foreign banks, overruling the regulatory framework of their home jurisdictions. Examples of this extraterritorial application of prescriptive jurisdiction relate to capital ratio requirements and certain financial transactions in the swaps derivative markets. The famous Volcker rule in the Dodd-Franck Act prohibits banks from proprietary trading and restricts investment in hedge funds and private equity by commercial banks and their affiliates. The rules generally prohibit banking entities from engaging in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account and from owning, sponsoring or having certain relationships with hedge funds or private equity funds, referred to as ‘covered funds’. This Volcker rule has extensive extraterritorial effect, as it applies to every foreign entity that directly or indirectly maintains a bank branch or agency in the US, or controls a commercial lending company. It also applies to an entity’s affiliates and subsidiaries, which are defined as companies controlled through ownership or control of 25 per cent or greater, direct or indirect, voting power of any class of voting securities of the company or through other indicia of ‘control’, as defined in the Bank Holding Company Act of 1956, as amended. Even foreign financial institutions that are not ‘banking entities’ can be subject to the rule, as their course of conduct involving the establishment of a de facto US office by utilising personnel of subsidiaries as

44  An Act to Protect Investors by Improving the Accuracy and Reliability of Corporate Disclosures made pursuant to the Securities Laws and for other Purposes (‘Sarbanes-Oxley Act’), Pub L 107–204, 116 Stat. 745, enacted 30 July 2002, available at http://www.soxlaw.com, accessed 21 August 2015. 45  Section 106(a) of the Sarbanes-Oxley Act. 46  D Vogel and RA Kagan (eds), Dynamics of Regulatory Change—How Globalisation Affects National Regulatory Policies (Berkeley, University of California Press, 2004). 47  See http://www.cftc.gov/lawregulation/doddfrankact/index.htm, accessed 21 July 2015.

186  John Vervaele agents of the foreign institution, or conducting US visits by banking personnel in such a way as to establish a US presence, can trigger the Volcker rule obligations.48 The Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve, the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency each get a slice of enforcement responsibility based on the types of firms they supervise. They have at their disposal the full set of enforcement powers, including criminal enforcement, in relation to these obligations. This is certainly not the only form of extensive extraterritorial prescriptive jurisdiction. As we have seen in the BNP Paribas case, the US International Emergency Economic Powers Act, the US Trading with the Enemy Act and the US Economic Sanctions Act provide for very extensive extraterritorial enforcement jurisdiction without any presence of financial actors in the US. The processing of dollar transactions through the US financial system and clearing house is sufficient to trigger enforcement jurisdiction. The same applies with the US anti-money laundering legislation and foreign bribery legislation. The extraterritorial application is not limited to prescriptive jurisdiction, but includes also jurisdiction to enforce and potentially also jurisdiction to adjudicate. Under the Obama Administration, the DOJ, the Securities and Exchange Commission, the Internal Revenue Services and an impressive set of other specialised agencies have worked together, since 2009, in an inter-agency Financial Fraud Enforcement Task Force and have elaborated, under the lead of DOJ, a coordinated and proactive effort to investigate and prosecute financial crimes.49 This approach has led to an intensification of criminal-law enforcement against foreign corporate bodies with whom the DOJ/Attorney General, conclude mostly (NPAs or DPAs) or guilty plea agreements. Without doubt, the US enforcement community has taken the lead in the enforcement of economic and financial crimes in the area of finance (banking crimes, Libor/Euribor rigging and currency rigging), money laundering operations, violations of embargos against states and transnational bribery to obtain contracts. In doing so, they have not limited their jurisdiction to investigate and prosecute to cases in which the main actors were US corporate bodies or in which the main conduct or main harm occurred in the US. In many cases, jurisdiction was triggered against foreign corporate bodies solely

48 See LG Baxter, ‘Extraterritorial Impacts of Recent Financial Regulation Reforms: a Complex World of Global Finance’, keynote presented to a conference on ‘The Current State of Global Financial Reforms’, Duke Law-KoGuan School of Lase, June 2014, available at http://scholarship.law.duke.edu/ cgi/viewcontent.cgi?article=6044&context=faculty_scholarship, accessed 21 August 2015. 49  See Executive Order 13519—Establishment of the Financial Fraud Enforcement Task Force, available at https://www.whitehouse.gov/the-press-office/executive-order-financial-fraud-enforcementtask-force, accessed 21 August 2015. For a critical assessment of the results of that policy, see Bradley T. Borden and David J. Reiss, Cleaning up the Financial Crises of 2008: Prosecutorial discretion or Prosecutorial Abdication, Brooklyn Law School Legal Studies, Research Paper Series, Research Paper No 331, March 2013.

Jurisdictional Issues in Transnational Investigations 187 by money transfers in US dollars or to financial transactions through US banks. In reality, US criminal jurisdiction has been functionally related to the flow of global finance, which is largely in US dollars and processed through clearing houses. This extensive interpretation of the functional territorial jurisdictions, based on the effect doctrine, has been qualified by many as a long arm of extraterritorial use of jurisdiction. Based on market power, ie access to the US market, US regulators impose on suspect corporate bodies far-reaching enforcement cooperation duties (eg production orders of information and evidence) under s­ubpoena schemes, under the risk of losing access to the US market. US regulators often include enforcement as part of the risks of global trade for the addressees. If the addressees of enforcement action act globally, they risk enforcement actions brought in multiple jurisdictions. However, US regulators also mention that the regulators of industrialised nations will cooperate and take into account the harm done to their jurisdictions. In other words, perpetrators and victims should trust the communities of regulators and enforcers. Even if it is true that some of these US regulatory enforcement activities are executed with the ad hoc assistance of regulators in EU countries, the investigations are clearly US-led with the aim of maximising US financial interests. Moreover, in many cases, the European judicial authorities responsible for criminal prosecutions do not seem to be involved.

C.  The International Community The international community has been active in standard setting and prescriptive jurisdiction in some specific areas, such as transnational organised crime,50 corruption51 and money laundering.52 Most of these international conventions and agreements contain far-reaching obligations concerning criminal substantive law and in some cases also criminal procedure. Although they contain obligations to vest jurisdiction and to apply mutual legal assistance, they do not contain mechanisms to prioritise case allocation for investigation and prosecution. Although some conventions contain clear provisions on joint investigation teams, they do not deal with the prevention and settlement of conflict of jurisdictions in that respect. Concerning global banking, the mechanism of the Basel Committee on ­Financial Supervision regulatory coordination has been developed, based on the concepts of mutual recognition and reciprocity, with the aim of decreasing the

50  United Nations Convention against Transnational Organized Crime (UNTOC), 15 November 2000 http://www.unodc.org/unodc/treaties/CTOC/#Fulltext, accessed 21 August 2015. 51 United Nations Convention against Corruption (UNCAC), 4 December 2000, available at https://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/08-50026_E.pdf, accessed 21 August 2015. 52 40 Recommendations of FATF, available at http://www.fatf-gafi.org/media/fatf/documents/ FATF%20Standards%20-%2040%20Recommendations%20rc.pdf, accessed 21 August 2015.

188  John Vervaele regulatory burdens of the banking institutions. The supervision mechanism, even the most recent one of Basel III,53 does not extend to enforcement regimes for infringements. It remains a global mechanism of regulations and prudential supervision.54

V. SOLUTIONS

As we have seen, states are asserting extraterritorial regulatory power now more than ever. Globalisation and digitalisation create an urgent need to reshape jurisdictional law. The growing phenomenon of extraterritoriality and the growing amount of jurisdictional overlap that invariably comes with it are placing novel and urgent demands on all actors, be they states, enforcement authorities, perpetrators or victims. The demands concern enforcement deficits and impunity, overlapping investigations and prosecutions, lack of efficient enforcement, as well as violations of the rule of law in transnational situations. An enforcement cooperation that will end up in just and fair outcome for all parties is a real chimera. Solutions can be found along two lines. The first line is redefining concepts of authority, power and territory. Reconceptualisation of sovereign territory into functional territory claims must thus be part of global theories of jurisdiction. Enforcement cooperation in multilateral frames should be based on new concepts of authority, power and territory that result in exercising reasonable jurisdiction.55 Choice of jurisdiction influencing factors were elaborated in this sense in the 1950s by Robert Leflar.56 He referred to: (a) predictability of results, (b) the maintenance of the interstate or international order, (c) simplification of the judicial task, (d) advancement of the state’s governmental interests, and (e) application of the better rule of law. The second line is re-orienting jurisdictional doctrine around the rights of parties instead of states (sovereignty and comity). Perpetrators and victims deserve individual rights protections that provide fair notice of the potentially applicable law at the time of conduct and that define the jurisdictional rules prospectively for individuals, that means not retroactively. In an interesting article,57 Anthony J Colangelo calls this ‘spatial legality’ and bases the fair notice requirement on (a) jurisdictional restraint by sovereigns through a significant aggregation of ­contacts, creating state interests, so that the choice of law is neither arbitrary nor

53 

See http://www.bis.org/bcbs/basel3.htm, accessed 21 August 2015. also https://www.pwc.com/en_US/us/financial-services/regulatory-services/publications/assets/ pwc-basel-iii-capital-market-risk-final-rule.pdf, accessed 21 August 2015. 55  See C Ryngaert, The Limits of Substantive International Economic Law: In support of Reasonable Extraterritorial Jurisdiction, Institute for International Law (Working Paper 99, Faculty of Law, Leuven, Belgium, 2006). 56  R Leflar, The Law of Conflicts of Laws (Indianapolis, The Bobbs-Merrill Company Inc, 1959). 57  AJ Colangelo, ‘Spatial Legality’ (2012) 107(1) Northwestern University Law Review 69. 54  See

Jurisdictional Issues in Transnational Investigations 189 fundamentally unfair and (b) legitimate expectations of the subjects concerning the applicable law that will govern their conduct excluding arbitrary or fundamentally unfair jurisdiction. On this basis, Colangelo rejects the application of US law to worldwide conduct of corporate bodies, solely because they have continuous and systematic contacts with the US. In his eyes, spatial legality should function as an individual rights shield and as a rule of law constraint. Human beings and corporate bodies need descriptors of jurisdictional allocations on which they may rely in planning their behaviour (spatial legality claims). States should, thus, accede to international treaties in a multilateral setting and should include mechanisms: (a) to avoid potential conflicts of jurisdiction; (b) that provide in predictable and foreseeable criteria of jurisdiction; and (c) for solving conflicts of jurisdiction. As it stands, no such initiatives are in view, not even at levels of strong regional integration, such as the EU. States can also establish networks between enforcement agencies and establish multi-jurisdictional task forces that operate on common schemes of allocation of cases. A good example of this practice are the agreements between anti-trust or competition authorities. These agreements also contain provisions regarding the possibility for one party to request the other to take enforcement action (positive comity), and for one party to take into account the important interests of the other party in the course of its enforcement activities (traditional comity). However, these agreements do not take into account the individual rights of the corporate bodies concerned. States can also unilaterally restrain their prescriptive and enforcement ­jurisdiction to a reasonable nexus. US Senator DeConcini submitted in 1985— in vain—a draft bill58 that addressed the overreach of the extraterritorial ­application of US anti-trust law. He pleaded for a set of restrictive criteria based on ‘jurisdictional rule of reason’ rather than a balancing of US and foreign interests. If states apply their jurisdiction in an extraterritorial way, while investigating and enforcing they should apply two standards. As part of a fair administration of justice they should trigger jurisdiction if they are the place that is substantially extraterritorial effected (effect control standard). Taking into account the human righs interest of defendants and victims- as part of transnational application of the rule of law- they should also trigger jurisdiction if their agents are acting abroad (agent control standard) the human rights interests of defendants and victims, as part of a fair administration of justice and transnational application of the rule of law. If all this fails, states and regional integration institutions, such as the EU, must have the right to apply blocking statutes to foreign extraterritorial use of enforcement actions. These blocking statutes can aim to prevent compliance with foreign state enforcement requests (such as subpoena orders for delivery of documents),

58  The Foreign Trade Antitrust Improvements Act of 1985, see S 397, 99th Cong, 1st Sess, 131 Cong Rec S1160-62 (1985).

190  John Vervaele as provisions that declare unenforceable decisions of foreign courts. The Canadian Foreign Extraterritorial Measures Act of 1984 is a good example of an attempt to block the extraterritorial application of US anti-Cuba laws to Canadian corporations. The UK Protection of Trading Interests Act 1980 is also a good example, as it prohibited British corporations from giving documentation to a potentially hostile foreign interest and empowered British courts to seize the assets of any overseas power which impounded assets of British corporations. The Act also restricts the enforceability of judicial decisions for multiple damages. Blocking statutes are, however, the last resort. They are like putting the toothpaste back in the tube. They do not resolve the problems of the actors involved. states, regional institutions, such as the EU, and global institutions should rethink their jurisdictional concepts, in order to avoid both impunity and concurring use of jurisdictions, in such a way that human beings and corporate bodies can expect reasonable and foreseeable use of jurisdiction in a transnational setting.

9 Transnational Multi-disciplinary Investigations and the Quest for Compatible Procedural Safeguards MICHIEL LUCHTMAN

I. INTRODUCTION

I

N RECENT YEARS, the financial markets have proven to be a perfect case for exploring the challenges related to the investigation, prosecution and ­punishment of transnational crimes. Numerous contributions to this volume ­illustrate how major financial institutions have been involved in the evasion of US sanctions against countries including Iran, Cuba and Sudan (BNP Paribas), the laundering of the proceeds of Mexican drug cartels (HSBC), or the ­manipulation of ­London Interbank Offered Rate (Libor) and of Euro Interbank Offered Rate (Euribor) benchmarks by banks formerly believed to be of impeccable reputation.1 Those cases not only illustrate the challenges to the law enforcement community, but also to the natural and legal persons concerned. The latter, for instance, face ­multiple prosecutions for essentially the same conduct in different legal orders, and/or will have to deal with multiple legal regimes that may define the legal position of the persons concerned (in terms of their rights and duties) in a completely ­different, sometimes even contradictory way. This begs the q ­ uestion of whether the said financial institutions or their (former) ­employees, when knowingly ­crossing legal borders, should take these complications for granted, or whether ‘the law’ (and if so, which one) imposes certain restrictions on the actions of law enforcers. Arguments in favour of the latter position could, for instance, be that the increasing number of references in treaties, ­Memorandum of ­Understandings (MoUs), national legislation and policy documents to ‘global g­overnance’, ‘shared ­responsibilities in the fights against crime’, ‘integrated (­criminal and ­administrative) law enforcement’ necessarily must not only have an impact on the design of investigative and prosecutorial powers and policies, but also—and inextricably—on the design and workings of fundamental rights standards. 1 

See Zagaris, Chapter 2 in this volume; Cappel, Chapter 3 in this volume.

192  Michiel Luchtman The quest for compatible procedural safeguards at the interface of different legal regimes and of actors of different status (criminal law, administrative law, self-regulation under private law) is a particularly interesting one. This chapter will examine the question of how to integrate procedural guarantees into a multilevel setting wherein (national and European) law enforcement actors have a common interest in pursuing certain goals, but are playing under different rules, either because they have different statutes already under national law, or because they are from different national legal orders. First, section II will analyse briefly how procedural safeguards were developed in the context of the nation-state, with a particular focus on what requirements follow from this for investigations at the interface of criminal law and other areas of law. Section III will discuss whether, how and why these safeguards fail to function adequately under a regime for cooperation in transnational criminal cases. The goal of all this is to offer, in section IV, an assessment of the state of play in the EU with respect to (harmonisation of) procedural safeguards in transnational multi-disciplinary investigations. The EU explicitly promotes the development of such transnational legal areas as the internal market and the Area of Freedom, Security and Justice (AFSJ). However, debates on what requirements follow from this for protecting fundamental rights are usually focused strongly either on specific rights, or on specific instruments of EU criminal law (such as the EU arrest warrant). This chapter makes a modest attempt to offer a more comprehensive analysis of the state of play. It should be noted that the focus of this chapter is on the EU and when defining criminal law, this chapter also includes what the European Courts (European Court of Human Rights (ECtHR) and the Court of Justice of the European Union (CJEU)) would qualify as punitive sanctions.2

II.  PROCEDURAL SAFEGUARDS: THE NATION-STATE

Ever since the Westphalian peace, the nation-state has been the central forum for the development of procedural safeguards. As such, the concept of procedural safeguards is often used interchangeably with such notions as procedural rights, defence rights or fundamental rights and liberties. In an attempt to provide more conceptual clarity, procedural safeguards in the area of criminal justice may be defined as those legal mechanisms that aim to prevent interferences with a person’s liberty, privacy and property from becoming arbitrary (‘breaches’). ­Moreover, they are not only related to the privacy, liberty and property of individuals, but also to the right to a fair trial. Procedural safeguards are those legal mechanisms that ensure that criminal justice is not ‘only’ about the discovery of the truth, but about truth-finding in a fair and inclusive way. They guarantee that defendants (if the analysis is limited to them) are not just mere objects of i­nvestigation, but 2  For a detailed overview of the jurisprudence of the ECtHR and the CJEU, see Böse, Chapter 3 in this volume.

Transnational Investigations and Compatible Procedural Safeguards 193 parties to a criminal procedure and are to be treated accordingly. This implies that defendants are entitled to determine their course of action in criminal ­proceedings autonomously and independently, on the basis of pre-established rules and with access to the same information and instruments as other parties involved. It is difficult, if not impossible, to isolate procedural safeguards from the broader framework of the rule of law. When the latter concept is defined in a n ­ arrow (‘thin’) sense as legality, both concepts coincide considerably. It is the law—and the law alone—that determines the conditions under which interferences with civil ­liberties are allowed and that provides the framework for e­ ffectuating civil rights in the area of criminal justice. The rule of law dictates that a state’s ius puniendi— its jurisdiction to prescribe offences, as well as to enforce and ­adjudicate alleged offenders—is under the command and control of the law. The rule of law offers safeguards against arbitrary prosecution, conviction and punishment, by reducing executive (and judicial) discretion. For analytical purposes, it is helpful to make a distinction between three ­different ways in which the law achieves its functions within the context of the nation-state. First, there is a substantive dimension that demands that the law must be ­sufficiently precise regarding its content when interfering with the ­privacy, ­liberty, etc of individuals; it must be sufficiently accessible and foreseeable to them, so as to enable them to regulate their conduct and to enable a certain degree of control over state actors. Second, the law must define the ground rules for the judicial organisation and guarantee its independence vis-à-vis other branches of state power in order to ensure effective legal protection (institutional dimension). Third, the law must define the procedures that are needed to effectuate rights. Criminal procedures must meet minimum requirements of procedural fairness (nullum judicium sine lege; procedural dimension). Following this basic scheme, and relying particularly on the case law of the ECtHR, three requirements can be identified that have particular relevance to multi-disciplinary proceedings. First, it follows from the Courts interpretation of Art 7 of the European Convention on Human Rights (ECHR) (nullum crimen, nulla poena sine lege) that in cases of overlapping competences the law may impose restrictions on what may be termed ‘forum choices’. In Camilleri v Malta, the ECtHR was asked the question of whether the Maltese system of criminal justice was compatible with Art 6 ECHR, now that it allowed the public prosecutor a degree of discretion to decide in which court the accused would be tried (for the same offence, but under different minimum and maximum penalties).3 Under Maltese law, the so-called Court of Magistrates is allowed to impose custodial sanctions of six months to 10 years, whereas the criminal court may impose four years to life imprisonment. In this case, Camilleri was prosecuted before the criminal court and sentenced to 15 years’ imprisonment. The ECtHR rephrased

3 

Camilleri v Malta (App no 42931/10) (2013) ECHR 281.

194  Michiel Luchtman the complaint of a violation of Art 6 ECHR into a complaint under Art 7, and then observed that: while it is clear that the punishment imposed was established by law and did not exceed the [statutory] limits …, it remains to be determined whether the Ordinance’s q ­ ualitative requirements, particularly that of foreseeability, were satisfied, regard being had to the manner of choice of jurisdiction, as this reflected on the penalty that the offence in ­question carried.4

The Court found that ‘[i]t would therefore appear that the applicant would not have been able to know the punishment applicable to him even if he had obtained legal advice on the matter, as the decision was solely dependent on the prosecutor’s discretion to determine the trial court’.5 In the absence of cognisable criteria for making this choice and a lack of procedural safeguards, fixing different minimum sanctions posed an ‘insoluble problem’, according to the ECtHR, as it gave the competent Attorney-General ‘unfettered discretion to decide which minimum penalty would be applicable with respect to the same offence’.6 The case illustrates that, even where the underlying offences are identical and the sanctions are defined by law, there may still be an issue of foreseeability where the ‘system as a whole’ leaves it to the executive to determine which specific procedure is to be followed (and, hence, which minimum sanction may be imposed). The question is interesting for this contribution since many states impose both criminal and administrative (punitive) sanctions for the same conduct, leading to different sanctions both in terms of their form and their duration. Does this case law also apply to these situations? If so, then national legislators will be forced to offer guidance (and, possibly, judicial review or other safeguards) on the route to follow in a specific case. In addition, and certainly where the p ­ rocedural ­frameworks diverge, there may be also issues under Art 6 ECHR and Art 47 Charter of ­Fundamental Rights (CFR), particularly with regard to the right to ‘a ­tribunal established by law’ and the maxim nullum judicium sine lege.7 It will be often the case in multi-disciplinary investigations that the procedural framework and ­safeguards for defendants vary considerably. To that extent, the concept of ‘law’, as defined by the ECtHR, clearly imposes certain restrictions on law enforcement frameworks in multi-disciplinary investigations. Administrative proceedings often run in parallel with criminal proceedings (parallel proceedings), or follow upon them (consecutive proceedings). A second requirement for multi-disciplinary investigations is that the investigative phase may not render later trial proceedings unfair. Criminal law safeguards are then

4 

ibid para 40. ibid para 42. 6  ibid para 43. 7  See in more detail M Panzavolta, ‘Choice of Forum and the Lawful Judge Concept’, in MJJP Luchtman (ed), Choice of Forum in Cooperation against EU Financial Crime—Freedom, Security and Justice & the Protection of Specific EU Interests (The Hague, Boom/Lemma, 2013); MJJP Luchtman, ‘Choice of Forum in an Area of Freedom, Security and Justice’ (2011) 7(1) Utrecht Law Review 74. 5 

Transnational Investigations and Compatible Procedural Safeguards 195 easily thwarted. The role of the law is to ensure that procedural safeguards in criminal proceedings can later still be effectuated. The ECtHR already decided in Imbrioscia v Switzerland that while ‘the primary purpose of Article 6 as far as criminal matters are concerned is to ensure a fair trial by a “tribunal” competent to determine “any criminal charge”, … it does not follow that the Article (Article 6) has no application to pre-trial proceedings, particularly where the fairness of the trial is likely to be seriously prejudiced by an initial failure to comply with them.’8 In Salduz v Turkey, the Court decided some 20 years later, that: Article 6 § 1 requires that, as a rule, access to a lawyer should be provided as from the first interrogation of a suspect by the police, unless it is demonstrated in the light of the particular circumstances of each case that there are compelling reasons to restrict this right. Even where compelling reasons may exceptionally justify denial of access to a lawyer, such restriction—whatever its justification—must not unduly prejudice the rights of the accused under Article 6 …. The rights of the defence will in principle be irretrievably prejudiced when incriminating statements made during police interrogation without access to a lawyer are used for a conviction.9

In a similar vein, non-criminal proceedings may also affect the fairness of the later trial. This is clearly illustrated by the famous case of Saunders v UK, in which the ECtHR established a violation of the privilege against self-incrimination, because of the (intense) use of statements made by Mr Saunders under c­ompulsion ­during non-punitive proceedings by Department of Trade and Industry (DTI)inspectors during consequent criminal proceedings.10 In both types of situations, the ­message is the same. The ECtHR, on the one hand, explicitly recognises that complex modern-day societies are in need of mechanisms that occasionally force individuals to keep or produce documents or information for law enforcement purposes. It would unduly hamper the effective regulation in the public i­nterest of complex financial and commercial activities to stipulate that such p ­ reparatory ­investigations should be subject to all the guarantees of Art 6 ECHR, such as the right to silence or access to a lawyer. On the other hand, however, such ­investigations should never render later trial proceedings unfair. To that extent, the concept of law certainly influences the design of any law enforcement system, including cases of multi-disciplinary investigations. The third requirement is related to the problem of parallel i­ nvestigations. Whereas in Saunders criminal proceedings followed upon non-criminal p ­ roceedings, the situation may also occur where both types of proceedings run in parallel. Proceedings for tax evasion or fraud, for instance, often coincide with additional collection of taxes. Bankruptcy proceedings may run in parallel with proceedings for insolvency fraud. In that regard, Martinnen v Finland is an important case.11 In that case, the applicant was charged with criminal offences for debtor’s fraud while 8 

Imbrioscia v Switzerland (App no 13972/88) (1993) ECHR 56, para 36. Salduz v Turkey (App no 36391/02) (2008) ECHR 1542, para 55. 10  Saunders v United Kingdom (App no 19187/91) (1996) ECHR 65. 11  Marttinen v Finland (App no 19235/03) (2009) ECHR 514. 9 

196  Michiel Luchtman simultaneously confronted with (non-punitive) ­recovery ­proceedings for the same facts. Marttinen was asked to produce information for recovery ­purposes, which he refused. Consequently, he was ordered to pay an ­administrative fine. The ECtHR observed that while the bailiff was bound by ­professional secrecy (and therefore prohibited from sharing the information with the police and ­prosecutor), Marttinen’s creditors apparently were not ­prohibited from using any information in the pending criminal proceedings. Now that national law did not explicitly exclude the later admission in evidence against the applicant of any statements made by Marttinen in the enforcement inquiry, the very essence of his privilege against self-incrimination and his right to remain silent was destroyed. This case, too, is proof of the fact that the ECtHR is willing to take into account that ­obligations to inform the authorities are a common feature of many states and that it would be difficult to envisage them functioning ­effectively without it, yet under no circumstances can this be an excuse for destroying the essence of fair trial rights in (consecutive or parallel) criminal proceedings. This threshold therefore must be met by any system of criminal justice, at the expense of not being able to use important materials (as evidence)12 in criminal proceedings. By its very definition this is a task for the law-maker.

III.  PROCEDURAL SAFEGUARDS: INTERNATIONAL (CRIMINAL) LAW

The previous section described how the law prevents arbitrary interferences with the position of the individual by defining the ‘benchmarks’ that together shape the design of a law enforcement system, with a particular focus on multi-disciplinary investigations. The cases that were discussed, however, all relate to single Member State jurisdictions. How do the requirements that were identified roll out in transnational investigations, under a regime of public international law? The position of the individual in cases of international cooperation in criminal matters has attracted a fair deal of academic attention already.13 It is well documented that at the interface of cooperation between various national legal orders the position of the individual is complicated. An important reason for this is that (almost) all existing human rights instruments are designed to be applied within a single legal order, with state territory as the dominant anchor point.14 Article 1 ECHR reads that the contracting parties shall secure to everyone within their jurisdiction the

12  I will disregard the issue of whether it follows from Marttinen that any use in criminal p ­ roceedings, as intelligence, for instance, is to be excluded. I do not think Marttinen can be read this way. 13  Cf AH Klip, ‘The Decrease of Protection under Human Rights Treaties in International ­Criminal Law’ (1997) 68 International Review of Penal Law 291; A Eser, O Lagodny and CL Blakesley (eds), The Individual as Subject of International Cooperation in Criminal Matters (Nomos, Baden-Baden, 2002); AH Van Hoek and MJJP Luchtman, ‘Transnational Cooperation in Criminal Matters and the ­Safeguarding of Human Rights’ (2005) 1(2) Utrecht Law Review 1. 14 Cf Bosphorus Hava Yolları Turizm ve Ticaret Anonim Şirketi v Ireland (App no 45036/98) (2005) ECHR I-3953, para 136; Rantsev v Cyprus and Russia (App no 25965/04) (2010) ECHR 22, para 206.

Transnational Investigations and Compatible Procedural Safeguards 197 rights and freedoms defined in the Convention. As an instrument of international public law, the ECHR thus imposes obligations on the contracting states, not on specific state actors. The focus on the responsibilities of individual states has various consequences for the position of the individual. First, there are consequences for his or her ­position in cases of transnational law enforcement cooperation. We know, for instance, that the ECtHR is sometimes prepared to lower its fundamental right standards, particularly with regard to third countries, referring to the ‘trend towards strengthening international cooperation in the administration of criminal justice, a trend which is in principle in the interests of the persons concerned’.15 We have also seen the ECtHR dealing with the right to hear witnesses in t­ ransnational cases in a similar vein. While moulding such cases in the framework of Art 6(3) (c) ECHR, the Commission nevertheless accepted without much ado a departure from the main rule that witnesses be heard at a public hearing with a view to an adversarial argument. International complexities of a case can justify a deviation from this rule. The Convention therefore: does not exclude that witnesses residing abroad whose presence at the trial cannot be enforced by the trial court are examined on commission by a court at their place of residence. This is a well-established practice provided for in numerous bilateral and multilateral international conventions. Its very purpose is to assure to the greatest possible extent the availability of evidence which cannot be collected otherwise.16

Where the authorities of the requested party fail to live up to the rules of their own legal system, then this is not something for which the requesting authorities can be held responsible.17 While the ‘international complexities of the case’ are thus explicitly included in the balancing exercise, we should also notice that the focus on the p ­ erspective of individual states leads to the inapplicability of (the criminal limb of) Art 6 in ­extradition proceedings or other forms of transnational cooperation. As it is not the requested state that is trying the person claimed, that state is not obliged to ­effectuate the defence rights of Art 6 ECHR under its criminal limb.18 This approach is closely related to the system of human rights protection under ­international law, which focuses on the responsibilities of individual states for their own actions. The same goes, in the opinion of the present author, for what is called the rule of non-inquiry (or comity), which leads national courts to refrain, in principle, from

15 

Drozd & Janousek v Spain and France (App no 12747/87) (1992) ECHR 52, para 110. PV v Germany (App no 11853/85) 4c, discussed by AH Van Hoek and MJJP Luchtman, ‘The European Convention on Human Rights and Transnational Cooperation in Criminal Matters’, in A Van Hoek et al (eds), Multilevel Governance in Enforcement and Adjudication (Antwerp, Intersentia, 2006) 50. 17  PV v Germany (App no 11853/85) 4c. 18  See, for instance: Csoszánszki v Sweden (App no 22318/02) (2006) ECHR 308; Saccoccia v Austria (App no 69917/01) (2008) ECHR 1734 (the civil limb may still be applicable). 16 

198  Michiel Luchtman testing the actions of foreign authorities in light of their legality under foreign law or compatibility with fundamental right standards. It is based on the principle of inter-state mutual trust, or (like in the US) on the belief that the judiciary (as opposed to the executive) is not well equipped to assess the political situation in another state.19 In line with this, it is often maintained that national authorities of one state cannot be held responsible for the actions of their foreign counterparts.20 The effect of this doctrine is that is becomes exceptionally difficult for the accused to find effective remedies for violations of their rights. Whereas in purely national inquiries violations of the right to privacy can lead to, for instance, the exclusion of materials as evidence, in transnational situations this is almost never the case. Obviously, trial states will still be obliged to guarantee the fairness of the ­proceedings as a whole (including the parts of investigations that were conducted abroad), but a violation of, say, Art 8 ECHR does not necessarily render a trial unfair, and trial courts and the ECtHR are prepared to include transnational ­complexities into their balancing exercise. The Dutch Supreme Court, for instance, accepts that in cases of mutual legal assistance (alleged) violations of foreign law and violations of Art 8 ECHR are not a concern for Dutch courts, as long as the foreign investigations were not carried out under Dutch responsibility.21 The focus on individual state responsibility not only has implications for the position of the individual in cases of transnational cooperation. Existing fundamental rights instruments are almost silent on the issue of overlapping competences. The recent scandals in the financial sector not only illustrate how individuals and companies are able to use or even exploit differences between ­different national legal orders, but also how their increasing i­nterconnectedness triggers the jurisdiction of multiple states. The result is that individuals are ­confronted with diverging legal systems and multiple proceedings for the same or related conduct in different states. Indeed, if we turn back to our examples in the financial sector it is not difficult to illustrate how the focus on individual nation states hampers the protection of procedural safeguards in such transnational cases. The Libor and Euribor affairs, for instance, have not only led to criminal charges in various legal orders, but also to civil claims against the banks in the Libor/Euribor-panels for the compensation of damages. Administrative proceedings were also opened. In this specific setting of overlapping competences, interesting questions arise. To what extent are individuals or companies, charged with criminal offences in State X, able to effectuate their right not to incriminate themselves when they are simultaneously under a legal obligation to produce information in State Y, which may consequently be used in the criminal proceedings in State X? As seen in the previous section, the

19  For extensive analyses, see Eser, Lagodny and Blakesley (eds) (n 13); MJJP Luchtman, E ­ uropean Cooperation between Financial Supervisory Authorities, Tax Authorities and Judicial Authorities (­Antwerp, Intersentia, 2008) 156–62. 20  See, for instance, n 16 above. 21  Supreme Court (Hoge Raad) 5 October 2010, NJ 2011, 169.

Transnational Investigations and Compatible Procedural Safeguards 199 ECtHR has put an end to such usage in the context of the nation-state. Yet how does this work out in a transnational context? Is there a responsibility for State X, because its activities—in the words of the ECtHR—will substantially affect the legal position of the individual in State Y? And/or is the responsibility imposed on State Y, where that information is used for criminal charges? Or should it be accepted that law enforcement in transnational situations is cumbersome and leads to a mitigation of fundamental right standards? Under the present situation, an affirmative answer to the last question ­undoubtedly comes closest to the state of the art under international (criminal) law. And within that particular framework, it is also understandable. After all, can we realistically expect the authorities of State X, who may have a legitimate i­ nterest in ordering information for non-punitive purposes,22 to unilaterally stall their proceedings, in the absence of other means to obtain the wanted information? That may be too much to ask, at least from the perspective of that particular state. The point is, however, that as long the focus remains on the perspectives and responsibilities of individual states, there will be little incentive to design legal rules that align the involved legal orders to each other in order to mitigate the adverse consequences for the individual. Consequently, while there is an ­increasing emphasis on the joint responsibility of the law enforcement community to tackle new types and modes of transnational crime, a corresponding development that integrates procedural safeguards in such an ‘internationalised’ context is still largely absent. Framed in terms of the national rule of law standards of the ­previous section, we face at the least the following complications: First, as a result of overlapping competences and diverging national ­standards, the problem is not, at least not primarily, the absence of national laws, their ­vagueness or the fact that they have not been respected, but rather the presence of a multitude of diverging national laws which may all in themselves be perfectly in line with fundamental rights standards. Indeed, the ECtHR leaves Member States sometimes considerable margins of appreciation. But how is the individual, in such an internationalised context, able to answer the question of which law to obey? How is that person able to assess what procedural safeguards apply to a particular case and to exert a certain degree of control over the application of, say, covert investigative techniques (substantive dimension)? With evidence becoming increasingly mobile and authorities cooperating intensively, there will always be a legal order available which will produce the result desired by the executive. Second, as regards the procedural dimension of the law, the example of the ­privilege against self-incrimination already illustrates that there is no framework to support this privilege in transnational cases. The result is that, under the p ­ resent situation, the individual is left with the choice of either to refuse cooperation in State X (and be punished for that accordingly), or to cooperate, which—upon transfer of the materials to State Y (which is strongly promoted under MLA-­ agreements or MoU’s)—will significantly affect his or her position as a defendant 22 

As is expressly recognised by the ECtHR, cf Marttinen v Finland (n 11) para 68.

200  Michiel Luchtman in the latter state. Similar questions may arise with respect for access to a lawyer, legal privilege, the presumption of innocence etc. Finally, the institutional dimension of the rule of law does not function­ properly, because current inter-state practice relies heavily on the rule of noninquiry. Legal protection and remedies are geared towards offering control over the actions of the authorities of one’s own state. The notion of ‘joint r­ esponsibilities’ thus strongly emphasises the need for intense law enforcement cooperation and coordination, but not the need for integrated, coordinated legal protection against arbitrariness.

IV  PROCEDURAL SAFEGUARDS: THE EUROPEAN UNION

The question is to which extent the findings of the previous section also hold true for the EU. Unlike in international criminal law, EU law is not (only) concerned with the relationships between states. To the contrary, [the] founding treaties of the EU [have], unlike ordinary international treaties, established a new legal order, possessing its own institutions, for the benefit of which the Member States thereof have limited their sovereign rights, in ever wider fields, and the subjects of which comprise not only those States but also their nationals.23

A combined reading of Art 2 and 3 TEU reveals that the EU has not only ­committed itself to the rule of law, but also to the establishment of a transnational AFSJ for its citizens, wherein the free movement of individuals is combined with appropriate measures to prevent and fight crime. Articles 67 et seq TFEU provide the EU with a series of functional competences to realise these ambitions. It is in line with this development that the role of individuals and other e­ conomic actors in the process of European integration has developed ­gradually from being mainly instruments for the promotion of economic integration (‘­market citizens’/ bourgeois), to a more entailing concept of EU citizenship since the ­Treaties of Maastricht, Amsterdam and following (‘Union citizens’/citoyen).24 EU citizens nowadays have rights of free movement and establishment, protected by the ­Treaties, and political rights of representation at the municipal and EU levels. The concept of EU citizenship is interesting because it offers a new perspective on the problem at hand in this contribution. Attorney-General Sharpston has, for instance, observed that the numerous references to the concept as such must have legal implications. Indeed, if the concept of citizenship is taken to mean, as it

23  Opinion 2/13 of the EU Court of Justice pursuant to Article 218(11) TFEU on the draft ­agreement on the accession of the European Union to the European Convention for the Protection of Human Rights and Fundamental Freedoms (18 December 2014) para 157. 24  On this, see also H Van Eijken, European Citizenship and the Constitutionalisation of the European Union (Utrecht, 2014) 8–11; C Callies, ‘The Dynamics of European Citizenship—From Bourgeois to Citoyen’, in A Rosas et al (eds), The Court of Justice and the Construction of Europe (The Hague, TMC Asser Press, 2014) 425–42.

Transnational Investigations and Compatible Procedural Safeguards 201 is commonly understood, the full membership to an entity that organises public life,25 then this logically implies that: by granting fundamental rights under EU law to its citizens, and stating that such rights are the very foundation of the Union (Article 6(1) TEU), the European Union ­committed itself to the principle that citizens exercising rights to freedom of movement will do so under the protection of those fundamental rights.26

Obviously, all of this begs the question of how procedural safeguards are best ­integrated into the existing body of EU law. After a brief overview of some ­examples of how the concept of EU citizenship indeed seems to influence the shape of p ­ rocedural safeguards in transnational investigations (subsection A), there are nonetheless a series of observations to made (subsection B).

A.  Procedural Safeguards in the European Union Ever since the Commission’s Strategy for the effective implementation of the ­Charter of Fundamental Rights by the European Union,27 and the Council’s Roadmap for strengthening procedural rights of suspected or accused persons in criminal proceedings,28 the notion of EU citizenship and fundamental rights have become increasingly interconnected. First, we now have a number of new directives and proposals for directives that aim to harmonise defence rights with a view to enhancing mutual trust in the EU (cf Art 82 TFEU). But in addition, the Roadmap reveals that the proposals also serve to facilitate the interests of EU citizens: [T]he removal of internal borders and the increasing exercise of the rights to freedom of movement and residence have as an inevitable consequence that an increasing n ­ umber of people are becoming involved in criminal proceedings in a Member State other than that of their residence. In those situations, the procedural rights of suspected or accused ­persons become particularly important in order to safeguard the right to a fair trial. Indeed, whilst various measures have been taken at the European Union level to ­guarantee a high level of safety for citizens, there is an equal need to address specific problems that can arise when a person is the suspect or accused in criminal ­proceedings. 25  Cf HJ Van Gunsteren, ‘Vierconcepties van Burgerschap’, in JBD Simonis, AC Hemerijck and PB Lehning (eds), De Staat van de Burger—Beschouwingen over Hedendaagsburgerschap (Boom, Meppel and Amsterdam, 1992); P Kivisto and T Faist, Citizenship: Discourse, Theory, and Transnational Prospects (Oxford, Blackwell, 2007) 1–2, 123; R Bellamy and A Warleigh, ‘Introduction: The Puzzle of EU Citizenship’, in R Bellamy and A Warleigh (eds), Citizenship and Governance in the European Union (London, Continuum, 2001) 41. 26  See Advocate-General Sharpston in Case C-34/09 Zambrano [2011] ECR I-1177, para 129, who incidentally, was not the first one; see also Advocate-General Jacobs in Case C-168/91 Konstantinidis [1993] ECR I-1191, para 46 (introducing the maxim ‘civis Europaeus sum’). 27  Commission, ‘Towards an EU Criminal Policy: Ensuring the Effective Implementation of EU Policies through Criminal Law’, COM (2011) 573 final, 20 September 2011. 28  Council, ‘Draft Resolution of the Council on a Roadmap for Strengthening Procedural Rights of Suspected or Accused Persons in Criminal Proceedings’, Document no 12531/09, 31 July 2009.

202  Michiel Luchtman This calls for specific action on procedural rights, in order to ensure the fairness of the criminal proceedings. Such action, which can comprise legislation as well as other ­measures, will enhance citizens’ confidence that the European Union and its Member States will protect and guarantee their rights.

Clearly, the picture of the civis Europaeus emerges, as those who travel over the ­European territory should have a set of common minimum rights in their ­proverbial backpack. Consequently, and quite innovatively, the new i­nstruments of the EU, for instance, expand the scope of the relevant defence rights to ­surrender proceedings under the European Arrest Warrant framework (Art 1).29 As was illustrated above, this clearly goes beyond the case law of the ECtHR. A second example of the increasing attention for procedural safeguards is related to the framework of OLAF investigations. Though the legal framework for OLAF was only revised in 2013,30 a new proposal introduces a series of further amendments.31 One of the goals of this proposal is to ensure a consistent high level of protection of procedural guarantees, as all persons concerned by OLAF investigations should be offered enhanced remedies against potential violations of their rights. A Controller of procedural guarantees, ­external to and independent from OLAF, should therefore be established and be tasked with reviewing OLAF’s compliance with the procedural guarantees of the persons ­concerned by OLAF investigations laid down in Article 9 of Regulation No 883/2013.32

The Controller will be given the power to issue a (non-binding) recommendation on the complaint to remedy the issue. In addition, the proposal obliges—in brief— OLAF to obtain prior authorisation of the Controller when it intends to exercise its power to inspect the professional office of a member of an EU ­institution at the premises of an EU institution during an internal investigation, or to take copies of documents or of any data support located in this office (Art. 9b (1) proposal). In taking his decision on whether or not to grant authorisation for these investigative measures, the Controller shall carry out an objective assessment of their ­legality and examine whether the same objective could be achieved with less intrusive investigative measures (Art. 9b (2)).33 The proposal is of interest to this discussion, not only because it deals with multi-disciplinary investigations, but also because OLAF investigations are, almost

29 Directive 2013/48/EU of 22 October 2013 on the Right of Access to a Lawyer in Criminal ­ roceedings and in European Arrest Warrant Proceedings, OJ L 294/1; incidentally, why the European P evidence warrant and the European investigation order have not been included in the scope of the Directive is not clear. 30  Regulation 883/2013, [2013] OJ L 248/1. 31  European Commission, ‘Proposal for a Regulation Amending Regulation 883/2013 as regards the Establishment of a Controller of Procedural Guarantees’, COM(2014) 340 final, 11 June 2014. 32  ibid recital 5. See also Art. 9a (1) of the proposal. 33  This appears to be a test similar to the one in competition law (cf Case C-94/00 Roquette Frères, [2002] ECR I-9011), or financial law (Council Regulation 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, [2013] OJ L 287/63, Art 13).

Transnational Investigations and Compatible Procedural Safeguards 203 by definition, transnational in character.34 Despite the many ­possible ­reservations and objections to its concrete form and shape,35 the proposed ­mechanisms are among the first that specifically address the issue of how m ­ aterials that were ­gathered under one set of rules, can be introduced as evidence in another legal order, while still guaranteeing respect for fundamental rights. Such a system helps to ensure (to a certain degree, at the least), for the whole EU, that before potential evidence is transferred from one legal order to another, there has been an ex ante authorisation or ex post review on the legality of certain investigative measures by an independent reviewer. Thus, it helps to reduce the adverse consequences of the rule of non-inquiry and of the inter-state differences in legal regimes (related to the aforementioned margins of appreciation), to the benefit of the defendant. There are other examples of how (proposed) EU legislation is increasingly ­dealing with procedural safeguards. The proposed frameworks for the European Public Prosecutor’s Office (EPPO),36 and the new rules on market abuse37 have been analysed elsewhere, so they will not be discussed in detail here. It is important to notice, however, that most of the safeguards have, meanwhile, been removed from the EPPO proposal again. In its version of 18 December 2014 the proposed regulation introduces a remarkable connection between mandatory prior judicial authorisation for certain intrusive investigative measures (searches and seizures, production orders, freezing measures and interception of telecommunications) and the (suspected) amount of financial harm to the EU. This approach implies that the EPPO framework only requires prior judicial authorisations where the offence subject to the investigation would cause or is likely to cause a damage of €100,000 or more.38 Instead of the impact of those measures on the personal privacy, the financial interests at stake are decisive for legislative intervention at EU level. In all other cases, and no matter how intrusive the measures may be, the issue of judicial control is left to the national level. A convincing reason for this approach is not easily found. Also the original proposal of the European Commission was not very clear on the need and necessity for introducing safeguards in the EPPO design. It simply stated that in accordance with the principle of proportionality, [the proposed regulation] does not go beyond what is necessary to achieve [its] objective. Throughout the proposed text, the 34 

See more in detail, Kuhl, Chapter 7 in this volume. It is a non-judicial, partly non-binding instrument, which is moreover limited in scope. At times, it is quite vague in its wording. The Controller of Procedural Guarantees may for instance issue (nonbinding) recommendations to the Director of OLAF, but it does not define the content and scope of these recommendations. 36  M Luchtman and JAE Vervaele, ‘European Agencies for Criminal Justice and Shared Enforcement (Eurojust and the European Public Prosecutor’s Office)’ (2014) Utrecht Law Review. 37  MJJP Luchtman and JAE Vervaele, ‘Enforcing the Market Abuse Regime: Towards an Integrated Model of Criminal and Administrative Law Enforcement in the European Union?’ (2014) 5(2) New Journal of European Criminal Law 192. 38  See the proposed regulation in Council Document no 16993/14 of 18 December 2014, Art 25(2) in connection with Art 26(1). 35 

204  Michiel Luchtman options chosen are those that are least intrusive for the legal orders and the ­institutional structures of the Member States. Key features of the proposal, such as the choice of the law that applies to investigative measures, the figure of Delegated P ­ rosecutors, the ­decentralised character of the EPPO and the system of judicial review, were designed in order not to go beyond what was necessary to achieve the main objectives of the proposal.39

The next subsection will argue why measures which go further are by no means ‘disproportionate’.

B.  A Series of Observations If we look at the initiatives that have been introduced by the European Union over the recent years, it should be noted how much progress has been made with regard to the development of transnational fundamental right standards. ­Simultaneously, these efforts all follow a more or less conventional approach. That is to say, they are geared towards implementation within the legal orders of individual states.40 The right to silence is, for instance, included in the proposal on a directive on the strengthening of certain aspects of the presumption of innocence and of the right to be present at trial in criminal proceedings.41 That proposal clearly seeks to codify the case law of the ECtHR. Yet it does not address the complications that were highlighted earlier in relation to transnational situations. ­Assuming that law e­ nforcement in a common European area indeed brings into play a joint ­responsibility for national authorities to enforce EU law, the question is why a joint responsibility for legal protection is not equally acknowledged. If we revert to the example where State A conducts an investigation for non-punitive ­purposes (EU conduct of business supervision, for instance), but the same conduct has attracted the attention of judicial authorities in State B, the question arises how the privilege against self-incrimination can be respected. We now have two ­authorities who (must) cooperate in the pursuit of a common European goal, but with unclear responsibilities as to who is responsible for protecting the privilege. Does the investigation in State A substantially affect the legal position of the defendant in B? If so, what are the consequences? A transnational application of the privilege against self-incrimination could for instance mean that State A is no longer at liberty to enforce duties of cooperation, as long as it is not excluded that that same information is used as evidence in State B.42 Difficult issues of transnational coordination then arise. In order to allow State A to continue its investigation, arrangements will have to be made on the use of that information in State B. 39 

COM(2013) 534 final, 17 July 2013, 4–5. There are still very few examples of fundamental right norms that are designed to be applied in transnational cases. The Schengen provisions on ne bis in idem are the most notable exception. 41  COM(2013) 821 final, 27 November 2013; see also Council Document no 16531/14 of 4 December 2014. 42  Cf n 11 above. 40 

Transnational Investigations and Compatible Procedural Safeguards 205 By its very definition, there appears to be a task for the EU here, yet thus far the EU remains silent. A second general remark is that most of initiatives on harmonisation of defence rights are explicitly limited to criminal law stricto sensu.43 That means that, as regards multi-disciplinary transnational investigations, their added value is relative. It implies that we have a harmonised set of rules in the area of criminal law and criminal cooperation, but no corresponding provisions for administrative or civil types of law enforcement. Nonetheless, the integrated legal order of the EU is dependent on smooth forms of law enforcement cooperation between all relevant actors, not only those in the area of criminal law enforcement. The EU has explicitly recognised this itself repeatedly, for instance in the new regime on market abuse which stresses that new forms of criminal law enforcement must not be taken to mean that administrative forms of law enforcement are no longer permitted.44 Is the case for a level playing field—enhancing mutual trust and promoting free movement—of less importance here? It is doubtful. Still, the EU remains silent. Now, obviously, one does not have to have much imagination to consider that in order to address the foregoing issues a whole series of new legislative interventions are needed. From the perspective of the Member States, those interventions imply a further loss of procedural autonomy and could perhaps indeed be considered disproportionate. Yet there is another side to it as well. Those same Member States also agreed to establish, in the words of the CJEU, a new legal order, with its own institutions, for the benefit of which the Member States thereof have limited their sovereign rights. Its subjects comprise not only those States but also their nationals.45 This implies that the perspective of the Member States is, unlike in international public law, no longer the sole or dominant perspective. It has to be reconciled with those of the EU citizens. If we then return to the three different roles of the law for the protection of fundamental rights, three observations must be made: (1) As regards the substantive element, it has to be stressed that innovative new ways of transnational law enforcement—mutual recognition instruments, joint investigation teams, EU law enforcement authorities (ELEAs), etc—are currently all implemented in a decentralised setting, with those mechanisms integrated 43  Cf European Commission, Proposal for a Directive of the European Parliament and of the Council on the Strengthening of Certain Aspects of the Presumption of Innocence and of the Right to Be Present at Trial in Criminal Proceedings, recital 6 of the preamble: ‘This Directive should apply only to criminal proceedings. Administrative proceedings, including administrative proceedings that can lead to sanctions, such as proceedings relating to competition, trade, financial services, or tax, including tax surcharge, and investigations by administrative authorities in relation to such proceedings, as well as civil proceedings, are not covered by this Directive.’ 44  See MJJP Luchtman and JAE Vervaele, ‘Enforcing the Market Abuse Regime: Towards an Integrated Model of Criminal and Administrative Law Enforcement in the European Union?’ (2014) 5(2) New Journal of European Criminal Law 192, with further references. 45  Opinion 2/13 of 18 December 2014 on the accession of the European Union to the European Convention for the Protection of Human Rights and Fundamental Freedoms, para 157.

206  Michiel Luchtman into the legal regimes of the Member States. Simultaneously, harmonisation of powers and safeguards is still rather limited. EU citizens are, therefore, confronted with the potential simultaneous application of rules and powers stemming from multiple, diverging legal orders. In addition, investigative measures (eg online searches) and sources of evidence have become increasingly mobile, also due to the abolition of internal border checks. Many have already warned for the risks of forum shopping by authorities and defendants in this specific setting. In answer to the question of why such forum shopping is a ‘bad’ thing,46 it should be remembered that the applicability of investigative and punitive powers from 28 divergent legal orders has a very intrusive effect on the legal position of those who are given full membership to the EU, ie EU citizens. The potential application of a multitude of divergent laws—with all its gaps and contradictions—is, in the present author’s opinion, capable of destroying the essence of one’s privacy, liberty or property just as much as the well known cases of the ECtHR where national laws are lacking, imprecise, vague or disrespected. It is unrealistic and, arguably, in contradiction with the concept of the free movement of citizens,47 that EU citizens are required to know all the legal regimes that they may possibly be subjected to in a transnational law enforcement area. The argument that all EU states are bound by the same fundamental right standards (CFR/ECHR) does not offer an adequate answer to this problem. It is after all standard case law of the ECtHR that Member States have a (sometimes significant) margin of appreciation on how to achieve compliance with the ECHR. Put differently, there are many different national ways that lead to Rome. Not all legal orders may for instance require a prior judicial authorisation to perform searches and seizures, nor does this necessarily follow from Article 8 ECHR.48 It could be tempting to seize the authorities in the legal order where such requirements are less stringent. On the many possible intersections that occur as a result of national pathways crossing each other, it is not certain that it is indeed in Rome where one will end up. (2) As regards the procedural dimension of the legality principle, it has to be emphasised that procedural safeguards often do not have an existence on their own motion. Those safeguards need legal rules to be effectuated. The aforementioned (not hypothetical) case of the privilege against self-incrimination is only one example of this. Similar observations can be made with respect to other rights and safeguards. All of these rights are particularly important for pre-trial ­proceedings. Their observance in that stage can be determinative for the overall

46  One may after all also frame it as a consequence of full interstate mutual trust, which is a building block of the EU’s legal order, see the ECJ’s Opinion 2/13 of 18 December 2014, para 191 et seq. 47  See also M Luchtman and JAE Vervaele, ‘European Agencies for Criminal Justice and Shared Enforcement (Eurojust and the European Public Prosecutor’s Office)’ (2014) Utrecht Law Review; E Muir and AP Van der Mei, ‘The “EU Citizenship” Dimension of the Area of Freedom, Security and Justice’ in MJJP Luchtman, Choice of Forum (n 8); M Böse and F Meyer, ‘Die Beschränkung nationaler Strafgewalten als Möglichkeit zur Vermeidung von Jurisdiktionskonflikten in der Europäischen Union’ (2011) 6(5) ZIS 336–344. 48 Cf Prezhdarovi v Bulgaria (App no 8429/05) ECHR, 30 September 2014, para 46 et seq.

Transnational Investigations and Compatible Procedural Safeguards 207 fairness of the proceedings. As the situation is now, however, it is unclear how the mutual ­responsibilities of the Member States are defined. It is at the level of ­inter-state coordination of responsibilities where the EU could make a major contribution to the development of transnational fundamental right standards. Indeed, it is ­necessary to have a common understanding on what those rights should entail—hence the need for the instruments and proposals on defence rights that have recently been introduced—but those instruments seem to ‘stop’ where the EU could really have added value in terms of protection of fundamental rights. (3) The institutional dimension of the law is the third dimension which merits attention. Judicial control is considered a vital instrument for upholding rule of law standards. Here too, it needs to be adapted to its transnational setting. For instance, instruments of mutual recognition imply a certain division of labor between the issuing and executing authorities, as is also clearly expressed by the CJEU: Thus, when implementing EU law, the Member States may, under EU law, be required to presume that fundamental rights have been observed by the other Member States, so that not only may they not demand a higher level of national protection of fundamental rights from another Member State than that provided by EU law, but, save in exceptional cases, they may not check whether that other Member State has actually, in a specific case, observed the fundamental rights guaranteed by the EU.49

Under a mutual recognition regime, executing authorities are not allowed to assess the necessity of certain coercive measures, the reasonableness of a suspicion, or other material grounds for application of a certain measure.50 Those tasks are in the hands of the issuing authorities.51 Yet if we take the example of the European Arrest Warrant, the issuing authorities need not necessarily be judicial ­authorities in the strict sense of Art 5(3) ECHR, ie a judge or other officer authorised by law to exercise judicial power, who offers ‘the requisite guarantees of ­independence from the executive and the parties, which precludes his subsequent i­ntervention in criminal proceedings on behalf of the prosecuting authority’. ‘[H]e or she must have the power to order release, after hearing the individual and ­reviewing the lawfulness of, and justification for, the arrest and detention …’.52 In such ­circumstances, the question arises as to whether there will be full judicial control in EU arrest warrant cases. The ECtHR normally requires, in the context of Art para 5(1-c) ECHR, that 49  See also Opinion 2/13 of the Court of Justice of 18 December 2014 on the accession of the EU to the ECHR, EU:C:2014:2454, paras 191–95. 50  Cf Directive 2014/41/EU of the European Parliament and of the Council of 3 April 2014 regarding the European Investigation Order in criminal matters, [2014] OJ EU L 130/1, Art 14(2); ‘The substantive reasons for issuing the EIO may be challenged only in an action brought in the issuing State, without prejudice to the guarantees of fundamental rights in the executing State.’ 51  In a more vertical setting, similar arrangements can be found in competition law (Case C-94/00, Roquette Frères (n 33)) and financial supervision (Regulation 1024/2013 (n 33) Art 13). National courts have only limited competence. The remainder of the test is performed by the CJEU itself. 52 Cf Medvedyev a.o. v France (App no 3394/03) ECHR, 29 March 2010, paras 123–24.

208  Michiel Luchtman the initial automatic review of arrest and detention … must be capable of examining lawfulness issues and whether or not there is a reasonable suspicion that the arrested person has committed an offence … When the detention does not, or is unlawful, the judicial officer must then have the power to release.53

Admittedly, a check will be performed in the executing state,54 but, as has been seen, that particular check is limited in scope and embedded in a regime of mutual recognition, precluding, for instance, a check on the reasonableness of the ­suspicion.55 The foregoing implies that such a check must then be in the hands of the issuing state. The relevant framework decision is however silent on the issue. Similar remarks can also be made with respect to the role and tasks of trial courts.56 To summarise, the picture that emerges is difficult to grasp. Without doubt, there is a high level of ambition to establish transnational common legal areas (eg the internal market and the AFSJ) and a fair deal of initiatives aim particularly to strengthen the position of the individual in this new setting. Simultaneously, once assessed against the traditional nation-state-oriented parameters, it is not difficult to pinpoint a series of shortcomings. To that extent, there appears to be a ­paradox. EU citizens are, on one hand, strongly encouraged to move and settle freely all over the AFSJ, but, on the other hand, the resulting intensified ­cooperation, ­overlapping competences and diverging national standards give executive powers great ­discretion on what legal order to choose for the performance of their tasks. Here lies a fundamental challenge for the EU in the years to come.

V.  CONCLUDING REMARKS

I am well aware that the conclusions of the last section go far beyond the current state of play in the EU. In light of the current negotiations on the EPPO, for instance, it appears to be politically unrealistic to expect that the Council will make a turn in the direction advocated here, certainly on the short term. My point, however, is that it is equally misleading to present the issue of procedural safeguards

53 

ibid para 125. See Art 5(1-f) ECHR. The review in the requested state in extradition cases is, quite logically, of a different nature than the one under Art 5(1-c) ECHR; see Khomullo v Ukraine (App no 47593/10) ECHR, 27 November 2014, para 52. 55  In Case C-396/11 Radu, EU:C:2013:39, 29 January 2013, paras 39–41, the CJEU ruled that ‘the observance of Articles 47 and 48 of the Charter does not require that a judicial authority of a Member State should be able to refuse to execute a European arrest warrant issued for the purposes of conducting a criminal prosecution on the ground that the requested person was not heard by the issuing judicial authorities before that arrest warrant was issued. … In any event, the European legislature has ensured that the right to be heard will be observed in the executing Member State in such a way as not to compromise the effectiveness of the European arrest warrant system.’ 56  In relation to the EPPO proposal, see the analysis in M Luchtman and JAE Vervaele, ‘European Agencies for Criminal Justice and Shared Enforcement (Eurojust and the European Public Prosecutor’s Office)’ (2014) Utrecht Law Review. 54 

Transnational Investigations and Compatible Procedural Safeguards 209 as a matter that can be left largely to individual states and that further reaching measures are ‘disproportionate’. Such a narrative fails to do justice to the interests of EU citizens, not only because such fragmentation will continue to hamper law enforcement, but also because it will hinder legal protection. The question is, therefore, who is to take the next step. If I understand the ­Opinion of the CJEU on the EU’s accession to the ECHR correctly, the concerns of the CJEU also relate to this very point. How will the ECtHR approach the EU once it accedes the ECHR? In its Opinion, the CJEU shows strong concerns that the EU’s accession to the ECHR may upset the institutional balance of the EU’s legal order. It could lead to a change in the approach towards cases of transnational cooperation as described above. The Soering case law was, for instance, developed within the setting of public international law, where full application of Convention standards may indeed have a detrimental effect on the fight against transnational crime. The ECtHR’s famous flagrant denial standard is to be seen in that ­specific setting. Attorney-General Sharpston already made some proposals for a more lenient standard in the EU, which was ultimately not taken over by the CJEU.57. It cannot be ruled out, however, that the ECtHR will take a similar approach as ­Attorney-General Sharpston. Should the ECtHR indeed follow that course, then that will inevitably lead to a need for new legislative measures. ­Fundamental rights could then become a vehicle for a further harmonisation of laws. That is at odds with the many references in the Treaties, Protocols and Charter that the provisions of the CFR, nor the accession to the ECHR shall extend, in any way, the competences of the Union as defined in the Treaties. This does not, however, not preclude that the EU itself should go in the d ­ irection advocated in the previous section. In my opinion, this task rests p ­ rimarily with the European legislator. The EU has committed itself to an AFSJ without ­internal ­frontiers, in which the free movement of persons is ensured in conjunction with appropriate measures with respect to the prevention and combating of crime. The AFSJ is not only about free movement of citizens, but about free movement in conjunction with appropriate measures to fight crime. Concerns to uphold fundamental rights are an integral part of this. Yet current developments focus mainly on criminal law stricto sensu and on application within the respective national legal orders of the EU Member States. As demonstrated in this chapter, that approach does not entirely fit the EU. In addition to a common European understanding on the content and scope of the rights as such, we are in need of legal mechanisms that offer EU citizens an adequate indication of the content and scope of government power in a transnational legal area, of mechanisms that clearly ‘allocate’ responsibilities for protecting defence rights over the many (EU and national) actors involved, and for mechanisms that allow for full and effective judicial control.

57 

Attorney-General Sharpston, Opinion, Case C-396/11 Radu EU:C:2012:648, 29 January 2013.

210 

10 The Consecutive Application of Different Types of Sanctions and the Principle of Ne Bis in Idem: The EU and the US on Different Tracks? MARTIN BÖSE

I. INTRODUCTION

E

CONOMIC CRIME CAN give rise to the imposition of various measures, ranging from imprisonment and fines, confiscation and forfeiture of illegal profits, damages to occupational debarments and the withdrawal of licences. The variety of these measures corresponds to their diverging purposes. Some of them are meant to compensate the victim for the damage occurred, some aim to prevent the offender from committing future misconduct and others are clearly intended to punish the offender for the committed crime. Accordingly, some of these measures form part of criminal law, others do not; nonetheless, they can be considered as sanctions in a wider sense, that is, a harm which is imposed upon the offender as a consequence of illegal conduct. Whether these sanctions (and which of them) are governed by criminal law, or by administrative or private law, depends upon the respective legal order. Since non-criminal sanctions—as the term already suggests—are not imposed in the framework of criminal proceedings, the consequence of the diversification of sanctions is not only a cumulation of sanctions, but also a multiplication of proceedings. The offender may be subject to criminal, administrative and civil proceedings, and these proceeding may—even if conducted in parallel—result in the ­consecutive application of several different sanctions to the offender. This is where the ne bis in idem principle comes into play. According to this principle, no one shall be punished twice for the same offence, and the question arises whether the non-criminal sanctions have—at least in part—a punitive effect and, thereby, fall into the scope of the ne bis in idem principle. If this is the case, a final decision in criminal proceedings bars the imposition of sanctions in the

212  Martin Böse course of administrative or civil proceedings and vice versa if these proceedings are related to the same (criminal) conduct. This chapter will take a closer look at the different concepts of the ne bis in idem principle and its consequences for multiple proceedings and sanctions in the US and EU. The analysis will be limited to the material scope of this principle (ie the notion of criminal proceedings). By contrast, it will not examine the issue of ‘the same offence’ or ‘the same facts’ (the ‘idem’).

II.  THE US: A FORMAL APPROACH

In the US, the ne bis in idem principle is enshrined in the double jeopardy clause of the fifth amendment to the US constitution.1 Despite its narrow wording (‘life or limb’), the double jeopardy clause applies to any kind of criminal sanction, irrespective of whether they affect the life, limb, liberty or property (eg fines) of the offender.2 Furthermore, the preclusion of a retrial of criminal charges does not depend upon whether the defendant has been convicted or acquitted.3 The question whether the scope of the double jeopardy clause extends beyond criminal proceedings stricto sensu and covers other types of punitive sanctions was first addressed by the Supreme Court in a tax case in 1938 (Helvering v Mitchell).4 The defendant (Mitchell) was suspected of having filed a fraudulent tax return. He was acquitted in criminal proceedings, but in subsequent civil proceedings, Mitchell was not only ordered to pay the taxes he evaded, but also a fine of 50 per cent of the tax amount due. Mitchell contended that the fine was in breach of the double jeopardy clause, but the Supreme Court held that the double jeopardy clause did not apply to civil proceedings; even if the civil fine were intended as punishment, it was part of civil proceedings. So, the applicability of the double jeopardy clause depended upon the statutory construction, ie Congressional intent to provide for either ‘civil’ or ‘criminal’ sanctions and proceedings.5 Relying on these formal criteria (­ labelling of sanctions as ‘criminal’ or ‘civil’), the Supreme Court left it to the legislator to determine the legal and procedural framework of a sanction and, thereby, to define the scope of the double jeopardy clause. The Supreme Court followed this formal approach over decades.6 Nevertheless, the Court accepted that in exceptional cases the Court could override ­Congressional designation of a sanction as civil, but this would require ‘clearest 1  The relevant passage reads as follows: ‘… nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb…’. 2  Jeffers v United States, 432 US 137, 155 (1977). 3  North Carolina v Pearce, 395 US 711, 717 (1969). 4  Helvering v Mitchell, 303 US 391 (1938). 5  ibid 399, 404–405. 6  Rex Trailer Co v United States, 350 US 148, 150 (1956); United States v One Assortment of 89 Firearms, 465 US 354, 362–363 (1984).

Types of Sanctions and the Principle of Ne Bis in Idem  213 proof ’ that the purpose and effect of a sanction are punitive and, thus, criminal in nature.7 When assessing the nature of a sanction, the Court applied a catalogue of criteria that have been applied to other constitutional guarantees with a scope limited to criminal proceedings. In particular, the Court referred to its ruling on the privilege against self-incrimination in United States v Ward.8 Under the ‘Ward test’, the following factors might indicate the criminal nature of a sanction: —— —— —— ——

The sanction has historically been regarded as punishment. The sanction involves affirmative disability or restraint (such as imprisonment). The imposition of the sanction requires the finding of scienter. The sanction promotes the traditional objectives of punishment (retribution and punishment). —— The conduct to be sanctioned is already a crime. —— The sanction is not connected to an alternative (eg remedial) purpose or the sanction appears excessive in relation to the alternative purpose assigned.9 Nevertheless, due to the high threshold (‘clearest proof ’), the formal classification of the sanction remained the key factor. This formal approach, however, was overturned in United States v Halper.10 Halper had managed a medical laboratory and submitted 65 false Medicare claims to the government, defrauding it of $585. He was convicted of fraud and sentenced to a fine of $5,000 and to two years’ imprisonment. In subsequent civil proceedings, the government sued Halper for $130,000. The amount exceeded the actual damages by far because the law allowed the government to seek $2,000 for each false claim. The Supreme Court held that the damages sought resulted in a second punishment and, thus, would violate the double jeopardy clause.11 In its reasoning, the Court distinguished the protection against a second criminal prosecution after conviction or acquittal from the protection from double punishment for the same offence. Whereas protection from double prosecution was related to a ­specific procedural framework (and its labelling as ‘criminal’ or ‘civil’), the concept of punishment was considered to depend upon whether the purpose of the sanction is remedial or punitive.12 Thereby, the Court moved from its formal approach (relying on statutory construction) to a substantial approach. Since the damages sought by the government went far beyond an amount that could be considered an adequate compensation for the loss and costs that had been caused by the ­defendant, the sanction could not be qualified remedial but only punitive and, as a consequence, it had to be considered a second punishment that was prohibited

7 

United States v One Assortment of 89 Firearms, 465 US 354, 362–363 (1984). ibid 362–363, referring to United States v Ward, 448 US 242, 249 (1980). 9  United States v Ward, 448 US 242, 249–250 (1984), referring to Kennedy v Mendoza–Martinez, 372 US 144, 168–169 (1963). 10  United States v Halper, 490 US 435 (1989). 11  ibid 452. 12  ibid 443. 8 

214  Martin Böse by the double jeopardy clause.13 In essence, Halper was not based upon double ­jeopardy as a procedural safeguard (protection against double prosecution), but upon a substantial understanding of this clause which comes close to the proportionality principle (double punishment as ‘over-punishment’).14 This new approach did not last for long. In 1997 (Hudson v United States), the Supreme Court overruled Harper and returned to its formal understanding of the double jeopardy clause which is mainly based upon Congressional intent and designation of a sanction as ‘civil’ or ‘criminal’.15 In Hudson, the competent administrative authority (the Office of the Comptroller of the Currency) had imposed financial penalties and occupational debarment upon the defendant. Subsequently, a criminal investigation was initiated for the same conduct, and the question arose whether criminal prosecution was barred by the double jeopardy clause. The Supreme Court re-affirmed Mitchell and stated that the double jeopardy clause only prohibited multiple criminal punishment, and that it was a matter of statutory construction whether a sanction is ‘civil’ or ‘criminal’. In the eyes of the Court, a substantive approach, distinguishing ‘punitive’ and ‘remedial’ sanctions, seemed unworkable because all civil penalties had at least some deterrent effect.16 Furthermore, the Court pointed out that the Halper logic failed to afford adequate protection under the double jeopardy clause because it required an assessment of the second sanction actually imposed and, thereby, made it impossible to examine a violation of the double jeopardy clause before the (second!) trial proceedings had been completed—a consequence which clearly contradicts to the notion that the double jeopardy clause should prevent the government from attempting to punish criminally for a second time.17 Admittedly, this problem does not arise where criminal proceedings are conducted after punitive sanctions have been imposed in civil proceedings. The consequences of the double jeopardy clause, however, are not less questionable because a ban on criminal proceedings, which may result in an inadequate ‘under-punishment’ for serious crimes, appeared to be hardly acceptable.18 On the other hand, protection from excessive sanctions could

13 

ibid 452. 452; the Court considered Halper’s liability ‘sufficiently disproportionate that the sanction constitutes a second punishment in violation of double jeopardy’. 15  Hudson v United States, 522 US 93, 99 (1997). 16  ibid, 102; see, however, the substantive criteria applied in the Ward test in n 8; see also the more elaborated approaches in legal literature that were based upon Halper: SE Cox, ‘Halper’s Continuing Double Jeopardy Implications: A Thorn by Any Other Name Would Prick as Deep’ (1994–1995) 39 Saint Louis University Law Journal 1235, 1273–99; AX Fellmeth, ‘Civil and Criminal Sanctions in the Constitution and Courts’ (2005) 94 Georgetown Law Journal 1, 41–50. 17  Hudson v United States (n 15) 102; accordingly, it was proposed not to refer to the sanction actually imposed, but to object and purpose of the sanctions to be applied in the relevant civil proceedings; S E Cox, ‘Halper’s continuing double jeopardy implications: A Thorn by Any Other Name Would Prick as Deep’ (1994–1995) 39 Saint Louis University Law Journal 1235, 1273–99, 1255 (‘… to protect defendants from the harassment of parallel civil and criminal proceedings which both seek to punish’). Thus, it is not the amount, but the purpose of the sanction that matters. 18 See the argument raised by Justice Scalia, dissenting, in Department of Revenue of Montana v Kurth Ranch, 511 US 767, 798, 804 (1994); in order to meet these concerns, SECox, ibid at 1299–1301, 14  ibid

Types of Sanctions and the Principle of Ne Bis in Idem  215 also be ensured by other constitutional guarantees (eg the due process clause) that were applicable to civil proceedings as well.19 In Hudson, debarment and penalty were formally classified as civil sanctions.20 Recalling its former case law, the Court conceded that this denomination could be overridden where an overall assessment of the sanction clearly reveals its punitive character.21 The debarment and the penalties were less severe sanctions and not at all part of the traditional forms of criminal punishment. The criminal liability of Hudson for the same conduct notwithstanding, the Court did not find sufficient evidence (‘clearest proof ’) to establish the criminal character of the sanctions imposed on Hudson.22 To sum up, it is not the nature, but the formal classification of the sanction as criminal that matters. As a consequence, the double jeopardy clause does not protect the individual from double sanctioning resulting from parallel proceedings in different legal frameworks, ie criminal proceedings on the one hand, civil proceedings on the other. Under the Ward test, the legislator enjoys a wide margin of discretion to denominate punitive sanctions as ‘civil’ and, thereby, to render the double jeopardy clause inapplicable.23

III.  THE COUNCIL OF EUROPE: A SUBSTANTIVE APPROACH

In Europe, the normative framework is much more complex, because the ne bis in idem principle is an integral part of the national criminal justice systems, national constitutions in particular,24 the EU Charter of Fundamental Rights (CFR) (Art 50) and Protocol No 7 to the European Convention on Human Rights (ECHR). Since the wording and content of Art 50 CFR are mainly based upon Art 4 of Protocol No 7 to the ECHR, the case law on this latter provision will serve as a starting point for the legal analysis of the EU legal framework. Protocol No 7 to the ECHR has been ratified by the vast majority of EU ­Member States (except the Netherlands, the UK and Germany).25 The ne bis in

calls upon the competent authorities to better coordinate civil and criminal proceedings; see also below, with regard to the EU. 19 

Hudson v United States (n 15) 102–103. ibid 103. 21  ibid 99–100. 22  ibid 104–105. 23  Justice Souter, concurring, in Hudson v United States (n 15), pointed, however, to the increasing relevance of civil penalties, and expected the Court’s power to override congressional to be used more frequently than in the past. 24  See the comparative overview provided by A Eser in U Sieber, H Satzger and B von HeintschelHeinegg (eds), Europäisches Strafrecht, 2nd edn (Nomos, 2014) § 36 paras 47–49. 25  A list of signatures and ratifications is available at the website of the Council of Europe http:// www.conventions.coe.int/Treaty/Commun/ChercheSig.asp?CL=ENG&CM=&NT=117&DF=04/12/2 014&VL, accessed 4 December 2014. 20 

216  Martin Böse idem ­principle is enshrined in its Art 4(1).26 As the double jeopardy clause, the scope of this provision is limited to criminal proceedings, and again the question arises how to assess whether a sanction and the corresponding proceedings are criminal or not. Like the US Supreme Court, the European Court of Human Rights has developed a concept of criminal proceedings or a criminal charge which is common to all procedural rights under the Convention and its protocols. So, the notion ‘charged with a criminal offence’ in Art 6(2) and (3) ECHR has the same meaning as the term ‘criminal proceedings’ in Art 4 Protocol No 7.27 Thus, the scope of application ratione materiae of the ne bis in idem principle must be determined by recourse to the following three criteria (the Engel criteria): —— legal classification of the offence under national law as criminal; —— the nature of the offence (violation of legal provisions generally applicable to the citizens, deterrent and punitive function of the penalty); —— the severity of the penalty that can be imposed on the person concerned.28 Whereas the criteria are quite similar to those applied in the Ward test of the US Supreme Court, the substantive criteria (nature of the offence, severity of the penalty) clearly outweigh the formal classification (first criterion). The European Court of Human Rights explicitly rejected a purely formal approach that refers to the legal characterisation under national law and, thereby, allows the Contracting States a great deal of discretion in defining the scope of application of the ne bis in idem principle—a discretion that bears the inherent risk that the understanding of the national legislator might be incompatible with the object and purpose of the Convention and the Protocol.29 In contrast to the US Supreme Court, the European Court of Human Rights does not rely on formal classification only, but first and foremost on substantive criteria30 and the threshold to establish the criminal nature of a sanction is far lower than the standard applied by the US Supreme Court (‘clearest proof ’). Following its substantive approach, the European Court of Human Rights developed a wide concept of ‘criminal proceedings’ that covered not only criminal punishment stricto sensu, but also other punitive sanctions. In Zolotukhin v Russia, administrative sanctions for minor disorderly conduct were considered to fall within the scope of the ne bis in idem principle because these sanctions were

26  ‘No one shall be liable to be tried or punished again in criminal proceedings under the jurisdiction of the same State for an offence for which he has already been finally acquitted or convicted in accordance with the law and penal procedure of that State.’ 27  Zolotukhin v Russia (App no 1493/03) ECHR, 10 February 2009, para 52. 28  ibid para 53, referring to Engel and Others v the Netherlands (Apps no 5100/71, 5101/71, 5102/71, 5354/72, 5370/72) (1976) ECHR Series A no 22, para 82. 29  ibid para 52, with further references. 30  Engel and Others v the Netherlands (Apps no 5100/71, 5101/71, 5102/71, 5354/72, 5370/72) (1976) ECHR Series A no 22, para 82: The formal classification provides ‘no more than a starting point’, and the ‘very nature of the offence is a factor of greater import’.

Types of Sanctions and the Principle of Ne Bis in Idem  217 aimed at ­deterrence and punishment and the potential maximum penalty of 15 days’ imprisonment is sufficiently severe to be considered a ‘criminal’ ­sanction.31 Accordingly, the imposition of an administrative sentence barred criminal ­prosecution with regard to the same facts.32 The wide interpretation of Art 4 Protocol No 7 corresponded to the wellestablished case law on the procedural rights under Art 6(2) and (3) ECHR that were held to be applicable to administrative fines33 and tax surcharges.34 This understanding has been confirmed most recently in Grande Stevens v Italy, where the regulatory framework of sanctions on market manipulation was at issue.35 The competent authority—the Companies and Stock Exchange Commission— imposed administrative fines on the applicant which the European Court of Human Rights considered to fall within the scope of the ne bis in idem principle.36 Thus, criminal proceedings on the same facts were barred and the subsequent conviction of the applicants by a criminal court was found to be in breach of Art 4 Protocol No 7.37 The decision in Grande Stevens is quite remarkable because Italy had made a reservation to Art 4 Protocol No 7 that the ne bis in idem principle shall only apply to offences, procedures and decisions qualified as criminal by Italian law.38 This declaration was clearly intended to limit the scope of Art 4 and to ­prevent the European Court of Human Rights from extending the approach based upon the Engel criteria to the ne bis in idem principle. The European Court of Human Rights, however, considered the reservation as invalid under Art 57 ECHR because the Italian government did not specify the provisions of the domestic legal order that were excluded from the scope of Article 4 Protocol No 7.39 This verdict has far-reaching consequences because the European Court of Human Rights’s reasoning will apply to reservations of other Contracting States which are phrased in an equally unspecific manner.40

31  Zolotukhin v Russia (n 27) paras 55–57; for a detailed analysis of the ECtHR case law see B Van Bockel, The Ne Bis in Idem Principle in EU Law (Ipskamp Drukkers, 2010) 190–195, available at https:// openaccess.leidenuniv.nl/bitstream/handle/1887/13844/000-diss-VanBockel-26-05-2009.pdf?sequence=1, accessed 18 January 2016. 32  Zolotukhin v Russia (n 27) paras 120–22; with regard to the concept of the ‘same offence’, see paras 70 et seq. 33  Öztürk v Germany (App no 8544/79) ECHR, 21 February 1984, para 79. 34  Jussila v Finland (App no 73053/01) ECHR, 23 November 2006, para 38; Nykänen v Finland (App no 11828/11) ECHR, 20 May 2014, para 40. 35  Grande Stevens and others v Italy (App no 18640/10) ECHR, 4 March 2014. 36  ibid paras 94–101, 222–23. 37  ibid paras 224–28. 38  For a list of the declarations and reservations to Protocol No 7 to the ECHR see http://www. conventions.coe.int/Treaty/Commun/ListeDeclarations.asp?NT=117&CM=8&DF=26/11/2014&CL= GER&VL,=1, accessed 4 December 2014. 39  Grande Stevens and others v Italy (n 35) paras 210–11. 40 Regarding the declarations made by France, Germany and Portugal, see Grande Stevens and ­others v Italy (n 35) ECHR, 4 March, para 204; by contrast, the Austrian declaration refers to criminal ­proceedings in the sense of its Code of Criminal Procedure.

218  Martin Böse IV.  THE EU: MAINTAINING DUAL SANCTIONING SCHEMES?

Even though the EU is not yet party to the ECHR and its protocols (see Article 6(2) TEU), Art 4 Protocol No 7 has a strong impact on the scope and content of the ne bis in idem principle in EU law.41 Its wording has been used as a blueprint for the corresponding guarantee in Art 50 CFR.42 Thus, the case law on Art 4 Protocol No 7 guides the interpretation of Art 50 CFR as well. Accordingly, the Court of Justice of the European Union (‘the Court of Justice’) construed the scope of Art 50 CFR in line with the case law on Art 4 Protocol No 7. In Bonda, a Polish court raised the question whether the imposition of administrative sanctions in the framework of the Common Agricultural Policy fell within the scope of Art 50 CFR and, thus, could bar criminal proceedings related to the same facts.43 In its assessment on the relevant sanction (the temporary exclusion from the benefit of an aid scheme), the Court of Justice referred to the Engel criteria:44 the sanctions were designated as administrative (and not criminal) sanctions and the relevant provisions and the sanction were not generally applicable, but applied only to economic operators who had recourse to the relevant aid scheme. Thus, the object and purpose of the sanction was not punitive, but preventive. Finally, the sanction appeared less severe because it deprived the farmer solely of the prospect of obtaining aid, but did not cause any further harm.45 For these reasons, the Court of Justice did not consider the sanction as ­‘criminal’, and Art 50 CFR did not require the Polish court to discontinue criminal proceedings.46 This assessment was supported by the general rules on the relationship between administrative penalties in the framework of the Common Agricultural Policy and criminal sanctions.47 These rules explicitly provided for a cumulation of proceedings (and sanctions) if the administrative penalties were integral part of financial aid schemes and could be applied independently of any criminal penalties.48 A closer look at the context, however, reveals that coordination of administrative and criminal proceedings were considered to be the rule rather than

41  See the references to Art 4 of Protocol no 7 in Joined Cases C-238/99 and others Limburgse Vinyl Maatschappij [2002] ECR I-8375, para 59; Case C-308/04 SGL Carbon [2006] ECR I-5977 para 26. 42  ‘No one shall be liable to be tried or punished again in criminal proceedings for an offence for which he or she has already been finally acquitted or convicted within the Union in accordance with the law.’ 43  Case C-489/10 Bonda EU:C:2012:319. 44  ibid para 37. 45  ibid paras 38–45. 46  ibid paras 45–46; in a previous decision, the Court came to the same conclusion, but did not refer to the Engel criteria; see Case C-150/10 Beneo-Orafti [2011] ECR I-6843, paras 69–74. 47  Case C-489/10 Bonda (n 43) para 35. 48  Council Regulation (EC, Euratom) 2988/1995 of 18 December 1995 on the protection of the European Communities financial interests, [1996] OJ L 312/1 Art 6(5) (‘Regulation 2988/1995’).

Types of Sanctions and the Principle of Ne Bis in Idem  219 the exception.49 Moreover, the notion of administrative penalties covers measures of a clearly punitive character (eg administrative fines).50 Since the income of economic operators (farmers, producers etc) crucially depends upon the benefits to be granted by financial aid schemes, it seems doubtful whether the exclusion from such an aid scheme can be considered less severe than an administrative fine. The non-punitive character of this penalty, thus, is not beyond all doubt.51 The Court of Justice, however, clearly favoured a restrictive understanding of the ne bis in idem principle in order to maintain the effectiveness of the double-track law enforcement system, ie a parallel application of criminal and administrative sanctions. By contrast, in the Åkerberg Fransson case, the Court of Justice refrained from an assessment on the nature of the penalty at stake, but confined itself to a general reference to the Engel criteria.52 This was quite remarkable because there was wellestablished case law of the European Court of Human Rights that the sanctions at issue (tax surcharges) were ‘criminal’ in nature and, thus, fell within the scope of the ne bis in idem principle under Art 4 Protocol No 7.53 The Court of Justice, however, left it to the national court to determine the nature of the tax penalty and to decide whether criminal proceedings with regard to the same facts were to be discontinued.54 The reasoning behind the rather hesitant approach of the Court of Justice seems to be two-fold. First, the Advocate-General raised general objections to the extensive interpretation of the ne bis in idem principle by the European Court of Human Rights because several Member States had not ratified Protocol No 7 to the ECHR, and others had lodged declarations that considerably limited the scope of the ne bis in idem principle.55 Therefore, the Advocate-General favoured a partially autonomous interpretation of Art 50 CFR that—in contrast to Art 4

49  See Regulation 2988/1995 recital (10) of the Preamble and Art 6(1)–6(4); see also J Tomkin, ‘Article 50—Right not to Be Tried or Punished Twice in Criminal Proceedings for the Same Criminal Offence’, in S Peers, T Hervey, J Kenner, A Ward (eds), The EU Charter of Fundamental Rights—A Commentary (Beck Hart Nomos, 2014) para 50.34. 50  Regulation 2988/1995, Art 5(1)(a). 51  For the contrary view (punitive sanction falling within the scope of Art 50 CFR) see J Stalberg, Zum Anwendungsbereich des Art. 50 der Charta der Grundrechte der Europäischen Union (Ne Bis in Idem) (Lang, 2013) 110–116; see also M Böse, Strafen und Sanktionen im Europäischen Gemeinschaftsrecht (Heymann, 1996) 285–87. 52  Case C-617/10 Hans Åkerberg Fransson, EU:C:2013:105, para 35. 53  B Van Bockel and P Wattel, ‘New Wine into old Wineskins: The Scope of the Charter of Fundamental Rights of the EU after Åkerberg Fransson’ (2013) 6 European Law Review 866, 880; OJ Gstrein and S Zeitzmann, ‘Die “Åkerberg Fransson”-Entscheidung des EuGH—“Ne bis in idem” als Wegbereiter für Einen Effektiven Grundrechtsschutz in der EU?’ (2013) 2 Zeitschrift für Europarechtliche Studien 239, 253; see also Advocate-General C Villalón in Case C-617/10 Hans Åkerberg Fransson (n 52) para 90. 54  Case C-617/10 Hans Åkerberg Fransson (n 52) paras 36–37. 55 Opinion of Advocate-General C Villalón in Case C-617/10 Hans Åkerberg Fransson, EU:C:2012:340, paras 72, 82–83.

220  Martin Böse ­ rotocol No 7—allowed for the consecutive application of administrative and P criminal penalties.56 Second, a more restrictive interpretation of the ne bis in idem principle could be based upon concerns that a ban on criminal proceedings resulting from a final decision in administrative proceedings might undermine the effective enforcement of EU law by dissuasive and effective sanctions. The Court of Justice expressly raised this issue with regard to the Member States’ constitutional standards only,57 but the same argument could be raised with regard to the standard established by Art 50 CFR.58 These objections, however, are not well-founded. The official explanations to the Charter expressly state that the reference to the ECHR in Art 52(3) CFR covers both the Convention and its Protocols and that their meaning and scope are also determined by the relevant case law of the European Court of Human Rights.59 In the light of recent developments, the decision in Grande Stevens in particular, only four Member States can be considered to be not bound by the case law on the application of the ne bis in idem principle to administrative penalties under Art 4 Protocol No 7.60 The understanding of this considerably small minority of ­Member States, thus, cannot represent a common constitutional tradition and thereby justify an interpretation of Art 50 that deviates from Art 4 Protocol No 7. The second argument does not seem convincing either. Admittedly, the EU has a legitimate interest in an effective enforcement of EU law, and this interest may even justify a limitation to the ne bis in idem principle under the umbrella of Art 52(1) CFR. This interest, however, does not allow for falling below the minimum standard established by Art 4 Protocol No 7.61 This view is also reflected in recent EU legislation, namely the preamble of Directive 2014/57/EU on criminal sanctions for market abuse.62 According to its recital (23), Member States shall ensure that the imposition of criminal sanctions and administrative sanctions63 does not lead to a breach of the ne bis in idem principle. Even though the Court of Justice did not follow the restrictive interpretation of the Advocate-General, it did not take a clear stand on the scope of the ne bis in idem principle and its applicability to tax surcharges, either. Thereby, the Court of Justice has caused ambiguity that has fostered a more restrictive interpretation of

56 

ibid paras 84–87, 93–96. C-617/10 Hans Åkerberg Fransson (n 52) para 36; see also Opinion of Advocate-General C Villalón (n 55) para 74. 58  See in that regard Van Bockel and Wattel, ‘New Wine into Old Wineskins’ (n 53) 880. 59  ‘Explanations relating to the Charter of Fundamental Rights’, [2007] OJ C 303/17 (33). 60  The Member States in name are Austria, Germany, the Netherlands and the UK, see nn 38 and 40. 61  See Van Bockel and P Wattel (n 53) 880–881, referring to Case C-500/10 Belvedere Costruzioni [2012] ECR I-202, paras 21–23. 62 Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on ­criminal sanctions for market abuse (Market Abuse Directive), [2014] OJ L 173/179. 63  See in that regard Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation) [2014] OJ L 173/1. 57  Case

Types of Sanctions and the Principle of Ne Bis in Idem  221 the ne bis in idem principle by national courts.64 In a recent decision, however, an Italian court considered tax surcharges to fall within the scope of Art 50 CFR and asked the Court of Justice for another preliminary ruling on the interpretation of the ne bis in idem principle under EU law.65 Even though the Court of Justice declared the request inadmissible because the case did not fall within the scope of the Charter (Art 51(1) CFR),66 it is only a matter of time before the question will come up again in a case involving VAT surcharges, and thus, falling within the material scope of Art 50 CFR.

V. CONCLUSION

The protection against double prosecution is part of the common ­constitutional principles of the US, the EU and its Member States. The rationale is based upon the res iudicata of final decisions and the principle of legal certainty.67 The scope of this principle, however, differs significantly in different jurisdictions,68 and the ­reasons for these differences are linked to the different traditions of law enforcement. In the US, the dichotomy of criminal proceedings and civil proceedings ­determines the ambit of the double jeopardy clause. As civil proceedings provide 64  See eg the Italian Supreme Court (Corte di Cassazione), decision of 15 May 2014, no 20266, Rivista di giurisprudenza tributaria 8-9/2014, 649, 650; referring to the ECJ, the Supreme Court stated that tax surcharges under Italian law do not fall within the scope of the ne bis in idem ­principle under Art 4 of Protocol no 7; this view is rejected by M Dova, ‘Ne Bis in Idem in Materia Tributaria: Prove Tecniche di Dialogo tra Legislatori e Giudici Nazionali e Sovranazionali’, Diritto Penale Contemporaneo, 5 June 2014, sub. 6, available at http://www.penalecontemporaneo.it/area/3/22-/-/3120-ne_bis_in_idem_in_materia_tributaria__prove_tecniche_di_dialogo_tra_legislatori_e_ giudici_nazionali_e_sovranazionali/#, accessed 16 December 2014; see also, without explicit reference to Åkerberg Fransson, the French Supreme Court (Cour de Cassation—Chambre Criminelle), decision no 7049 of 22 January 2014 (12-83.579), available at https://www.courdecassation.fr/jurisprudence_2/ chambre_criminelle_578/7049_22_28280.html, accessed 16 December 2014. 65  Tribunale ordinario di Torino (Quinta Sezione Penale), decision of 27 October 2014 (Proc. n. 16821/12 r.g.n.r., Proc. n. 1444/14 r.g.dib.), sub 6, available at http://www.archiviopenale.it/apw/ wp-content/uploads/2014/11/ORDINANZA-RINVIO-PREGIUDIZIALE.pdf, accessed 16 December 2014. 66  Order of the Court of 15 April 2015, Case C-497/14 Stefano Burzio [2015] ECLI:EU:C:2015:251, para 29. 67  United States v DiFrancesco, 449 US 117, 128 (1980); Case C-467/04 Gasparini [2006] ECR I-9199 para 27; for a detailed analysis see J Lelieur, ‘Transnationalising Ne Bis in Idem: How the Rule of Ne Bis in Idem Reveals the Principle of Personal Legal Certainty’ (2013) 9(4) Utrecht Law Review 198. 68  Similar differences arise with regard to multiple prosecutions at the state and at the federal (respectively Union) level; whereas Art 50 CFR expressly provides for a transnational dimension (‘within the Union’), the double jeopardy clause does not prohibit a second prosecution at the federal level after adjudication on the state level and vice versa (dual sovereignty doctrine); for the vertical dimension (prosecutions at the federal and at the state level), see United States v Lanza, 260 US 377, 382 (1922) and Abbate v United States, 359 US 187, 195 (1959); for the horizontal dimension (multiple proceedings in different states), see Heath v Alabama, 474 US 82, 88–89 (1985); with regard to Art 50 CFR, see Case C-17/2010 Toshiba, EU:C:2012:72 para 94, with further references (vertical dimension) and Joined cases: C-187/01 and C-365/01, Gözütok and Brügge, [2003] ECR I-1345 (horizontal ­dimension under Art 54 CISA).

222  Martin Böse a procedural framework for a variety of different sanctions, including remedial as well as punitive sanctions, it is particularly difficult to consider these proceedings as criminal, in the sense that they give rise to a legitimate expectation that a final decision on the case will bar criminal proceedings. In Europe, the procedural framework of administrative sanctions is much more closer to law enforcement by traditional criminal law. In EU law, this is clearly reflected in the sanctioning powers of the European Commission in competition cases.69 The law of minor (administrative) offences is considered—as a German scholar has put it ironically—the ‘well-educated little sister of criminal law’ (‘die wohlerzogene kleine Schwester des Strafrechts’).70 Since the competent authorities and courts pursue similar objectives (law enforcement by punitive and deterrent sanctions), they can be expected to coordinate their proceedings and to consider the defendant’s legitimate interest not to be subjected to multiple prosecution (and double punishment). In this regard, the case law of the European Court of Human Rights provides for a standard which is binding upon the EU as well. However, the ne bis in idem principle does not urge the EU (nor the Member States) to abolish their dual sanctioning regimes, but to coordinate the two law enforcement tiers. The possible coordination mechanisms are many-fold. The legislator can confer investigative and prosecutorial powers in both criminal and administrative proceedings upon one and the same authority,71 or the courts can be given full power to impose either administrative or criminal sanctions ­irrespective whether the court proceedings resulted from the imposition of an administrative sanction or a criminal indictment.72 In any case, the coordination mechanism should provide for a competence of administrative authorities to refer cases to the public prosecutor (and vice versa).73 Thereby, the legislator can ensure that the offender will not escape from criminal punishment because he has already been fined in administrative proceedings. Finally, it should be borne in mind that protection from double prosecution is not absolute, but subject to the exception under Art 4(2) Protocol No 7 (and corresponding restrictions under Art 52 CFR). So, it appears neither necessary nor legitimate for the EU to change track and to adopt the American formal approach to the ne bis in idem principle.

69  See Art 23 of Council Regulation (EC) 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 TEC, [2003] OJ L 1/1. 70  K Schmidt, ‘Zur Verantwortung von Gesellschaften und Verbänden im Kartell-Ordnungswidrigkeitenrecht‘ (1990) 4 Zeitschrift für Wirtschafts- und Steuerstrafrecht 138. 71  The UK Competition and Markets Authority may serve as an example; see Blake, Chapter 13 in this volume. 72 See, in this regard, the German model, which is based upon a concentration of judicial ­competences which covers both administrative offences (Ordnungswidrigkeiten) and criminal offences; ‘Ordnungswidrigkeitengesetz’—ss 81 et seq of Regulatory Offences Act. 73  See Market Abuse Regulation, Art 23(1) and recital (72).

Part IV

Challenges with Respect to Shared or Integrated Enforcement Models

224 

11 Challenges in the Field of Economic and Financial Crime from a European Perspective JEROEN BLOMSMA1

I. INTRODUCTION

O

VER THE PAST 25 years, European criminal justice has developed into a EU policy like any other. The fight against economic and financial crime is an important driver behind this. Even before the EU formally gained competence in criminal law, Member States were already required to protect European financial legal interests with criminal sanctions.2 Currently, important developments in European criminal justice still take place against the backdrop of financial crime. Once established, a European Public Prosecutor’s Office will be competent to investigate and prosecute fraud and other crimes affecting the EU’s financial interests.3 This will mark an important first step towards a truly supranational European criminal justice system. This chapter takes a European perspective on economic and financial crime and discusses some of the challenges policy-makers and practitioners encounter in fighting this type of crime. It will explain how the special nature of criminal law, as enshrined in the Treaty of Lisbon influences the options to fight economic and financial crime. After an enumeration of the legal bases for measures of criminal law, it will take a closer look at one of these legal bases, Art 83(2) TFEU. It will reflect on the interplay between administrative and criminal law and conclude with a brief outlook on the possibilities to fight economic and financial crime in the near future.

1  The views expressed here are solely those of the author in his private capacity and do not necessarily reflect the views of the European Commission. 2  Case 68/88 Commission v Greece [1989] ECR-2965. 3  Commission, ‘Proposal for a Council Regulation on the Establishment of the European Public Prosecutor’s Office’, COM (2013) 534 final, 17 July 2013.

226  Jeroen Blomsma II.  SPECIAL NATURE OF CRIMINAL LAW

Those seeking to counter unwanted and damaging behaviour often call for the criminalisation of this behaviour at national or Union level. Criminal law is however not a panacea. Criminal sanctions are very intrusive and should only be used as a last resort, where other tools of enforcement fail. From a European perspective, criminal law is a sensitive policy field because differences between the national systems remain substantial, regarding the type and level of sanctions, as well as the classification of certain conduct as an administrative or criminal offence. This sensitivity of criminal justice is institutionalised in the Treaty of Lisbon by strict requirements of subsidiarity. In addition to the general requirements of subsidiarity under Art 5 TFEU, Protocol 2 to the Treaty allows national parliaments to object to a legislative proposal on the grounds that it breaches the principle of subsidiarity, as a result of which the proposal may be maintained, amended or withdrawn by the European Commission, or blocked by the European Parliament or the Council. The threshold to trigger this mechanism is lower for proposals relating to the area of freedom, security and justice.4 The Treaty of Lisbon also grants Denmark, Ireland and the UK a special position in the field of criminal law, giving them the choice to either not take part at all or to take part in selected measures.5 This challenge is mitigated by the circumstance that EU action in the field of financial and economic crime, in comparison to other types of crime, enjoys increased legitimacy. Due to the globalised nature of economies and financial markets, the argument that action can be better taken at EU than at national level is stronger. Regarding the protection of the EU’s financial interests, the very ­European nature of the protected interest seems to warrant deeper integration. Truly ‘European legal interests’ should be protected in an equivalent manner throughout the EU. Only the EU is in a position to develop binding legislation with effect for all Member States.6

A.  Legal Bases The legal bases that can be used to take measures to combat economic and financial crime reflect the special nature of criminal law. The Treaty provides for several legal bases for measures of substantive law. First, Art 83(1) TFEU allows for measures relating to, amongst others, money laundering and corruption. In 2014, the

4  The threshold provided for in Art 7(2) of Protocol no 2 to the TFEU is one quarter of the votes allocated to national Parliaments as opposed to the normal threshold of one third of the votes. 5  Protocols 21 and 22 to the Treaty of Lisbon. 6  See Art 325(4) TFEU.

Challenges in the Field of Economic and Financial Crime 227 Directive against counterfeiting of the Euro and other currencies was adopted on this basis.7 Second, Art 325 TFEU allows for the taking of measures in the field of the protection of the EU’s financial interests. The Commission proposed a Directive on the fight against fraud and other offences against the financial interests on this legal basis (‘the anti-fraud Directive’), but the European Institutions are still discussing whether this would be the correct legal basis. It has been argued that the anti-fraud Directive should instead be based on Art 83(2) TFEU.8 Article 83(2) TFEU enables the EU legislator to adopt minimum rules with regard to the definition of criminal offences and sanctions in a particular EU policy area if this proves essential to ensure effective implementation of a EU policy in an area which has been subject to harmonisation measures. The provision emphasises the subsidiarity requirement. There can only be criminal legislation when this is essential for the effective enforcement of an EU policy. This underlines the idea that criminal law should be the last resort.

B.  Legislating in the Field of Criminal Law The above-mentioned provision of Art 83(2) TFEU is not one of the most clearcut provisions in the Treaty of Lisbon. In order to ensure consistency, the European Commission therefore provided guidance on the application of this provision in a 2011 Communication.9 The main points of these guidelines are explained here and applied to a concrete case of financial crime: market abuse and insider dealing. The decision to harmonise substantive criminal law can only follow a thorough necessity and proportionality test on whether criminal law measures would achieve the stated objective. It is necessary to analyse whether measures other than criminal law measures—for example, civil or administrative sanction regimes— would not sufficiently ensure policy implementation, and whether criminal law could address the problems more effectively. Action can only be taken where enforcement choices in the Member States do not yield the desired result and levels of enforcement remain uneven. As a second step, it should be decided which criminal law measures are to be taken. Article 83 of the Treaty allows the EU legislator to set ‘minimum rules’ regarding the definition of criminal offences and sanctions, requiring Member States to legislate in a way that corresponds to the minimum level provided for in the legislative instrument. Member States are thus free to adopt wider definitions

7  Directive 2014/62/EU of the European Parliament and of the Council of 15 May 2014 on the protection of the Euro and other currencies against counterfeiting by criminal law, and replacing Council Framework Decision 2000/383/JHA, [2014] OJ L151/1. 8  See Council, ‘Opinion of the Legal Service’ Document no 15309/12, 22 October 2012. 9  Commission, ‘Towards an EU Criminal Policy: Ensuring the Effective Implementation of EU Policies through Criminal Law’, COM (2011) 573 final, 20 September 2011.

228  Jeroen Blomsma of criminal offences or more stringent sanctions, provided this does not violate fundamental rights, freedoms or other provisions of EU law.10 The requirements of necessity and proportionality are also important in deciding which criminal law measures are to be taken. Choices can be made on the type and level of penalties. The necessity for more harmonised sanctions must be demonstrated on the basis of clear factual evidence regarding the differences between Member States. Finally, under Art 49 of the EU Charter of Fundamental Rights, the severity of the penalty must not be disproportionate to the criminal offence. Following this guidance, Directive 2014/57/EU on criminal sanctions for market abuse was the first instrument adopted on the basis of Art 83(2) TFEU.11 Its preamble justifies why the use of criminal law for at least serious market abuse offences was considered essential to ensure the effective implementation of EU policy on fighting market abuse: Not all Member States have provided for criminal sanctions for some forms of serious breaches of national law implementing Directive 2003/6/EC. Different approaches by Member States undermine the uniformity of conditions of operation in the internal market and may provide an incentive for persons to carry out market abuse in Member States which do not provide for criminal sanctions for those offences. […] Common minimum rules would also make it possible to use more effective methods of investigation and enable more effective cooperation within and between Member States. […] The absence of common criminal sanction regimes across the Union creates opportunities for perpetrators of market abuse to take advantage of lighter regimes in some Member States. The imposition of criminal sanctions for market abuse will have an increased deterrent effect on potential offenders.

C.  Complementary Enforcement Financial and economic crime is often subject to both administrative and criminal sanctions. In many Member States, a complementary enforcement regime exists, allowing national authorities to apply administrative and/or criminal enforcement mechanisms for similar infringements. The EU created a complementary enforcement regime with the adoption of the ‘criminal’ Market Abuse Directive and the ‘administrative’ Market Abuse Regulation.12 Member States have to make sure that administrative sanctions can be

10  P Asp, The Substantive Criminal Law Competence of the EU (Stockholm, Stiftelsen Skrifter Utgivna av Juridiska Fakulteten vid Stockholms Universitet, 2012) 111. 11  Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (Market Abuse Directive), [2014] OJ L 173/179. 12  Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation) and Repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, [2014] OJ L 173/1.

Challenges in the Field of Economic and Financial Crime 229 imposed for the infringements defined in the Market Abuse Regulation. For ‘serious cases’ of these infringements, which are committed with intention, the Market Abuse Directive requires Member States to also provide for criminal sanctions. The Commission proposal drew the line between administrative and criminal offences at intentional cases of market abuse.13 The Council and the European Parliament opted for the criterion of serious offences committed with intent, leaving it to Member States to define in national law what is ‘serious’ with some (nonbinding) examples provided in the preamble. Recital 11 refers to cases where the impact on the integrity of the market, the actual or potential profit derived or loss avoided, the level of damage caused to the market, or the overall value of the financial instruments traded is high. The distinction makes clear that certain conduct can qualify for both administrative and criminal sanctions in national legislation. Conduct that should be criminalised under the Market Abuse Directive is by definition also covered by the requirements of the Market Abuse Regulation. Member States are free to choose which sanctions they impose in concrete cases. The EU legislator did not exclude that both administrative and criminal sanctions are imposed for the same behaviour. The EU legislator partially addressed possible overlaps, first by requiring that the imposition of criminal sanctions for offences in accordance with the Market Abuse Directive and of administrative sanctions in accordance with the Market Abuse Regulation does not lead to a breach of the principle of ne bis in idem.14 Second, Member States are granted an exception from the obligation to adopt administrative sanctions under the Market Abuse Regulation where these infringements already constitute criminal offences in national law.15 This exception reflects a fundamental difference between Member States in what is the most effective means of enforcement. For some Member States, administrative sanctions do not add value where criminal sanctions already apply. For others, administrative sanctions are the most efficient way of enforcement and should therefore be included in the toolkit of all enforcement authorities across the EU. Outside these parameters, national law determines what type of enforcement national authorities may use. In some Member States, the law clearly prescribes which type of enforcement should be used when, whereas in others authorities have more discretion. In general, it is noted that administrative law provides for a broader range of enforcement tools and these can be applied much easier than criminal measures. Criminal sanctions are often reserved for the gravest unlawful acts, where they can reflect a greater degree of social disapproval and stigma.16

13  Commission, ‘Proposal for a Directive of the European Parliament and of the Council on Criminal Sanctions for Insider Dealing and Market Manipulation’, COM (2011) 654 final, 20 October 2011. 14  Market Abuse Directive, recital 23. 15  Market Abuse Regulation, recital 72. 16  Commission, ‘Towards an EU Criminal Policy’ (n 9).

230  Jeroen Blomsma D.  What Are ‘Criminal’ Sanctions? When discussing the possible overlaps of administrative and criminal sanctions, it is important to be clear on what exactly are criminal sanctions. How does the EU perceive the concept of criminal sanctions? Does the EU take a formal approach, making the classification of the offence under domestic law decisive? Or does the EU apply a more comprehensive assessment, and, in line with the case-law of the European Court of Human Rights, does it also look at the nature of the offence and the nature and severity of the penalty?17 The question is of major importance for unlocking the more protective side of criminal law that comes into play when someone is suspected of or charged with a criminal offence. In particular, it is important for the question of the protection of ne bis in idem, the right not to be prosecuted twice, which is limited to subsequent criminal proceedings.18 On the one hand, the EU takes a formal approach because Member States are required to provide for criminal sanctions in their legislation. Where Member States have to provide for effective, proportionate and dissuasive criminal sanctions, like in the Environmental Crime Directive,19 this is exactly what they must do. Whether these sanctions can be considered criminal sanctions in substance is less important. First and foremost, they must have this formal label. On the other hand, the Court of Justice adopts a functional approach to the concept of criminal sanction, in line with the European Court of Human Rights.20 Sanctions that are formally labelled administrative can in fact be considered criminal in substance. An example can be found in the Market Abuse Directive. It recognises that administrative penalties can be considered as criminal penalties in certain cases, possibly leading to a violation of ne bis in idem. As explained above, Member States are called upon to avoid these situations. In this way, the requirements from the Court of Justice and the European Court of Human Rights are respected. But should the EU go further than these minimum requirements? Should it regulate in more detail the interplay between administrative and criminal law? In favour of this, it can be argued that currently, enforcement still operates on a first come first serve basis and conflicts of jurisdiction may

17  Engel and Others v the Netherlands (Apps no 5100/71, 5101/71, 5102/71, 5354/72 and 5370/72) (1976) ECHR Series A no 22; Grande Stevens and Others v Italy (Apps no 18640/10, 18647/10, 18663/10, 18668/10 and 18698/10) (2014) ECHR 230. 18  Charter of Fundamental Rights of the European Union, [2007] OJ C303/1, Art 50; Convention Implementing the Schengen Agreement of 14 June 1985 between the Governments of the States of the Benelux Economic Union, the Federal Republic of Germany and the French Republic on the gradual abolition of checks at their common borders, [2000] OJ L239/19, Art 54; Protocol 7 to the European Convention of Human Rights, [1984] ETS no 117 Art 4. 19  Directive 2008/99/EC of the European Parliament and of the Council of 19 November 2008 on the protection of the environment through criminal law, [2008] OJ L328/28. 20 Case C-489/10 Bonda, EU:C:2012:319, para 37; Case C-617/10 Hans Åkerberg Fransson, EU:C:2013:105, para 35.

Challenges in the Field of Economic and Financial Crime 231 occur, not only between authorities of different Member States, but also between (administrative and criminal) authorities of one Member State. Multiple sanctions can therefore be imposed for the same conduct. Finally, coordination is not as efficient as it could be. There can be coordination on a multinational level, for instance between criminal enforcement authorities in two Member States, but this becomes less evident when administrative authorities in one Member State need to cooperate with criminal authorities in another.21 With the increasing overlaps between administrative and criminal sanctions, these issues become more and more pressing.

III. OUTLOOK

This chapter will conclude with a brief outlook on the challenges for the coming years regarding financial and economic crime. A first challenge for new action is that the EU is supposed to focus in the coming years on the consistent transposition, effective implementation and consolidation of legal instruments and policy measures in place. This is expressed in the 2014 strategic guidelines of the European Council legislative and operational planning within the area of freedom, security and justice,22 and adopted by President Juncker in his opening statement to the European Parliament.23 The EU has adopted an enormous number of legislation in the last years. It makes sense to first ensure that this legislation is applied and to evaluate its effects in practice. In order to properly evaluate existing legislation and assess the need for new legislation, the EU needs to have at its disposal sufficient statistical data. In criminal law, this is a problem, because many legal systems do not structurally collect comprehensive data on things such as on-going prosecutions, acquittals and sanctions imposed.24 The shift in focus from legislation to implementation coincides with an important turning point in the history of EU criminal justice. As of 1 December 2014, it no longer has a special status: all EU policies for police and criminal justice have become ‘normal’ EU policies. The Court of Justice will play its full role, first, as

21  See M Luchtman and JAE Vervaele, ‘Enforcing the Market Abuse Regime: Towards an Integrated Model of Criminal and Administrative Law Enforcement in the European Union?’ (2014) 2 New Journal of European Criminal Law 192, 213–216. 22  Council, ‘European Council 26/27 June 2014—Conclusions’, Document no EUCO 79/14, 27 June 2014. 23  JC Juncker, ‘A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change—Political Guidelines for the Next European Commission’, Opening Statement in the E ­ uropean Parliament Plenary Session’, Strasbourg, 15 July 2014, available at http://ec.europa.eu/priorities/docs/ pg_en.pdf, accessed 27 February 2015. 24  Some progress has been made; see, for instance: Directive 2014/42/EU of the European Parliament and of the Council of 3 April 2014 on the freezing and confiscation of instrumentalities and proceeds of crime in the European Union, [2014] OJ L 127/39, Art 11.

232  Jeroen Blomsma an interlocutor for national courts as all will now be able to turn to the Court for preliminary rulings, when they have doubts about the correct interpretation or application of a particular instrument. Second, the Court of Justice will also be able to fully play its part as ultimate reference point. This is linked to the European Commission’s new tasks in the field of criminal justice to check that agreed rules are properly transposed into national legislation. The European Commission will continue to work with Member States, assisting them with the correct implementation of recently adopted instruments, including the Market Abuse Directive.25 Does this new focus mean there will be no more proposals for legislation in the area of financial and economic crime? Not necessarily. Based on a thorough evaluation of existing measures and continuous consultation of Member States and independent experts, the EU will continue to develop EU criminal justice over the coming years. The 2011 Commission Communication identified some areas of possible action and gave some basic, but useful guidelines for the legislator. In search for more consistency and coherency, these guidelines could be further elaborated in another Communication and possibly provide for the interpretation of basic legal concepts used in EU criminal law.26 In conclusion, many of the challenges that have been discussed in this chapter are here to stay. Criminal law will always be a sensitive policy field, deeply rooted in long-standing national legal traditions. It is therefore important that all EU initiatives on criminal law conform to the highest possible standards of subsidiarity and proportionality. Harmonisation of criminal law should only happen when there is clear evidence that it is necessary. At the same time, we have now definitely left the third pillar behind us. This opens up many avenues to a better and more integrated approach to fight economic and financial crime.

25 

A first implementation workshop took place on 15 January 2015, in Brussels. Preliminary work has been done by C Peristeridou, The Principle of Legality in European Criminal Law (Cambridge, Intersentia, 2015); J Keiler, Actus Reus and Participation in European Criminal Law (Cambridge, Intersentia, 2013); J Blomsma, Mens Rea and Defences in European Criminal Law ­(Cambridge, Intersentia, 2012). 26 

12 Enforcing Prudential Banking Regulations in the Eurozone: A Reading from the Viewpoint of Criminal Law SILVIA ALLEGREZZA AND IOANNIS RODOPOULOS1

I. INTRODUCTION

E

ITHER SEEN AS a factual event, a normative situation or just a discursive artefact, the recent financial crisis has undeniably triggered major political developments in the EU and has led to a considerable reshaping of several aspects of EU law. New rules, institutions and mechanisms have been established, often through unconventional and controversial procedures, in order to protect the EU from further economic damage, or even from a radical political collapse. Although still in its infancy, the European Banking Union (EBU) not only constitutes undoubtedly one of the most far-reaching innovations in this context, but it can be considered as a milestone of the whole procedure of European integration until today. Amongst other innovations, the EBU includes a highly complex shared enforcement system—to a certain extent comparable to the one found in EU competition law—where stricto sensu supervisory, investigatory and sanctioning powers are shared between European and national authorities. The main criteria for the division of prerogatives are the ‘significant’ or ‘non-significant’ character of the supervised entities, the legal personality of the addressees of the measures and sanctions (natural or legal persons) and the legal characterisation of the misconduct (administrative or criminal). As far as the last criterion is concerned, the solution adopted (unified administrative-punitive sanctions applied at the EU level, combined with harmonised administrative and barely harmonised criminal sanctions applied at the national

1 This article is part of the project ‘The Enforcement Dimensions of EU Banking Regulations (EUBAR)’, undertaken in the University of Luxembourg by Professor Silvia Allegrezza and financed by the Fonds National de la Recherche du Luxembourg (FNR). As the project is still ongoing, the considerations and opinions expressed herein should not be considered as definitive.

234  Silvia Allegrezza and Ioannis Rodopoulos level) should not be of surprise to anyone who has even superficially followed the development of EU ‘punitive’ law. Moreover, centralising at the EU level the control of systemically important entities, and leaving the control of ‘less significant’ entities and natural persons to national authorities seems legally, politically and economically coherent. Nevertheless, despite this ostensible coherence, a thoughtful study of the EBU legal framework brings up to light several unclear aspects that can prove problematic in terms of efficiency and dangerous in terms of legal security. From a criminal law perspective, some of the main questions that arise are: to which extent are the administrative measures and sanctions, applied by the European Central Bank (ECB) and the Single Resolution Board (SRB), punitive or even ‘criminal in nature’? Do these measures and sanctions sufficiently respect the fundamental principles of substantive (legality, certainty, predictability, proportionality, etc) and procedural (defence rights, ne bis in idem, judicial review, etc) punitive law? What place is left for traditional (national) criminal law in prudential banking regulation? In order for these questions to be answered, this chapter gives a brief descriptive overview of the enforcement-related aspects of the EBU framework in section II. These elements consisting mainly of administrative procedures and sanctions, the focus then shifts to the normative interactions between the EBU enforcement system and ‘hard core criminal law’ in section III. Synthesising the first two parts, section IV examines the possibility of a more coherent enforcement framework, where criminal law could serve not only as an enforcement tool itself, but also as a normative and epistemological paradigm for non-criminal punitive mechanisms.

II.  THE EUROPEAN BANKING UNION ENFORCEMENT MECHANISMS: A SHARED ENFORCEMENT MODEL FOR THE EUROZONE

The widely accepted correlation between the financial crisis and flaws in the previous dispersed regulatory and supervisory schemes led to a convergence towards high global prudential standards and an integrated enforcement system.2 In order to conciliate this need with the existing EU Treaty framework, the designing of 2  See inter alia ‘The High-Level Group on Financial Supervision in the EU: Report’ chaired by Jacques de Larosière, Brussels, 25 February 2009; M Dewatripont, J-C Rochet and J Tirole (eds), Balancing the Banks: Global Lessons from the Financial Crisis (Princeton, Princeton University Press, 2010); E Wymeersch, K Hopt and G Ferrarini (eds), Financial Regulation and Supervision: A Post-Crisis Analysis (Oxford, Oxford University Press, 2012), E Ferran, N Moloney, JG Hill and JC Coffee Jr, The Regulatory Aftermath of the Global Financial Crisis (Cambridge: Cambridge University Press, 2012) notably 1–110 and 111–202. For a more sceptical approach to the interaction between factual and legal crises, see inter alia A-J Arnaud, ‘Crise contemporaine de nos sociétés, crise du droit et réflexion’ (Conférence prononcée le 23 novembre 1981 au Centre de philosophie du droit de l’Université del Zulia, Maracaïbo, Vénézuéla) (1997) 20 Droit et Société 20, 1–14; I Rodopoulos, ‘La crise financière est-elle aussi une crise du droit pénal? Esquisse d’une dialectique entre une crise factuelle et une crise normative’ (2013) 1 Revue de Science Criminelle et de Droit Pénal Comparé 1 et seq.

Enforcing Prudential Banking Regulations in the Eurozone 235 the Banking Union has been, as Eilís Ferran has observed, ‘an exercise in sophisticated legal gymnastics’, involving ‘high-stakes political manoeuvring and pragmatic decision making’.3 The outcome of this ‘exercise’ has been the adoption of a common corpus of prudential rules (the ‘Single Rulebook’), accompanied by a particularly intricate enforcement system based on two mechanisms; a Single Supervision Mechanism (SSM) and a Single Resolution Mechanism (SRM), which are themselves based on the cooperation of European and national actors. Finally, this Daedalian normative architecture becomes even more chaotic by some rather enigmatic references, found especially in the Directive 2013/36/EU of 26 June 2013 (CRD IV)4 and in the SSM Framework Regulation (SSMFR)5 to a potential, alternative or cumulative, recourse to criminal law.6 Although most of the provisions related to prudential supervision and bank resolution could fall under a lato sensu understanding of the concept of enforcement,7 the discussion here will focus on the stricto sensu enforcement aspects, which could possibly interfere with ‘hard core criminal law’:8 the investigatory (subsection A) and sanctioning (subsection B) powers within the SSM and the SRM, as well as the rules on judicial protection related to these powers (subsection C). This chapter will only focus on the centralised aspects of these powers, leaving aside a detailed analysis of the investigatory and sanctioning powers of the national competent authorities (NCAs) as they are provided for by national law.

A.  Investigatory Powers Within the SSM and the SRM Notwithstanding some significant differences, mainly with regard to their scope, their legal basis,9 as well as the legal nature of the principal actors

3  E Ferran, ‘European Banking Union: Imperfect but It Can Work’, in D Busch and G Ferrarini (eds), European Banking Union (Oxford, Oxford University Press, 2015) 61. 4  Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing directives 2006/48/EC and 2006/49/EC, [2013] OJ L 176/338. 5  Regulation (EU) No 468/2014 of the European Central Bank of 16 April 2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (ECB/2014/17), [2014] OJ L 141/1. 6  On this question, see section III.A. 7  Indeed, even a refusal of authorisation to take up the business of a credit institution or a resolution decision could be considered as modes of enforcement. 8  Therefore, administrative measures such as withdrawals of authorisation, will be considered—in spite of their potentially ‘punitive character’ and although they are clearly ‘sanctions’ in the broad sense of the term—reparatory measures and will thus be excluded from the present analysis. Nevertheless, it will be argued that periodic penalty payments, despite their supposedly ‘preventive’ or ‘compelling’ nature, also present a clearly punitive nature and will thus be dealt with. 9  The legal basis for the SSM is Art 127(6) of the Treaty on the Functioning of the European Union (TFEU). The legal basis for the SRM is Art 114 TFEU.

236  Silvia Allegrezza and Ioannis Rodopoulos involved,10 the supervisory and investigatory powers granted to the ECB by Arts 10 et seq of the SSM Regulation (SSMR)11—as completed by Art 141 et seq of the SSM Framework Regulation (SSMFR)—and the ones granted to the SRB by Arts 34 et seq of the SRM Regulation (SRMR)12 are rather similar.13 For the purpose of performing the tasks conferred on them, both authorities may require information and they may conduct investigations, as well as onsite inspections at the business premises of the concerned natural or legal persons.14 These powers are not necessarily limited to ‘significant banks’ but they can also apply in some cases to investigations involving less significant banks. More precisely, the ECB and the SRB may require the legal or natural persons, subject to Arts 4 SSMR and 2 SRMR respectively, to provide all information that is necessary in order to fulfil the tasks conferred on them by the two Regulations. In the case of the SSM, this also includes the provision of information at recurring intervals and in specified formats for supervisory and related statistical purposes, while, in the case of SRM, the SRB is also able to obtain, even on a continuous basis, any information necessary for the exercise of its functions, in particular on capital, liquidity, assets and liabilities concerning any institution subject to its resolution powers. It is worth mentioning that, in both cases, professional secrecy provisions do not exempt the concerned persons from the duty to supply the demanded information. Supplying that information cannot be deemed to be in breach of professional (including banking) secrecy (Arts 10 SSMR and 34 SRMR).15 As far as general investigatory powers of the ECB and the SRB are concerned, they include the right to require the submission of documents; to examine the books and records and take copies or extracts from such books and records; to obtain written or oral explanations from any legal or natural person or their representatives or staff; and to interview any other person who consents to be interviewed for the purpose of collecting information relating to the subject matter of an investigation. The investigations are launched on the basis of a decision of the

10  The ECB has the legal status of an EU institution (Art 13(1) of the Treaty on European Union (TEU)), while the SRB has the status of an EU agency (Art 42(1) SRMR). Although this difference can have important legal consequences (for example, with regard to the accountability regimes of the two authorities or to the ‘Meroni’ doctrine), it is not particularly significant for the issues dealt with in this article. 11  Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the ­European Central Bank concerning policies relating to the prudential supervision of credit institutions, [2013] OJ L287/63. 12  Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010, [2014] OJ L 225/1. 13  See also N Moloney, ‘European Banking Union: Assessing Its Risks and Resilience’,(2014) 51 Common Market Law Review 1609–70 and particularly 1642 et seq. 14  A contrario, no specific power is provided when it comes to private premises or vehicles of the managers or related staff. It is, however, worth mentioning that the texts are rather silent on the status of legal profession privilege. On this question, see section III.C. 15  See also section III.C.

Enforcing Prudential Banking Regulations in the Eurozone 237 ECB and the SRB respectively. In both cases, where a person obstructs the conduct of the investigation, the NCAs of the participating Member State where the relevant premises are located should afford, in accordance with national law, the necessary assistance, including facilitating the access to the business premises of the natural or legal persons (Arts 11 SSMR and 35 SRMR). Finally, the ECB and the SRB may, after prior notification to the relevant NCAs and, where appropriate, in cooperation with them, conduct all necessary on-site inspections at the business premises of the concerned natural or legal persons. Where the proper conduct and efficiency of the inspection require, the ECB and the SRB may also carry out the on-site inspections without prior announcement to those legal persons. The officials of the ECB and the SRB, or other persons authorised by the two authorities to conduct an on-site inspection, may enter any business premises and land of the legal persons subject to an investigation decision. As with the other investigatory measures, on-site inspections are launched on the basis of a decision of the ECB and the SRB respectively. Officials of the NCAs, as well as other accompanying persons authorised or appointed by them, can also participate in the on-site inspections and are supposed to actively assist the ECB and SRB officials and other persons authorised by them, under the supervision and coordination of the ECB and the SRB respectively. Where the officials of, and other accompanying persons authorised or appointed by, the ECB or the SRB find that a person opposes an ordered inspection, the NCAs of the participating Member States concerned should afford them the necessary assistance in accordance with national law. To the extent necessary for the inspection, that assistance may include the sealing of any business premises and books or records. Where that power is not available to the national resolution authorities concerned, the ECB and the SRB may exercise their powers to request the necessary assistance of other national authorities (Art 12 SSMR and 36 SRMR). In case of on-site inspections, when required by national law, judicial authorisation by national judicial authorities must be applied for.16 National judicial authorities may review the authenticity of the decision of the ECB or the SRB and the potentially arbitrary or excessive character of the coercive measures taken, and they may ask the ECB or the SRB for detailed explanations. However, neither the necessity for the inspection can be reviewed, nor can information on the files be demanded by national judicial authorities. The lawfulness of the ECB and the SRB decisions are subject to review only by the Court of Justice of the European Union (CJEU) (Arts 13 SSMR and 37 SRMR). Although these investigatory powers do not go far beyond those traditionally entrusted to administrative authorities at the national or the European level,17

16  It is worth mentioning that, a contrario, apart from on-site inspections, investigatory measures decided by the ECB or the SRB are not subject to judicial authorisation by national courts, which could prove problematic, taking into account the coercive nature of some of these measures. 17  See also, inter alia, O. Jansen, P. M. Langbroek (eds and research directors), Defence Rights during Administrative Investigations (Antwerp, Intersentia, 2007) passim.

238  Silvia Allegrezza and Ioannis Rodopoulos there are still potentially problematic issues, especially when administrative investigations may lead to imposing criminal or ‘quasi-criminal’ sanctions. For instance, problems can arise with regard to the duty of the concerned persons to supply the requested information, as far as legal professional privilege and the protection against self-incrimination are concerned, with regard to the principle of separation between investigative and adjudicative functions within the same administrative authority, as well as with regard to the requirement of some national legal orders for judicial authorisation for some of the aforementioned investigatory measures.18

B.  Sanctioning Powers Within the SSM and the SRM Beyond their investigatory and supervisory powers, the ECB and the SRB are entitled, in certain cases, to impose sanctions. The relevant regime is defined by a fairly complex corpus of European provisions, of diverse legal nature, which have in turn to be harmoniously combined with the—highly disparate—domestic legal orders. It is worth remembering, however, though that the ECB has been empowered to impose administrative sanctions since 1998.19 Previously limited to the context of its monetary tasks, the sanctioning powers of the ECB have been extended by the SSMR to cover its supervisory tasks for breaches of directly applicable acts of EU law (Art 18(1) SSMR), as well as of ECB regulations and decisions (Art 18(7) SSMR). Similar prerogatives are granted to the SRB by Arts 38 and 39 SRMR, for an enumerated list of infringements (Art 38(2) and 39(1) SRMR, respectively). Moreover, in addition to these direct sanctioning powers, the ECB may ask the NCAs to impose penalties in case of infringements of relevant national legislation, including national rules implementing EU Directives (Art 18(5) and 4(3) SSMR). For the time being, this indirect sanctioning power concerns mainly the rules implementing the CRD IV, which invite Member States to provide for ‘effective, dissuasive and proportionate’ administrative penalties and other administrative measures, in order to ensure compliance with the obligations deriving from the

18 

See also section III.C. See Council Regulation (EC) No 2532/98 concerning the powers of the European Central Bank to impose sanctions, [1998] OJ L 318/4, as amended by Council Regulation (EU) No 2015/159 of 27 ­January 2015 amending Regulation (EC) No 2532/98 concerning the powers of the European ­Central Bank to impose sanctions, [2015] OJ L 27/1 (‘Regulation 2532’) and ECB Regulation (EC) No 2157/1999 of 23 September 1999 on the powers of the European Central Bank to impose sanctions (ECB/1999/4), [1999] OJ L264/21, as amended by Regulation (EU) No 469/2014 of the ­European ­Central Bank of 16 April 2014 amending Regulation (EC) No 2157/1999 on the powers of the ­European Central Bank to impose sanctions (ECB/1999/4) (ECB/2014/18), [2014] OJ L 141/51, which is however still limited to non-supervisory tasks (Art 1a). 19 

Enforcing Prudential Banking Regulations in the Eurozone 239 Directive itself, as well as from Regulation No 575/2013 of 26 June 2013 (CRR)20 (Rec 35 and Art 65(1) CRD IV). 1.  Direct Sanctioning Powers The direct sanctioning powers of the ECB and the SRB consist of the possibility to impose ‘administrative pecuniary penalties’ (Art 18(1) SSMR), as well as ‘fines and periodic penalty payments’ (Art 18(7) SSMR and Art 1(7) Reg 2532/98; Art 38 and 39 SRMR), which all fall under the general category of ‘administrative penalties’ (Art 120 SSMFR). As no clear distinction between these concepts is provided by the texts,21 one should understand penalties and sanctions, as well as administrative pecuniary penalties and fines, as practically synonymous.22 a.  Administrative Pecuniary Penalties More precisely, Article 18(1) SSMR provides the ECB with the power to impose specific pecuniary penalties if a legal person under its supervision, intentionally or negligently, breaches a ‘requirement under relevant directly applicable acts of Union law’ (ie. the CRR and any technical standards adopted in the form of Regulations), ‘in relation to which relevant Union law makes administrative pecuniary penalties available to NCAs’ (ie Art 67 CRD IV). A doctrinal discordance has appeared on whether Art 18(1) SSMR is applicable to both ‘significant’ and ‘less significant’ entities.23 Although the SSMR is rather unclear on this point,24 it can be deduced from Art 6 SSM and, notably, from Art 134 SSMFR that Art 18(1) SSMR is only applicable to ‘significant’ supervised entities.25 As far as the magnitude of the applicable penalties is concerned, Art 18(1) SSMR provides that administrative pecuniary penalties can reach ‘up to twice the

20  Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, [2013] OJ L 176/1. 21  Furthermore, the description of administrative pecuniary penalties in Art 18(1) SSMR and of fines in Art 4a Regulation 2532/98 as amended by Regulation 2015/159 is completely identical. The notion of fines under Art 38 SRMR is also the same, although the modes of calculation are slightly different and the maximum amount of the fines is significantly lower. 22  While administrative penalties, fines and periodic penalty payments are classified separately in the SSMR, in the SRMR, fines and periodic penalty payments are classified as subcategories of penalties. See also A De Moor-van Vugt, ‘Administrative Sanctions in EU Law’ (2012) 5(1) Review of ­European Administrative Law 5–48, 12. For the distinction between administrative penalties and measures, which is also not entirely clear, see, inter alia, R D’Ambrosio, ‘Due Process and Safeguards of the Persons Subject to SSM Supervisory and Sanctioning Proceedings’ (2013) 74 Banca d’Italia Quaderni di Ricerca Giuridica della Consulenza Legale 16 et seq. 23  See D’Ambrosio, ‘Due Process and Safeguards’ (n 22) 38 et seq. 24  Since Rec 36 and Art 4 SSMR seem to imply that the only relevant distinction with regard to the potential addresses of the sanctions is the one between natural and legal persons. 25  See also C Gortsos, The Single Supervisory Mechanism (SSM): Legal aspects of the first pillar of the European Banking Union (Athens, Nomiki Bibliothiki, 2015) 228.

240  Silvia Allegrezza and Ioannis Rodopoulos amount of the profits gained or losses avoided because of the breach where those can be determined, or up to 10% of the total annual turnover, as defined in relevant Union law, of a legal person in the preceding business year or such other pecuniary penalties as may be provided for in relevant Union law’.26 In any case, the imposed penalties must be, according to the classic leitmotiv of EU punitive law, ‘effective, proportionate and dissuasive’ (Art 18(3) SSMR). It is thus to be expected that the ECB will consider a range of factors, among them the level of cooperation shown by the supervised entity, the seriousness, the repetition, the frequency and the duration of the offence, any potential profits obtained through it, the size of the supervised entity and—potentially—prior sanctions imposed by other authorities based on similar facts.27

In order to determine whether to impose a penalty and in determining the appropriate penalty, the ECB is expected to ‘cooperate closely’ with the NCAs (Art 18(3) and 9(2) SSMR). b.  Fines and Periodic Penalty Payments Apart from the administrative pecuniary penalties provided for by Art 18(1) SSMR, in case of a breach of ECB regulations or decisions, the ECB may impose sanctions in accordance with Regulation 2532/98 (Art 18(7) SSMR). These sanctions consist of fines, defined as ‘a single amount of money which an undertaking is obliged to pay as a sanction’, and periodic penalty payments, defined as ‘amounts of money which, in case of a continued infringement, an undertaking is obliged to pay either as a punishment, or with a view to forcing the persons concerned to comply with the ECB supervisory regulations and decisions’ (Art 1(5) and (6) Reg 2532/98 as amended by Reg 2015/159). Regarding the potential addressees of these sanctions, a literal interpretation of Art 18(7) SSMR, combined with Arts 1(3) and 2(1) Reg 2532/98, could give the false impression that fines and periodic penalty payments in the sense of Art 18(7) SSMR could be applied to both legal and natural persons. However, a teleological interpretation, based on Recital 53 SSMR,28 Regulation 2015/159,29 as well as on

26  Moreover, according to Art 18(2) SSMR, ‘where the legal person is a subsidiary of a parent undertaking, the relevant total annual turnover referred to in paragraph 1 shall be the total annual turnover resulting from the consolidated account of the ultimate parent undertaking in the preceding business year’. 27  G Schuster, K Lackhoff and JE Windthorst, The SSM Framework Regulation Part 4: Investigatory measures and santioning powers (Freshfields Bruckhaus Deringer LLP, June 2014) 3. 28  ‘Nothing in this Regulation should be understood as conferring on the ECB the power to impose penalties on natural or legal persons other than credit institutions, financial holding companies or mixed financial holding companies, without prejudice to the ECB’s power to require national competent authorities to act in order to ensure that appropriate penalties are imposed.’ 29  Which, without explicitly excluding natural persons, is clearly referring only to legal persons.

Enforcing Prudential Banking Regulations in the Eurozone 241 Art 122 SSMFR,30 leads to the conclusion that sanctions, according to Art 18(7) SSMR, can only be imposed on legal persons. Furthermore, since the legal basis for this restriction is not only the SSMFR but the SSMR itself, an extension of these powers to natural persons is not possible by a simple amendment of the SSMFR. A revision of primary legislation would be necessary as well. That being said, contrary to Art 18(1) SSMR, Art 18(7) SSMR is not limited to ‘significant’ supervised entities but concerns ‘less significant’ entities as well, where the relevant ECB regulations or decisions impose obligations on these e­ ntities ­vis-à-vis the ECB. Similarly to the sanctioning powers accorded to the ECB within the SSM, those accorded to the SRB within the SRM also consist of fines and periodic penalty payments, which are imposed on entities which, intentionally or negligently (Art 38(1) SRMR), (a) do not supply the information requested in accordance with Art 34 SRMR; (b) do not submit to a general investigation in accordance with Art 35 SRMR or an on-site inspection in accordance with Art 36 SRMR; (c) do not comply with a decision addressed to them by the SRB pursuant to Art 29 SRMR (Art 38(2) SRMR). Where the SSM and the SRM sanctions differ significantly is the scale of the sanctions, as well as the enforcement procedure. The first difference can be explained, not only by the different nature and gravity of the sanctioned infringements, but also by the different rationale of the two mechanisms, including the limited utility of imposing heavy pecuniary penalties to an entity under resolution. More precisely, according to Art 4a of Regulation 2532/98, as amended by Regulation 2015/159, the upper limit of fines applied by the ECB ‘shall be twice the amount of the profits gained or losses avoided because of the infringement where these can be determined, or 10 per cent of the total annual turnover of the undertaking’. In other words, the fines mentioned in Art 18(7) SSMR are identical in nature and magnitude with the administrative pecuniary penalties of Art 18(1) SSMR. For periodic penalty payments, the upper limit is fixed at 5 per cent of the average daily turnover per day of infringement. Periodic penalty payments may be imposed in respect of a maximum period of six months from the date stipulated in the decision imposing the periodic penalty payment. In the context of the SRM, the basic amount of the imposed fines also corresponds to a percentage of the total annual net turnover of the sanctioned entity, which however can range, for the first two cases envisaged in Art 38(1) SRMR,

30  ‘The ECB shall impose administrative penalties, as defined in Article 120(b), if there is a failure to comply with obligations under ECB regulations or decisions on: (a) significant supervised entities, or (b) less significant supervised entities where the relevant ECB regulations or decisions impose obligations on less significant supervised entities vis-à-vis the ECB’. Of course, in the case of the SSMFR, the interpretation is rather literal than teleological. However, the SSMFR is only an act of secondary legislation. With regard to the interpretation of primary legislation, it can be used only teleologically.

242  Silvia Allegrezza and Ioannis Rodopoulos from 0.05 per cent to 0.15 per cent, while for the third it can go from 0.25 per cent to 0.5 per cent. In order to decide whether the basic amount of the fines should be set at the lower, the middle or the higher end of the limits referred to in the first subparagraph, the SRB should take into account the annual turnover in the preceding business year of the entity concerned (Art 38(3) SRMR). These basic amounts can be adjusted in case of a certain number of enumerated aggravating circumstances (Art 38(5) and (6) SRMR), according to a list of corresponding coefficients (Art 38(9) SRMR). In principle, the fines applied cannot exceed 1 per cent of the annual turnover of the concerned entity, except for cases where the entity has directly or indirectly benefited financially from the sanctioned infringement and where profits gained or losses avoided because of the infringement can be determined. In such cases, the fine should be at least equal to that financial benefit. Finally, in case of multiple infringements, only the higher fine relating to one of those infringements is applicable (Art 38(7) SRMR). The amount of periodic penalty payments is fixed at 0.1 per cent of the average daily turnover in the preceding business year (Art 39 (3) SRMR). Considering this fixed amount, the requirement for the periodic penalty payments to be effective and proportionate could seem redundant (Art 39 (2) SRMR). However, although this requirement cannot guide the nature and the magnitude of the penalty itself, it can guide the decision on whether a periodic penalty payment should be imposed or not. Finally, as with the periodic penalty payments imposed by the ECB, penalties imposed by the SRB within the SRM may not exceed a period of six months following the notification of the Board’s decision (Art 39 (4) SRMR). Concerning the enforcement procedure, the main difference between the SSM and the SRM consists in the fact that, while the ECB Regulation provides a complete set of procedural rules on the enforcement of administrative penalties (Art 123 et seq SSMFR), in the case of the SRM, enforcement is governed ‘by the applicable procedural rules in force in the participating Member State in the territory of which it is carried out’ (Art 41(3) SRMR). c.  Publication of Sanctions According to both the SSM and the SRM regulations, all sanctions applied by the ECB and the SRB have to be published (Art 18(6) SSMR, 132(1) SSMFR, 1a(3) Reg 2532/98 as amended by Reg 2015/159 and 41(1) SRMR), unless, but only in the context of the SRM, such disclosure could endanger the resolution of the entity concerned. The objective of this requirement is twofold:31 first, to increase the

31  A third rationale could be also invoked, with regard to the protection of the market. This concerns though mostly the publication of measures while an infringement is still ongoing. For sanctions applied for past infringements, the basic rationales are the two mentioned above.

Enforcing Prudential Banking Regulations in the Eurozone 243 transparency of ECB decision-making procedures;32 second, to enhance, through a ‘name and shame’ logic, the dissuasive effect of the sanctions.33 In cases though where publication of penalties could ‘jeopardise the stability of the financial markets or an on-going criminal investigation’, or ‘cause, insofar as it can be determined, disproportionate damage’ to ‘the supervised entity concerned’ (Art 132(1) SSMFR) or to ‘the natural or legal persons involved’ (Art 41(1) SRMR), decisions regarding administrative penalties should be published on an anonymised basis. Furthermore, in the case of the SRM, penalties should also be published on an anonymous basis ‘where the information published contains personal data and following an obligatory prior assessment, such publication of personal data is found to be disproportionate’.34 Alternatively, in all these cases, the publication of the data in question may be postponed for a reasonable period if it is foreseeable that the reasons for anonymous publication will cease to exist within that period (Art 132(1) SSMFR, 1a(3) Regulation 2532/98 and 41(1) SRMR). It should be mentioned that, since the amendment of Regulation 2532/98 by Regulation 2015/159, any decision of the ECB imposing sanctions, either under Art 18(1) or Art 18(7) SSMR, has to be published without any undue delay, ‘whether or not such decision has been appealed’ (Art 18(6) SSMR and 1a(3) Reg 2532/98).35 As will be shown below,36 the immediate publication of sanctions, even when the relevant decision has been appealed, is not without problems, especially with regard to the presumption of innocence. The SRMR is silent on this question. However, the obligation of the SRB to provide information to the EBA ‘on the appeal status and outcome thereof ’ does not imply that this information has to be published. It rather suggests the contrary. Furthermore, although the appeals lodged against decisions of the SRB according to Art 85(3) SRMR do not have suspensive effect (Art 85(6) SRMR), the general rule of Art 41(3) SRMR,37

32  See European Parliament, Committee on Economic and Monetary Affairs, Report on the draft Council regulation amending Regulation (EC) No 2532/98 concerning the powers of the European Central Bank to impose sanctions; rapporteur: Kay Swinburne (10896/2014—C8-0090/2014— 2014/0807(CNS)), explanatory statement, §4.1. 33  See Rec 38 CRD IV. In the case of the SSM, the punitive character of the publication is further reinforced by the obligation for the ECB to keep relevant information published on its official website for at least five years (Art 132(3) SSMFR and 1a(3) Regulation 2532/98). In the case of a resolution procedure, such a provision would not make much sense; hence, its omission is justified. 34  The reason for omitting this criterion in the provisions on sanctions imposed by the ECB is that ‘personal data’ is understood in EU law as only referring to physical persons (see Art 2a Directive 95/46/ EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, [1995] OJ L281/31), who are not concerned by the ECB’s direct sanctioning powers. 35  However, if an appeal to the Court of Justice in respect of a decision imposing a sanction is pending, the ECB shall, without undue delay, also publish on its official website information on the status of the appeal in question and the outcome thereof (Art 132(2) SSMFR and 1a(3) Regulation 2532/98). 36  See section III.C. 37  ‘Enforcement shall be governed by the applicable procedural rules in force in the participating Member State in the territory of which it is carried out.’

244  Silvia Allegrezza and Ioannis Rodopoulos combined, mutatis mutandis, with Art 68(1) CRD IV,38 seems to permit, in case of appeal, a suspension of the publication of the contested decision. 2.  Indirect Sanctioning Powers Apart from its direct sanctioning powers, the ECB39 is also entitled, in the case of breaches of national legislation transposing relevant directives or any other ‘relevant national legislation which confers specific powers which are currently not required by Union law’, to ‘require NCAs to open proceedings with a view to taking action in order to ensure that appropriate penalties are imposed’ (Art 18(5) and 4(3) SSMR). At the time of writing, the ‘relevant directive’ referred to is the CRD IV. In its Articles 64 et seq, the CRD IV provides for harmonised rules as regards the powers of the NCAs to impose penalties, the addressees of these penalties, the infringements for which penalties should be available to the NCAs,40 the ‘minimum of maximum’ penalties that should be available to the NCAs, as well as the publication of the imposed penalties, the exchange of information related to and the effective application of these penalties, the reporting of breaches and the right to appeal. The cases where this indirect sanctioning power may apply—which are not limited to ‘significant supervised entities’—are further defined by Art 134(1) SSMFR. They include: (a) ‘non-pecuniary penalties in the event of a breach of directly applicable Union law by legal or natural persons, as well as any pecuniary penalties in the event of a breach of directly applicable Union law by natural persons’; (b) ‘any pecuniary or non-pecuniary penalties in the event of a breach by legal or natural persons of any national law transposing relevant Union directives’; and (c) ‘any pecuniary or non-pecuniary penalties to be imposed in accordance with relevant national legislation which confers specific powers on the NCAs in Euro area Member States which are currently not required by the relevant Union law’. It should be noted that ECB’s request concerns only the opening of the proceedings and not their outcome.41 The decision on the imposition of punishments, as well as on their nature and magnitude is entirely left to the NCAs. Furthermore, as far as ‘significant supervised entities’ are concerned, and where necessary for the 38  ‘Member States shall ensure that the competent authorities publish on their official website at least any administrative penalties against which there is no appeal …’ 39  Such a possibility is not provided for the SRB by the SRMR. 40  These infringements also include breaches of the CRR. 41  Art 134(3) SSMFR: ‘An NCA of a participating Member State shall notify the ECB of the completion of a penalty procedure initiated at the request of the ECB pursuant to paragraph 1. In particular, the ECB shall be informed of the penalties imposed, if any.’

Enforcing Prudential Banking Regulations in the Eurozone 245 purpose of carrying out its task under the SSMR are concerned, NCAs can open proceedings only at the request of the ECB. However, NCAs may ask the ECB for a request to open proceedings (Art 134(2) SSMFR). In any case, penalties are imposed by the NCAs according to national—substantive and procedural—law, on the condition that they are effective, proportionate and dissuasive (Art 18(5) SSMR).

C.  Judicial Protection Within the SSM and the SRM Notwithstanding some obvious analogies between the SSM and the SRM, judicial protection is established in a quite different manner in the two mechanisms. Although a detailed analysis of the question is not possible here,42 some remarks are necessary, in order to illustrate the complexity of the organisational interactions within the two mechanisms of the EBU and the difficulties that could arise thereof. In the context of the SSM, supervisory decisions—including investigatory measures and penalties—taken by the ECB and directly addressed to credit institutions are subject to two different kinds of review: (a) an internal administrative review carried out by the Administrative Board of Review and covering also ECB decisions based on powers granted by national legislation (Art 24 SSMR), and (b) a judicial review.43 As far as the latter is concerned, no specific rules are provided for by the SSMR or the SSMFR; the applicable regime is the general one provided in Art 263 TFEU,44 according to which ECB decisions directly addressed to supervised entities can be challenged before the CJEU. Judicial review before the CJEU is also possible, always according to Art 263 TFEU, for decisions or instructions of the ECB which are of ‘direct and individual concern’ to the supervised entities, even in case these decisions or instructions have to be implemented by the NCAs and even if they are also based on national law. However, in case there is some autonomous decision-making power left to the NCAs when implementing decisions or instructions of the ECB, these decisions of the NCAs can only be challenged before national jurisdictions.45 Fines and periodic penalty payments applied within the SRM—but not investigatory measures46—are subject to administrative review by the Appeal Panel,

42  For such an analysis, see notably TMC Arons, ‘Judicial Protection of Supervised Credit Institutions in the European Banking Union’, in D Busch and G Ferrarini (eds), European Banking Union (n 3) 433–74; D’Ambrosio (n 22) passim. 43  Arons, ‘Judicial Protection’ (n 42) 442. 44  Art 24(11) SSMR: ‘This Article is without prejudice to the right to bring proceedings before the CJEU in accordance with the Treaties’. 45  See notably, Case C-133/12 P Stichting Woonlinie et al v Commission, EU:C:2014:105, para 55 et seq; Cases 41-44/70 NV International Fruit Company v Commission [1971] ECR 411, paras 25–26. For further analysis, see Arons (n 42) 445 et seq. 46  Since they are not referred to in Art 85(3) SRMR.

246  Silvia Allegrezza and Ioannis Rodopoulos established by the SRB according to Art 85(1) SRMR. The appeals have no automatic suspensive effect; the Appeal Panel may however suspend the execution of the sanction if the situation so requires (Art 85(6) SRMR). The Appeal Panel’s decisions, as well as the investigatory measures applied by the SRB, are subject to review by the CJEU, in accordance with the general provisions of Art 263 TFEU. Where the enforcement of sanctions is governed by applicable national procedural rules (Art 41(3) SRMR), the decisions of the SRB can only be challenged before the CJEU, on the condition that there has been no autonomous decision-making by the national authorities. Decisions autonomously taken by national authorities with regard to the enforcement of sanctions imposed by the SRB have to be challenged before national jurisdictions.47 Under both mechanisms, the CJEU may annul or declare invalid the challenged act or decision due to a lack of legality, which can take the form of a lack of competence, an infringement of an essential procedural requirement, an infringement of the TFEU and TEU or any rule relating to their application, or a misuse of power.48 Lastly, under Recital 61 of the SSMR and Art 87 of the SRMR, both the ECB and the SRB can be held liable according to Art 340 TFEU49 for damages incurred to the supervised entities or to third parties as a result either of inadequate supervision or wrongful decisions. Although this topic cannot be dealt here in depth,50 it is noteworthy that no limitations of liability or immunities of the ECB and the SRB are provided for by the texts, despite similar provisions that are found in national legal systems with regard to national supervisory authorities. However, according to opinions expressed in the doctrine, limitations can be justified, either on the legal basis of ‘the general principles common to the laws of the Member States’,51 or the criterion of ‘sufficiently serious violation’, as this has been formed by the CJEU case law.52

III.  THE INTERACTION BETWEEN ADMINISTRATIVE AND CRIMINAL ENFORCEMENT SYSTEMS WITHIN THE EBU LEGAL FRAMEWORK

As shown above, the enforcement tools provided for by the EBU legal framework consist of a combination of administrative coercive powers, measures and penalties. 47 

Arons (n 42) 460 et seq. ibid with further analysis on each one of the aforementioned categories. 49  For an in-depth analysis of this article, see notably K Lenaerts, I Maselis and K Gutman, EU Procedural Law (Oxford: Oxford University Press, 2014) 480 et seq. 50  For further analysis, see inter alia Arons (n 42) 469 et seq; P Athanassiou, ‘Financial Sector Supervisors’ Accountability: A European Perspective’, ECB Legal Working Paper Series, 12 August 2011; R D’Ambrosio, ‘The ECB and NCA Liability within the Single Supervisory Mechanism’ (2015) 78 Banca d’Italia Quaderni di Ricerca Giuridica della Consulenza Legale. 51  E Wymeersch, ‘The Single Supervisory Mechanism or ‘SSM’: Part One of the Banking Union’, Financial Law Institute Ghent University Working Paper Series, 2014-01, 62. 52  D’Ambrosio, ‘The ECB and NCA Liability’ (n 50); similarly Arons (n 42) 470. 48 

Enforcing Prudential Banking Regulations in the Eurozone 247 Obviously, these tools do not include stricto sensu criminal sanctions. Less obviously—but not surprisingly—no harmonisation of criminal sanctions is provided for by the CRD IV either.53 Nevertheless, criminal law is not entirely absent from the picture. It appears, on the one hand, to be a legitimate complementary enforcement tool, to which Member States can decide to have recourse, if they consider it necessary. On the other hand, it functions as a source of principle-based limits on the administrative-punitive prerogatives of both the European and the national competent authorities. Therefore, interactions between administrative penalties and criminal law within the EBU legal framework can take two forms: intersystemic and intrasystemic. The first kind of interaction concerns potential overlaps between administrative and criminal sanctions, which can be applied alternatively or cumulatively for the same facts (see subsection A). The second kind refers to cases where applicable administrative sanctions can be assimilated, due to their purpose, their nature and their gravity, to criminal ones, according to the relevant case law of the European Court of Human Rights (ECtHR) and the CJEU54 (see subsection B). Although these interactions are not necessarily problematic, conflicts can arise, since administrative and criminal enforcement, not only follow different rationales—a difference which is far from clear—but they are also subject to different fundamental principles.55 The question which emerges is thus under

53  For the reasons of this choice, see Commission Staff Working Paper Impact Assessment, accompanying the document ‘Proposal for a Directive of the European Parliament and the Council on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending Directive 2002/87/EC of the European Parliament and of the Council on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate’ Brussels, 20 July 2011, SEC(2011) 952 final, 61: ‘The respondents are divided on requiring the Member States to introduce criminal sanctions for some violations of the EU financial services legislation. Although respondents generally agree that criminal sanctions could considerably increase deterrence, different views were expressed on whether the EU should act in this area. Some respondents, including public authorities, a consumer association and to a lesser degree some industry representatives, are favourable for introducing the obligation for the Member States to foresee criminal sanctions under strict conditions. Thus in their view, criminal sanctions could be introduced for the most serious violations for which administrative sanctions are not sufficiently deterrent and under strict compliance with fundamental rights and with proportionality and subsidiarity principles. Other respondents, in particular some public authorities and to larger degree the industry, are not favourable for requiring the Member States to criminalise certain violations of the EU financial services legislation. Some respondents, who shared the view that criminal sanctions could be more deterrent than administrative sanctions in some cases, considered that it should be left to the Member States to decide when and for which infringements to introduce criminal sanctions. Other respondents questioned the assumption that the criminal sanctions are more efficient than administrative sanctions. In their view, it is in general more difficult to handle criminal cases because of the higher procedural and evidence requirements in criminal proceedings and because of the reliance on criminal courts, which are not always well prepared to assess complex financial issues. Other respondents with a negative view on criminal sanctions pointed at the risk of having divergences in the application of the EU law since it is not easy to foresee a cooperation mechanism among criminal courts within the EU.’ 54  Of course, intersystemic and intrasystemic interactions can appear simultaneously. 55  It should be noted that this complexity ratione materiae is further enhanced by a complexity ratione loci, which is caused by the simultaneity and interdependence of national law principles, EU law and international law principles, as well as by the interpretation given to these principles by national or supranational jurisdictions.

248  Silvia Allegrezza and Ioannis Rodopoulos which conditions, to which extent and in which ways, the aforedescribed enforcement mechanisms should be subject to the principles traditionally associated with criminal law (see subsection C).

A. Intersystemic Interactions: The—Cumulative and/or Alternative—Use of Administrative and Criminal Sanctions Intersystemic interactions between administrative and criminal enforcement mechanisms can refer to the normative effects that either administrative law has on criminal law, or vice-versa. In the first case, interactions have to be studied from the viewpoint of national criminal law systems and therefore cannot be dealt with here in depth. It should be noted however that, due to the principle of legality, the normative effects of administrative law on criminal law ought to be fairly limited. Criminally punishable conduct has to be defined entirely under criminal law norms. Of course, administrative law provisions, such as those contained, for example, in the CRR, can affect a judgment within a criminal trial, for example, on the cognitive aspects of the mens rea. However, soft law provisions, such those developed, for example, by the Basel Committee on Banking Supervision, could have similar normativity with regard to criminal law. The inverse case is more complex, since criminal law can be used, as mentioned before, either as a cumulative or as an alternative means of enforcement for breaches of European prudential regulations. Furthermore, despite various references to criminal law found in the CRD IV, in the SSMFR, in Reg 2532/98 and in the SRMR (but not in the SSMR), the margin of appreciation left to the Member States to use criminal law for such breaches remains in some cases quite unclear, as will be explained below. Even more unclear is the hierarchical priority existing, or not existing, between the two types of sanctioning systems (centralised/­administrative—national/criminal) in case of conflict. The difficulty and the complexity of establishing such a hierarchical priority are not only due to the complexity of the relevant general principles (precedence of EU law, state sovereignty in criminal matters, ‘ultima ratio’, proportionality, ne bis in idem) but they also stem from the specific texts themselves. More precisely, the CRD IV clearly states in Recital 42 that its provisions ‘should be without prejudice to any provisions in the law of Member States relating to criminal penalties’. Additionally, according to Art 65(1) CRD IV, Member States are required to ‘lay down rules on administrative penalties and other administrative measures in respect of breaches of national provisions transposing this Directive and of Regulation (EU) No 575/2013’, ‘without prejudice to […] the right of Member States to provide for and impose criminal penalties’. Therefore, in principle, and without prejudice to the ne bis in idem principle,56 administrative 56 

See section III.C.

Enforcing Prudential Banking Regulations in the Eurozone 249 and criminal sanctions can be provided for and applied cumulatively.57 However, where Member States opt for criminalising infringements for which they are required by the CRD IV to adopt administrative penalties—or where these infringements are covered by more general criminal law provisions—they are discharged from their obligation to adopt administrative penalties for the same breaches.58 In this case, which presents some interesting analogies with the 2014 market abuse legal framework,59 criminal sanctions can be used as an alternative to the administrative penalties that Member States are supposed to adopt according to the Directive, and thus the indirect sanctioning powers of the ECB, according to Art 18(5) SSMR, can be circumvented.60 This is not, though, the case for Arts 18(1) and 18(7) SSMR. As mentioned above, Art 18(1) empowers the ECB to impose sanctions for breaches of requirements of ‘directly applicable Union law’ (ie the CRR), ‘in relation to which administrative pecuniary penalties shall be made available to competent authorities under the relevant Union law’. Since the relevant EU law (the CRD IV) makes administrative pecuniary penalties available to competent authorities for breaches of requirements of directly applicable Union law (the CRR), Art 18(1) is applicable whether Member States have adopted—or not—administrative sanctions or have opted for criminal ones instead. This is further confirmed by several provisions of the SSMFR (for example, Arts 130(5), 132(1a), 136), which clearly refer to cases where administrative procedures might coincide with criminal ones. The same conclusion can be deduced, with regard to the penalties imposed by the SRB, from Article 41(1b) SRMR.

B. Intrasystemic Interactions: On the ‘Penal’ Nature of the Administrative Sanctions Apart from the intersystemic interactions described above, interactions between criminal and administrative law also appear within the same administrative-punitive

57  Such an understanding is further reinforced by other provisions of the Directive. For example, administrative penalties imposed by NCAs can be published on an anonymised basis, ‘where publication would jeopardise the stability of financial markets or an ongoing criminal investigation’ (Art 68(2-b) CRD IV); ‘confidential information […] may be disclosed only in summary or aggregate form, such that individual credit institutions cannot be identified, without prejudice to cases covered by criminal law’ (Art 53(1) CRD IV). 58 ‘Where Member States decide not to lay down rules for administrative penalties for breaches which are subject to national criminal law they shall communicate to the Commission the relevant criminal law provisions’ (Art 65(1) CRD IV). 59  See Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/ EC, [2014] OJ L173/1, Rec 72 and Arts 25 and 30. 60  That being said, it should be noted that, in most Member States, credit institutions cannot be punished under a criminal regime. See SEC(2011) 952 final (n 53) 8.

250  Silvia Allegrezza and Ioannis Rodopoulos system, due to the autonomous definition of criminal charge developed by the ECtHR and followed by the CJEU. It therefore should be examined, according the case law of the two jurisdictions, to which extent administrative penalties provided for by the SSMR and the SRMR are ‘criminal in nature’.61 In that sense, administrative penalties and fines, on the one hand, and periodic penalty payments, on the other hand, should be studied separately, due to their—supposedly—different functional purpose. 1.  Administrative Pecuniary Penalties and Fines As is well known, the ECtHR has constructed over the years an autonomous notion of ‘criminal charge’, in order for the procedural safeguards laid down in Art 6 of the ECHR to be applied independently of the ‘criminal’ or ‘administrative’ label given by national law to serious punishment.62 In order to define which administrative sanctions should be assimilated to criminal ones—at least to the extent that the right to a fair trial is guaranteed in both cases—the ECtHR has adopted and constantly followed a three-stage approach based on (a) the legal classification of the offence under national law, (b) the ratio legis of the offence and (c) the severity of the sanction (the ‘Engel criteria’). Despite its structural and functional differences with traditional criminal law63—and notwithstanding the fact that the EU has not yet acceded to the ECHR—EU administrative-punitive law is, at least to some extent, subject to the restraints imposed by the Engel criteria. This can not only deduced from the text of the EU treaties,64 but has also been confirmed by the CJEU case law.65 The question is to what extent ‘administrative pecuniary penalties’ and ‘fines’ provided for by the SSM and the SRM legal framework fulfil these criteria. As far as the first criterion is concerned, applicable penalties in both mechanisms, which, with regard to the case law of the ECtHR, have to be assimilated to those provided for by national law, are explicitly of administrative nature (Arts 18 SSMR and 41(2) SRMR).66

61  Administrative penalties provided for by national law implementing the CRD IV will not be examined here. 62  See notably ECtHR cases: Engel v the Netherlands, 8 June 1976, Series A, No 22, cons 82–83; Oztürk v Germany, 21 February 1984, Series A, No 22, cons 53; Benham v United Kingdom (App No 19380/92), 10 June 1996, cons 56; Bendenoun v France, 24 February 1994, Series A, No 284, cons 47; Grande Stevens and others v Italy, (App no 73053/01), 4 March 2014, para 94 et seq. 63 CE Paliero, ‘The Definition of Administrative Sanctions—General Report’ in O Jansen (ed), Administrative Sanctions in the European Union (Cambridge: Intersentia, 2013) 7. 64  Preamble and Art 52(3) of the Charter of Fundamental Rights of the European Union (2000/C 364/01); Art 6(3) TEU. 65  Case C-45/08 Spector Photo Group NV, Chris Van Raemdonck v Commissie voor het Bank-, Financieen Assurantiewezen, EU:C:2009:806, para 42 et seq; Case C-489/10 Criminal proceedings against Łukasz Marcin Bonda, EU:C:2012:319, para 37 et seq; Case C-617/10 Åklagaren v Hans Åkerberg Fransson, EU:C:2013:105, para 35. 66  See Case C-489/10 Bonda (n 65) 38.

Enforcing Prudential Banking Regulations in the Eurozone 251 Concerning the second criterion, these penalties are clearly ‘intended not as pecuniary compensation for damage but essentially as a punishment to deter reoffending’ and ‘are imposed under a general rule, whose purpose is both deterrent and punitive’.67 They are applied ‘by a public body with statutory powers of enforcement’ and they rely on a finding of an intentional or negligent infringement.68 Finally, mutatis mutandis, at least some of the described breaches are criminally punishable in the vast majority of the Member States.69 Therefore, the punitive character of administrative penalties and fines under Arts 18(1) and (7) SSMR and 38 SRMR is rather evident. The criterion of the severity of the penalty is more difficult to determine, taking into account that these penalties are addressed to ‘significant credit institutions’. That being said, even if the applicable penalties under the SRMR, or even under Art 18(7) SSMR, could be considered as not severe enough, the potential administrative penalties under Art 18(1) SSMR seem to be sufficiently severe to meet the Engel criteria.70 2.  Periodic Penalty Payments The punitive character of periodic penalty payments is more ambiguous. Initially, Regulation 2532/98 (Art 1(6)) defined them ‘as the amounts of money which, in the case of a continued infringement, an undertaking is obliged to pay as a sanction following the notification of a decision to initiate an infringement procedure’. This solely punitive function was contested by the ECB.71 With a clear reference to EU competition law,72 the ECB considered that periodic penalty payments should be available, not only as a consequence of an infringement, but also in order to compel undertakings to comply with its decisions. ECB’s recommendation was finally validated by Art 1(1a) of Regulation 2015/159, amending Art 1(6) of Regulation 2532/98, according to which ‘periodic penalty payments shall mean amounts of money which, in the case of a continued infringement, an undertaking

67  Bendenoun v France, 24 February 1994, Series A, No 284, cons 47. It should be noted that the first criterion applied by the ECtHR concerning ‘a given group with a particular status’ (which could be used to describe ‘significant supervised entities’) is not of relevance here, since it is clearly used to distinguish rather between disciplinary and criminal than administrative and criminal penalties. See also Oztürk v Germany (n 62) cons 53. 68  Benham v United Kingdom (Application No 19380/92) ECHR, 10 June 1996, cons. 56. 69  Oztürk v Germany (n 62) cons 53. 70  D’Ambrosio (n 22) 27. 71  Recommendation for a Council Regulation amending Regulation (EC) No 2532/98 concerning the powers of the European Central Bank to impose sanctions (ECB/2014/19), [2014] OJ C 144/2, III, Art 1: ‘[I]t should be clearly spelled out that the ECB may use periodic penalty payments not only to punish a continued infringement, but also to compel undertakings to comply with an ECB regulation or decision. […] As a result, the definition of “sanctions” should also be amended so that the reference to periodic penalty payments being imposed “as a consequence of an infringement” is deleted.’ 72  Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, [2003] OJ L 1/1, Art 24.

252  Silvia Allegrezza and Ioannis Rodopoulos is obliged to pay either as a punishment, or with a view to forcing the persons concerned to comply with the ECB supervisory regulations and decisions’. This solution is not without problems. Indeed, one can recognise an obvious ontological difference between periodic penalties and fines, both in terms of their rationale and of their modes of application.73 However, questioning the punitive character of periodic penalties seems theoretically incoherent and practically problematic; not only because considering that a ‘penalty’ has not a punitive character goes far beyond the acceptable margins of literal interpretation of legal terms, but also because the fact that a measure is intended to compel—in terrorem—compliance to a rule does not exclude its punitive character.74 It is very difficult to imagine cases where, in the absence of an infringement, a ‘periodic penalty’ could be justified, especially since the ‘non-compliance with the ECB supervisory regulations and decisions’ is ex definitio a punishable infringement. Certainly, as it has correctly been argued, ‘whether ‘periodic penalty payments’ are defined as ‘fines’ or as ‘astreintes’ carries somewhat different implications for the regime applicable. While both are subject to the full jurisdiction of the CJEU, the culpability principle applies to the fines but not to the astreintes; moreover, unlike fines, astreintes cannot be applied after the infringement has been terminated; both astreintes and fines can be applied to the same infringement without violating the ne bis in idem principl’.75 However, if the culpability principle does not apply, this can only be justified by the lesser severity of a specific periodic penalty; beyond a certain level of severity, applying periodic penalties based on ‘strict liability’ would surely create problems with regard both to the ECHR and to national constitutions. The argument that periodic penalties cannot apply after the infringement is terminated is also inexact; the penalty payment can only concern the part of the infringement already completed. Finally, if the ne bis in idem principle does not apply, this is due to a lack of identity of facts, since the sanctioned conduct just refers to different stages of the ‘iter criminis’ of the infringement. None of these arguments is sufficient to neutralise the substantially punitive character of these sanctions. In other words, whether periodic penalty payments are ‘criminal in nature’ according to the Engel criteria will have to be judged, case by case, on the sole criterion of the severity of the coercion or the penalty.76

73 

See inter alia J Schwarze, Droit administrative européen, 2nd edn (Bruxelles: Bruylant, 2009) 400. even stricto sensu criminal penalties have, beyond their retributive character, a deterrent function, and, when applied to ongoing continuous offences, they also seek to cease the offence. Contra D’Ambrosio (n 22), who distinguishes between punitive and preventive use of periodic penalty payments, borrowing for the latter the French concept of astreinte. However, both under French and Belgian law, astreintes also present, unequivocally, a punitive character (see inter alia Y Chartier, La réparation du préjudice (Paris: Dalloz, 1983) 762 et seq; J v Compernolle, L’astreinte (Bruxelles: Larcier, 1992) 28). 75  D’Ambrosio (n 22) 18, with reference to Schwarze, Droit administrative européen (n 73) 400. 76  See also Grande Stevens and others v Italy (n 62) cons 94 et seq. 74  Indeed,

Enforcing Prudential Banking Regulations in the Eurozone 253 C.  Which Criminal Law Principles for Which Administrative Sanctions? The potentially ‘criminal nature’ of administrative sanctions provided for by the SSM and the SRM raises questions about the general substantive and procedural principles that should be respected in the application of these sanctions. As discussed above, the ECtHR, followed by the CJEU, requires in some cases the respect of criminal law principles even for sanctions classified as administrative under national law. However, this ‘amalgam’ between criminal and punitive-administrative law77 should not be understood as a mere rebalancing of the traditional dual distinction, by means of transferring some elements of one category to the other. The ECtHR seems to understand punitive law as a unique category, within which substantive and procedural criminal law safeguards should be applied, to an extent proportional to the severity of the coercion or punishment.78 Of course, the situations where criminal law principles should or should not apply to administrative sanctions cannot be examined here analytically. Some general remarks on the most basic of these principles seem necessary though. 1.  Substantive Principles With regard to substantive criminal law, the general principles concerned by the enforcement of administrative sanctions within the two mechanisms are the principle of legality—and especially the principle of clarity of criminal law (nullum crimen nulla poena sine lege certa)—and the principle of culpability ­(nullum ­crimen nulla poena sine culpa). The problems related to the principle of legality stem from the fact that administrative penalties within the SSM79 are not clearly associated with specific prohibited conducts. Penalties, which are defined only by their maximum amount, can be applied for any breach ‘of directly applicable acts of Union law’, including ECB decisions and regulations. Although the stricto sensu principle of legality is respected, since there is a ‘clear and unambiguous legal basis’ for these penalties,80 77 

Paliero, ‘The Definition of Administrative Sanctions’ (n 63) 7. Jussila v Finland (Application No 73053/01, 23 November 2006, cons. 43: ‘There are clearly ‘criminal charges’ of differing weight. What is more, the autonomous interpretation adopted by the Convention institutions of the notion of a ‘criminal charge’ by applying the Engel criteria have underpinned a gradual broadening of the criminal head to cases not strictly belonging to the traditional categories of the criminal law, for example administrative penalties, prison disciplinary proceedings, customs law, competition law, and penalties imposed by a court with jurisdiction in financial matters. Tax surcharges differ from the hard core of criminal law; consequently, the criminal-head guarantees will not necessarily apply with their full stringency’. See also Grande Stevens and others v Italy (n 62) cons 94 et seq. 79  In the SRM, prohibited conducts are described in a more detailed way and they entail significantly lower sanctions. 80  See Case C-117/83 Karl Könecke GmbH & Co KG, Fleischwarenfabrik, v Bundesanstalt für landwirtschaftliche Marktordnung [1984] ECR 3291, para 11: ‘In that respect it must be emphasized that a penalty, even of a non-criminal nature, cannot be imposed unless it rests on a clear and unambiguous legal basis.’ 78 See

254  Silvia Allegrezza and Ioannis Rodopoulos the question arises as to whether the association between prohibited conduct and level of sanction is precise enough, in order for the sanction to be considered as foreseeable. Certainly, it could be argued that administrative sanctions do not require the same degree of lex certa as criminal ones. This does not, however, mean that there is no requirement for the penalty to be attached to a specific offence.81 In order to be in conformity with the ECtHR standards,82 the more severe a penalty is, the more precisely defined the prohibited conduct should be. The same conclusion is applicable to the principle of culpability. In several occasions the CJEU has stipulated that the nullum poena sine culpa principle is not a general principle of EU law as far as administrative sanctions are concerned.83 A contrario, it is recognised as a general principle of EU law in the field of criminal law, at least for criminal sanctions over a certain level of gravity. Since Arts 18(1) SSMR and 38 SRMR only refer to intentional or negligent breaches, the question concerns only sanctions applied under Art 18(7) SSMR and Regulation 2532/98. Amongst these sanctions, the principle of culpability is applicable only to those that can be considered of criminal nature.84 Furthermore, taking into account the principle of proportionality, as well as the gradual approach undertaken by the ECtHR in the aforementioned Jussila case, it can be argued that maximum penalties should only be reserved to intentional breaches. 2.  Procedural Principles The procedural complexity of the two enforcement mechanisms, especially of the SSM, makes it impossible to predict all potential normative conflicts and principle-related problems that could appear in the application of sanctions. There are, however, some points in the texts that seem particularly problematic with regard to fundamental principles of criminal procedure. First, the intersystemic interactions (possibility of cumulative application of criminal and administrative sanctions) combined with the intrasystemic ones (criminal nature of administrative sanctions) are prone to lead to violations or abuses of the ne bis in idem principle. As mentioned above, the SSMR85 does not refer to criminal law. For the principle ne bis in idem to be respected, this could be understood as an implicit ‘neutralisation’ of national criminal law provisions for

81  See A Klip, European Criminal Law: An Integrative Approach, 3rd edn (Cambridge: Intersentia, 2016) 201. 82  See notably the aforementioned ECtHR cases Jussila and Grande Stevens. 83  Inter alia, Case 137/85 Maizena Gesellschaft mbH and others v Bundesanstalt für landwirtschaftliche Marktordnung (BALM), [1987] ECR 4587, notably para 14; Case 210/00 Käserei Champignon Hofmeister GmbH & Co KG v Hauptzollamt Hamburg-Jonas [2002] ECR I-6453, notably paras 35 and 44. 84  D’Ambrosio (n 22) 70. See also Klip, European Criminal Law (n 81) 220. 85  For the SRMR the problem is less intense, since the sanctions provided do not seem severe enough to be considered criminal in nature.

Enforcing Prudential Banking Regulations in the Eurozone 255 the breaches foreseen under Art 18(1) and (7) SSMR. However, Art 136 SSMFR does not support such an interpretation, since it seems to foresee the possibility of a cumulative imposition of administrative and criminal sanctions. To the extent the penalties under Art 18 SSMR can present a criminal nature, such a situation may result in a violation of the ne bis in idem principle.86 Most probably, ne bis in idem-related problems will be solved either on the ‘first come, first served’ basis— especially since, according to the wording of Art 18 SSMR, the ECB ‘may impose’ (and not ‘shall impose’) penalties—or by the application of the principle of proportionality to the total of the sanctions.87 Problems may also arise with regard to the right against self-incrimination, since natural and legal persons are required ‘to provide all information that is necessary’ (Art 10(1) SSMR), while even ‘professional secrecy provisions do not exempt those persons from the duty to supply that information’ (Art 10(2) SSMR).88 Of course, according to the CJEU case law from the field of competition law, which should be applicable mutatis mutandis in the field of banking supervision as well, the ECB ‘may not compel an undertaking to provide it with answers which might involve an admission on its part of the existence of an infringement which it is incumbent upon the [ECB] to prove’.89 However, there are clearly situations where it will not be obvious, either to the supervised persons or to the investigators, what information has to be provided and what can be concealed. As it has been correctly observed, it would have been wise if the ECB obligation to ensure compliance with the right not to incriminate oneself would have been codified in the SSM Regulation or SSM Framework Regulation. For reasons of legal certainty of individuals, but also to prevent possible noncompliance with the right by the investigation unit.90

Furthermore, the immediate publication of sanctions can lead to conflicts with fundamental rights such as the presumption of innocence and the right to protection 86  Case C-617/10 Fransson (n 65) 50. For further analyses on the ne bis in idem principle in EU law, see B v Bockel, The Ne Bis In Idem Principle in EU Law (Alphen aan den Rijn, Wolters Kluwer, 2010). 87 Case 14/68 Walt Wilhelm and others v Bundeskartellamt [1969] ECR 1, para 11. See also D’Ambrosio (n 22) 79 et seq. 88  It is worth mentioning that the texts are rather quiet on the question of the legal profession privilege. Certainly, the SSMR refers to it as a ‘fundamental principle of Union law, protecting the confidentiality of communications between natural or legal persons and their advisors, in accordance with the conditions laid down in the case-law of the Court of Justice of the European Union’ (Rec 48). It is though possible to see through these lines a clear reference to the case law of the CJEU as developed in the field of competition law (Case C-550/07 P Akzo Nobel Chemicals & Ackros Chemicals v European Commission [2010] ECR I-8301), where the ECJ (now CJEU) confirmed its previous restrictive interpretation (Case 155/79 AM & S Europe v European Commission [1982] ECR 1575), according to which communications with in-house lawyers are not accorded legal professional privilege under EU law. This solution could end up in some conflict with the more generous protection offered by the ECtHR (see notably AB v Netherlands (App No 37328/97), 29 January 2002 (final 29 April 2002). 89  Case 374/87 Orkem v Commission [1989] ECR 3283, para 26. 90  L Wissink, T Duijkersloot and R Widdershoven, ‘Shifts in Competences between Member States and the EU in the New Supervisory System for Credit Institutions and their Consequences for Judicial Protection’ (2014) 10(5) Utrecht Law Review 114.

256  Silvia Allegrezza and Ioannis Rodopoulos of personal data. As far as the first is concerned, the problem does not lie in the publication itself, but in its immediate character, which is, as mentioned above, independent of whether the sanction is still subject to appeal.91 As for the latter, any violation of personal data ‘must prove proportionate and therefore be adequate to the aim and necessary to attain it, without going beyond such necessity’.92 As the CJEU has stated, ‘no automatic priority can be conferred on the objective of transparency over the right to protection of personal data (…), even if important economic interests are at stake’.93 Finally, some remarks should be made on the principle of separation of powers. As far as the criminal law principle of separation between investigatory and adjudicatory powers is concerned, this is rather well respected, since an independent investigating unit has been established by the ECB ‘which is to autonomously investigate breaches of supervisory rules and decisions’ (Rec 6 and Art 123 et seq SSMFR). The question is, however, more complex as far as the general principle of separation of legislative, executive and judicial powers is concerned. Of course, the principle of separation of powers has neither been institutionally manifested by the Treaties nor by the case law of the CJEU.94 However, it clearly makes part of the ‘constitutional traditions common to the Member States’ in the sense of Article 6(3) TEU. In that sense, the fact that a single institution, namely the ECB, can adopt regulations, apply them and sanction their breaches is clearly problematic; if not from a strictly legal, at least from a political point of view.

IV.  TOWARDS A COHERENT FRAMEWORK OF ENFORCEMENT: RETHINKING THE ROLE OF CRIMINAL LAW IN THE ENFORCEMENT OF PRUDENTIAL BANKING REGULATIONS

From what has been said above, it can be deduced that the enforcement system of the EBU legal framework presents a considerable degree of systemic closure towards other enforcement systems and especially towards criminal law. To borrow the terminology—but not necessarily the (non-)deontological assumptions— of Niklas Luhmann’s systems theory of law,95 the EBU enforcement mechanisms,

91  The possibility of an anonymised publication seems to be able to offer an acceptable solution to this problem. However, sanctions—especially the ones that are criminal in nature—which are still subject to appeal, should be published only in an anonymised way. See also J Pfaeltzer, ‘Naming and Shaming in Financial Market Regulations: Violation of the Presumption of Innocence?’ (2014) 10(1) Utrecht Law Review 134 et seq, notably 147. 92  Case C-92/09 Volker und Markus Schecke GbR v Land Hessen [2010] ECR I-11063, paras 74 and 85. See also D’Ambrosio (n 22), 67. 93  Case C-92/09 Volker ibid. 94  T Konstadinides, Division of Powers in European Union Law: The Delimitation of Internal Competence between the EU and the Member States (Austin, Wolters Kluwer, 2009) 52 et seq, with further references. 95  See notably, N Luhmann, Social Systems (Stanford, Stanford University Press, 1995 [1984]) 12 et seq; G Teubner (ed), Autopoietic Law: A New Approach to Law and Society (Berlin, Walter de Gruyter, 1988).

Enforcing Prudential Banking Regulations in the Eurozone 257 especially the SSM, could be understood as a self-referential, ‘autopoietic’ system, which distinguishes itself from its environment, establishing its own limits, as well as its own reproduction and decision-making procedures. Of course, this autopoiesis is very relative. From a Kelsenian point of view, the traditional hierarchy of norms is still there: all the enforcement prerogatives of European and national competent authorities are delegated by European and national legislative acts, in conformity with European treaties and national constitutions and are subject to review by national and supranational jurisdictions. However, due to the complexity of the aforedescribed enforcement system, ‘anything goes’:96 it is possible that illegitimate—according to traditional principles of punitive law, as these have been developed mainly in criminal law—punitive action can be justified as necessary and thus be ‘legitimised through procedure’.97 Moreover, unlike the functional differentiation of law towards other social systems described by Luhmann, which ends up with law being a ‘normatively closed’ but ‘cognitively open’ system,98 differentiation between the enforcement aspects of the bank prudential regulation system and the criminal justice system is much more ‘normatively open’ and ‘cognitively closed’. Indeed, in some cases, there is no clear normative barrier—neither in the EBU legal framework itself nor in the superior norms—according to which an infringement should be sanctioned according to banking law or criminal law rules. Furthermore, as has been mentioned above, criminal provisions could in practice—not in a strictly normative sense—rely on non-criminal ones (for example the CRR) and vice-versa (criminal penalties as an alternative to administrative ones). The problems posed by this horizontal99 normative openness are further accentuated by a certain cognitive closure, which is due, not only to the fact that banking law specialists are almost never also specialists in criminal law and vice-versa, but also to the fact that banking law and criminal law are two legal fields based on different legitimating rationales, following different normative and epistemological principles and serving different functional roles. On the one hand, criminal law is supposed to protect the rule of law and the ‘public order’ in a transversal way; it mainly concerns acts committed by individuals; it has presented for two centuries, notwithstanding some revolutionary ideas that affected penal theory and practice, an undeniable structural and conceptual stability, at least as far as its basic normative and epistemological principles are concerned; it has mainly remained a prerogative of national legislative authorities; both its production and its application are guided by more dogmatic (in continental Europe) or more casuistic (in the UK) moral-based propositions and syllogisms. On the other hand, banking law and, especially, prudential supervision

96 

See P Feyerabend, Against Method (London, Verso, 1993 [1975]) 14 et seq. Luhmann, La légitimation par la procédure (Laval, Presses de l’Université Laval—Cerf, 2001 [1969]) notably 246–47. 98  N Luhmann, ‘The Unity of the Legal System’, in G Teubner (ed), Autopoietic Law (n 95) 20. 99  On the vertical level, every subsystem of the legal system is open, at least, to the hierarchically superior category of norms; otherwise it would cease to be ‘legal’. 97  N

258  Silvia Allegrezza and Ioannis Rodopoulos are meant to protect ‘the safety and soundness’ of the banking system;100 they mainly concern the situations of legal persons; during the last few years, they have been constantly changing and been enriched with new concepts, tools and institutions; they are to a large extent internationalised; and their production and application are largely guided by pragmatic political considerations. Taking these differences into account, the aim of section IV is to summarise the merits and the pitfalls of using criminal law as an instrument of enforcement of bank prudential regulations (subsection A). It will be shown that, both from a pragmatic and an idealistic point of view, the use of criminal law as an enforcement tool has to remain only an ultimum refugium (subsection B). Nevertheless, beyond its factual application as an enforcement tool, criminal law has a lot to offer as a normative and epistemological paradigm that could guide as well noncriminal enforcement policies (subsection C).

A.  What Criminal Law Can and Cannot Offer in Bank Prudential Regulation The opinions on how appropriate is criminal law as an enforcement tool for banking regulation are far from unanimous. One reason for this is, of course, the general scope of the question itself. In order to be answered properly, the question should be how appropriate is the use of criminal law in a specific case, with regard to a specific act or omission, committed by a specific, natural or legal, person. However, even in that case, the answers would differ significantly, for they would be based on different rationales. Indeed, between situations that clearly need criminal enforcement and situations which should clearly remain out of the scope of criminal law, there is a fairly broad grey zone.101 For cases belonging to this grey zone, the political decision between criminalisation or not-criminalisation/ de-criminalisation can only be taken according to ambivalent pragmatic judgements on principle-based general questions: can the use of criminal law in banking regulation protect the soundness and safety of the banking system or it could rather put them at more risk? Is ‘financial order’ just a subdivision of ‘public order’ or they are rather two parallel fields whose protection could result in conflicts? If criminal prosecution of bank-related offences entail significant financial risks, should the protection of financial stability prevail over fairness or not? Finally, in case criminal sanctions are considered necessary, should they target institutions, natural person perpetrators, hierarchical superiors or a combination thereof?

100  Of course, a sound and safe banking system can be understood in modern societies as a precondition of ‘public order’. However, the protection at any cost of the ‘banking order’ is not necessarily protecting the general ‘public order’. There can be a conflict of rationales with regard to the protection of the two orders. 101  As Eilís Ferran correctly points out (op cit, 59), ‘there is no exact formula for the creation of an effective supervisory system’.

Enforcing Prudential Banking Regulations in the Eurozone 259 These questions precede by far the idea of a European Banking Union. Just to give an example, criminal law has already been used as a means of protection of the stability of the banking system in the Victorian times, which was perhaps the apogee of the laisser-faire doctrine, when legal reforms made it possible for bankers to be held criminally responsible for their actions.102 Certainly, despite some interesting parallels one can make between Victorian Britain and the actual EU, the differences are significant. Britain was an empire, competent for both its financial policy and its criminal policy. The EU is merely a constellation of semiautonomous Member States, where the financial policies are decided mainly on a centralised level, while criminal policy is still, notwithstanding some interesting developments, left, almost entirely to the Member States. That being said, even in the globalised twenty-first century, the aforementioned core questions remain the same, as shown by the most recent and widely publicised banking scandals.103 Although there is no ambition here to thoroughly answer these questions, it is worth summarising some of the major arguments in favour and against the use of criminal law for breaches of prudential regulations. In both categories of arguments, considerations of both a pragmatic and an idealistic nature can be found. From a pragmatic point of view, the main arguments for leaving prudential regulation, as much as possible, out of the scope of criminal law are: the damage that can criminal prosecutions provoke to the soundness and stability of the financial system;104 the complex nature of the relevant rules themselves;105 as well as, from an opposite standpoint, the risk of impunity and inefficiency, due to the elaborated safeguards associated with criminal justice. On the other hand, criminal law is traditionally considered as having a more deterrent effect on deviant behaviour, not only because of the gravity of the sanction itself, but also because of the stigma associated with a criminal conviction.106 Furthermore, criminal punishment of

102 

See J Taylor, ‘Why have no bankers gone to jail?’, History and Policy, 14 November 2013. is reflected both in official documents and in the media. See inter alia ‘The Wheatley Review of LIBOR: final report’, September 2012, https://www.gov.uk/government/uploads/system/ uploads/attachment_data/file/1917 62/wheatley_review_libor_finalreport_280912.pdf; Parliamentary Commission on Banking Standards,’ Changing banking for good: fifth report’, June 2013, http://www.­ publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/2704.htm; I Birell, ‘Iceland has jailed 26 bankers, why won’t we?’ Independent, 15 November 2015; T Worstall, ‘If Iceland Can Jail Bankers For The Crash Then Why Can’t America?’, Forbes, 24 October 2015. 104  See on this question BL Garrett, Too Big to Jail: How Prosecutors Compromise with Corporations, (Cambridge (MA), Harvard University Press, 2014). 105  See, for example, M Madureira Prates, ‘Why Prudential Regulation Will Fail to Prevent Financial Crises. A Legal Approach’, Banco Central do Brasil, Working Paper 335, November 2013, 12: ‘Unlike criminal law, that has simple and enduring rules regulating easily comprehensible situations to almost every person, financial regulation deals with more complex and intricate situations. It is not possible to compare a crime, which almost every person can easily recognize and, if needed, call the police, with a violation of a financial rule, which even the most prepared and seasoned supervisor may face difficulties to identify.’ 106  See E Sutherland, ‘Is ‘White-Collar Crime’ Crime?’ (1944) 10(2) American Sociological Review 136–37: ‘A civil fine is a financial penalty without the additional penalty of stigma while a criminal fine is a financial penalty with the additional penalty of stigma.’ 103  This

260  Silvia Allegrezza and Ioannis Rodopoulos unlawful activities in the banking sector can enhance public trust and confidence in the well-functioning of the financial, the judicial and the political system.107 From an idealistic point of view, the main arguments against the use of criminal law are related to the protection of economic liberty and the risk of overcriminalisation, either specifically of financial life or of society in general. For their part, arguments in favour of more criminalisation can stem from diverse ideological narratives that go from classic retributivist theories, with regard to the immense damage that bank-related offences can cause to society and fairness in the application of criminal law, to Marxist-inspired and other critical approaches that consider these offences as crimes of the powerful against the masses, which remain unpunished as a result of class stratification. Lastly, the substantive and procedural safeguards of criminal law, which are often criticised for impeding the efficiency of enforcement mechanisms, can also be used, from a human rights protection perspective, as an argument for submitting more punitive powers under the criminal justice system, instead of leaving them to less accountable administrative authorities. However, the aforementioned arguments are mainly non-legal. Their ground is economic, political or even moral. Of course, this is always the case when it is to be decided whether an antisocial behaviour should be criminalised or not, due to the cognitive openness of the legal system towards other social systems. Nevertheless, there are also legal arguments—often despised—108 that should guide this kind of decision, which deserve special attention.

B. The Self-limitation of Criminal Law as an Enforcement Tool: Reviewing the Principles of ‘Ultima Ratio’ and Proportionality From a systemic point of view, the most important principles, inherent to criminal law,109 that guide the choice between penal and non-penal (or, more generally, between punitive and non-punitive) reactions to an unlawful conduct are probably

107 See Taylor, Why have no bankers gone to jail?’ (n 102): ‘The prosecutions which became commonplace by the end of the nineteenth century were high-risk and did not always succeed, but they had important economic and social effects. They restored market confidence in times of crisis, established the City of London’s good reputation, and demonstrated the fairness of the criminal justice system.’ 108  See also C Santulli, ‘L’Euro: Analyse juridique de la “crise de la dette”’ (2011) 115(4) Revue générale de droit international public 834: ‘Obsessed by an economic analysis of law, jurists have very easily abandoned a legal analysis of the economy.’ 109  Of course, even these principles are self-limiting the scope of criminal law according to extralegal, political and moral interpretations; thus they consist, in fact, in some kind of ‘cognitive gate’ between the legal system and other social systems. Indeed, self-definition of law as necessary or proportionate would be nothing more than a self-referential tautology. However, either as general rules— for example, constitutional imperatives—or as grounds of in concreto jurisprudential applications, necessity and proportionality are legally normative and therefore have to be distinguished from purely ­extra-legal—for example, economic—criteria.

Enforcing Prudential Banking Regulations in the Eurozone 261 ‘ultima ratio’ and proportionality. In every field that is somehow related to criminal policy, the decision on whether an unlawful or antisocial conduct should be criminally punishable will have to be based not only on purely intrasystemic legal criteria, eg whether or not this is possible under the EU treaties or not, but also on the (political) evaluation of the necessity of this criminalisation, as well as on the (moral) evaluation of the proportionality of a criminal response towards the gravity of the unlawful act and its result. Certainly, the normativity of these two principles, especially as far as the creation of law is concerned, is fairly limited, since abuses could threaten the separation between judicial and legislative powers.110 However, it is useful to make some brief remarks with regard to the role that these two principles can play in the context of a coherent normative structure for the enforcement of banking regulations. Literally, ultima ratio and proportionality do not follow exactly the same rationales; ultima ratio is based on a purely utilitarian logic, while proportionality can be based either on a utilitarian logic, where punishment has to be proportional to the objective to be achieved, or on a more retributive one, where punishment has to be proportionate to the socio-moral gravity of the conduct.111 That being said, ultima ratio is traditionally coupled with stricto sensu proportionality under a unique principle of proportionality lato sensu. Under this understanding, proportionality concerns the relation between punishment and an objective to be achieved.112 In their jurisprudential application the two principles are, due to the principle of legality, restricted to a potential limitation of the punitive power of the state. However, in the creation of a penal norm, the functional role of the two principles is less clear and is dependent on philosophical assumptions related to the purpose of punishment. In that sense, necessity and proportionality can impose not only ‘less punishment’, but also ‘more punishment’, if this is needed in order to effectively protect legal goods, as well as to ensure a certain degree of ‘fairness’.113

110  For further developments, see inter alia M Böse, and the Protection of Legal Interest’ (2011) 1 European Criminal Law Review 35; N Jareborg, ‘Criminalization As Last Resort (Ultima Ratio)’ (2004) 2 Ohio State Journal of Criminal Law 521; R Wendt, ‘The Principle of ‘Ultima Ratio’ and/or the Principle of Proportionality’ in Ultima Ratio, a principle at risk. European Perspectives, Oñati Socio-Legal Series, vol 3, no 1 (2013) 81. 111  Contra Böse, ‘The Principle of Proportionality’ (n 110) 36, who accepts only the utilitarian understanding. Indeed, the conception of proportionality in German and European case law is mainly utilitarian. However, the gravity of the punishment is proportionately associated with the gravity of the crime even in the most pure retributivist theories. On this question, see notably A v Hirsch, ‘Proportionality in the Philosophy of Punishment’ (1992) 16 Crime and Justice 55 et seq. 112  As it has been developed mainly in German public law and has been adopted by the CJEU as well as by many other national legal orders, proportionality lato sensu includes the suitability, the necessity and the proportionality stricto sensu (the term reasonableness is also often used) of a sanction or measure, with regard to the objectives that have to be attained. For German law, see Wendt, ‘The Principle of Ultima Ratio’ (n 110); for EU law, see S Melander, ‘Ultima Ratio in European Criminal Law’ in Ultima Ratio, a principle at risk. European Perspectives, Oñati Socio-Legal Series, vol 3, no 1 (2013) 42. 113  For an in-depth analysis of the most important relevant theories, see A v Hirsch, ‘Proportionality’ (n 111).

262  Silvia Allegrezza and Ioannis Rodopoulos In such a perspective, in the specific case of bank prudential supervision, questions on the necessity and proportionality of criminal sanctions can be extremely complicated. First of all, it is not clear which are the protected legal goods. Can the ‘soundness and safety of the banking system’ or the ‘right to fair banking’ be considered as autonomous legal goods under criminal law? Do they form part of other, more traditional legal goods as the right to property or even the protection of public order? If one considers, for example, the protection of the banking system as an autonomous legal good, where would this good be put hierarchically if its protection conflicts with other legal goods? Second, it can be rather unclear which means of protection can be considered suitable, necessary and proportionate. Both punishment and impunity can seriously damage the soundness and safety of a banking system. Besides, this soundness and safety is a rather liquid and unpredictable situation. Apart from cases of serious intentional misdemeanour, or at least heavy negligence with a clearly exteriorised effect, it is very difficult to link causally breaches of prudential regulations with serious damage or even endangerment of soundness and safety of the banking system. Moreover, even where such a link of causality can be established, it is very difficult to impute the unlawful conduct to specific physical persons; breaches of prudential regulations are usually, by their nature, the result of collective conduct, which in many legal systems cannot enter the scope of stricto sensu criminal law. In that sense, administrative sanctions seem to be more ‘suitable’ measures to enforce prudential regulations. However, leaving criminal law entirely outside of this field creates problems with regard to an ordinal conception of proportionality, which requires that penalties are scaled according to the comparative seriousness of crimes.114 Punishing simple crimes against property with several years of imprisonment and leaving unpunished—or less severely punished—unlawful conducts that create enormous benefits for the perpetrators and can lead to severe damages to the financial system as a whole creates an obvious lack of fairness, which cannot be justified on the complexity of the system. Furthermore, this lack of fairness can dialectically create further damage to the public order, since it can harm public trust in the banking, political or judiciary system. Criminal law is surely not suitable as a general regulation tool for the banking system, but, as an ultima ratio, it needs to be there.

C. Criminal Law as a Normative and Epistemological Paradigm for ­ Non-criminal Enforcement Policies Whereas the direct usefulness of criminal law in dealing with the prudential regulation of the banking system seems to be fairly limited, several aspects of criminal 114 

ibid 79.

Enforcing Prudential Banking Regulations in the Eurozone 263 law can serve as a paradigm for shaping, not only the rules on the prudential regulations’ enforcement, but, in a more general way, the administrative-punitive law of the EU. In the normative field, the enforcement aspects of the EBU legal framework remain unclear regarding several points. Most probably, these points will be clarified in the near future, case by case, by the jurisprudence of the CJEU—and, to a lesser extent, of the national supreme courts—as well as, where needed, by additional secondary legislation, such as ECB regulations and decisions. However, as long as the direct and indirect punitive powers of European authorities get more and more extensive and complex, some sort of systematisation will be sooner or later indispensable, in order to ensure a certain degree of legal security. A ‘common language’ needs a ‘common grammar’.115 Of course, this systematisation will not necessarily have to take the form of a complete codification, like the one undertaken in criminal law by the nation-states in the nineteenth century. But in order to limit the inevitable randomness of jurisprudential decisions, which acts in prejudice of both of the internal coherence of the legal system and of its external relations with the political expectations of society towards it, the specific punitive prerogatives provided to either supranational or national authorities by EU law will have to be systemised in a basic corpus of substantive and procedural basic rules and according to general principles,116 however difficult this can be from a political point of view. Moreover, it should be reminded that the rather exemplary normative structure of modern criminal law systems has not appeared fortuitously. Apart from being a corpus of legal rules, criminal law has become within the last two centuries, especially in continental Europe, an eclectic but consistent distinct epistemological field, based on the dogmatic systematisation, generalisation and pre-treatment of legal questions, in order to ensure that sanctions and their application are compatible both with the legal system’s inherent logic and with the moral and political expectations of society.117 As Kai Ambos points out, the merits of this systematisation are, at least from a continental European point of view, almost evident: ‘complete and “economic” solution of cases; rational and equal application of the law; simplification and better manageability of the law; guidance to further development of the law; better identification of value judgments built in the system’.118

115  See also I Rodopoulos, ‘Un langage commun sans grammaire commune: Quelques réflexions à propos de la Proposition de directive du 11 juillet 2012 relative à la lutte contre la fraude portant atteinte aux intérêts financiers de l’Union au moyen du droit pénal’ (2014) 580 Revue de l’Union Européenne 454–60. 116  Of course, this basic corpus of rules will have to go far beyond an abstract requirement for ‘effectiveness, dissuasiveness and proportionality’ of the sanctions applied, interpreted spontaneously by national and supranational jurisdictions. 117  See inter alia G Fletcher, ‘The Nature and Function of Criminal Theory’, in RL Christopher (ed), Fletcher’s Essays on Criminal Law (Oxford: Oxford University Press, 2013) 21–35. 118  K Ambos, ‘Towards a Universal System of Crime. Comments on George Fletcher’s Grammar of Criminal Law’ (2007) 28(6) Cardozo Law Review 2648.

264  Silvia Allegrezza and Ioannis Rodopoulos Besides, apart from its role as a cohesive force for the legal system, and despite the evident lack of a direct representative legitimacy, doctrinal systematisation serves also as a vehicle for the democratisation of law, opening (practically; not normatively) the decisional procedure on legal problems to a discursive sphere that goes beyond the closed doors of administrative authorities and courts of justice.119 Of course, as has been mentioned above, there are obvious ontological differences between criminal, banking and administrative law on the one hand, and between national and EU law on the other. Administrative and banking law, dealing with everyday situations and conflicts which often need immediate solutions, have to be more flexible and be based on simpler decisional procedures than criminal law, which is, according to the ultima ratio principle, reserved for exceptional situations and exceptional legal sanctions. For its part, EU law has served—at least until now—quite different purposes from those of national law and, therefore, it cannot share with national legal systems the same rules, methods and structures. Nevertheless, as it has been pointed out by the ECtHR case law from quite early on, labelling criminal penalties as administrative, just in order to circumvent the principles associated with criminal law is not an acceptable solution to the more and more intricate contemporary legal problems. Punitive powers have to be subject, not necessarily to the same rules (since even within the criminal justice system there are graduations according to the nature and the gravity of the offences and the sanctions), but to the same system of rules. If stricto sensu criminal law is not always the optimal sanctioning tool to enforce bank prudential regulations, it still has a role to play, both as a corpus of principles and as a scientific discipline: to guide the development, the interpretation and the application of a ‘less criminal’ corpus of punitive law.

119 

For further analysis, see Rodopoulos, ‘La crise financière’ (n 2) 14.

13 Strategy of Integrated Enforcement: The UK Competition and Markets Authority STEPHEN BLAKE1

I. INTRODUCTION

T

HIS CHAPTER WILL explore the role of the UK Competition and ­Markets Authority (CMA), including its criminal enforcement f­ unction, and how that fits within the wider UK competition regime. It will ­discuss the key ­features of the UK cartel regime and the challenges it presents; and the CMA’s approach to meeting those challenges—including how it is structured and its ­relationships with other enforcement agencies, both within the UK and ­internationally. It will argue that there are clear benefits in embedding the CMA’s c­ riminal enforcement functions within a specialist competition authority, ­supported by strong ­partnership working with other enforcement authorities.

II.  THE IMPORTANCE OF CARTEL ENFORCEMENT AND THE ROLE OF THE CMA

The CMA is an independent, non-ministerial government department, which was established by the Enterprise and Regulatory Reform Act 2013 (ERRA) and brought together the UK’s Competition Commission and parts of the Office of Fair Trading (OFT), thus providing the UK with a single, integrated

1  The author is grateful to a number of colleagues in the UK Competition and Markets ­Authority for their assistance in preparing this article, in particular, to Ruth Ashworth, together with Emma Lindsay, Lee Craddock, Richard Brown, Juliette Enser, Roland Green, Paul Latham, Michael Grenfell and John Kirkpatrick.

266  Stephen Blake ­competition authority,2 alongside certain sectoral regulators, which also have powers to apply competition law in the particular sectors they regulate—powers which they hold concurrently with the CMA.3 The CMA acquired its powers on 1 April 2014. The CMA’s overall mission is to make markets work well in the interests of ­consumers, business and the economy, recognising that competition is a vital ­contributor to productivity and strong, sustainable economic growth.4 As such, it has a broad remit with responsibility for carrying out investigations into ­mergers, markets and the regulated industries,5 as well as enforcing competition and ­consumer law. The CMA’s enforcement functions include criminal e­ nforcement, principally in relation to cartels, although the CMA also has the power to ­prosecute certain consumer protection offences, an example of this being the CMA’s ­prosecution of a £ 20 million pyramid promotion scheme, which resulted in the conviction of nine individuals.6

2  The Government’s thinking behind the creation of the CMA was to achieve a number of benefits, including: ‘greater coherence in competition practice and a more streamlined approach in decision making, through strong oversight of the end-to-end case management process’; ‘more flexibility in resource utilisation to address the most important competition problems of the day and better incentives to use antitrust and markets tools to deal with competition problems’; ‘a single powerful advocate to speak for competition across the economy, in Europe, and globally’; and ‘the scope for long term cost savings’ (Department of Business, Innovation and Skills (BIS), Competition and the Competition Regime, Government response to Consultation (March 2012), available at https://www.gov.uk/government/ uploads/system/uploads/attachment_data/file/31879/12-512-growth-and-competition-­regimegovernment-response.pdf, accessed 13 March 2016, para. 3.21). 3 These powers include the power to apply the EU and UK prohibitions of anti-competitive ­agreements and the abuse of a dominant position and to make market investigation references to the CMA under the Enterprise Act 2002 (EA02) in relation to activities in their respective sectors. Through its Sector Regulation Unit, the CMA plays a key role in ensuring the consistent and effective use of competition powers across the regulated sectors and more generally in promoting competition within those sectors. The sectoral regulators which at present have such concurrent competition law p ­ owers are the Office of Communications, the Gas and Electricity Markets Authority, the Financial Conduct Authority, the Payment Systems Regulator, the Water Services Regulation Authority, the Office of Rail Regulation, the Civil Aviation Authority, Monitor (the health service regulator) and the Utility Regulator of Northern Ireland. The Financial Conduct Authority and the Payment Systems Regulator obtained such concurrent competition law powers on 1 April 2015. 4  A robust competition regime contributes to open, well-functioning markets, ensuring that the terms of competition are fair for all, rewarding businesses that innovate to satisfy consumers, and encouraging new entry and investment. In turn, consumers benefit from lower prices, wider choice and better products. 5  For example, the CMA may conduct market studies and investigations with the aim of identifying and addressing competition and consumer issues that may not be the result of any infringement on the part of firms or individuals. The issues identified may be dealt with in a number of ways, including by way of structural or legislative remedy, thus leading to interventions that produce real transformations in key markets. A CMA market investigation may also be initiated following a market investigation reference by a sectoral regulator using its concurrent competition law powers, as described in n 3 above. 6  These convictions followed a major investigation in which almost 300 witness statements were taken and over 5000 items of material were seized and examined, and lengthy proceedings involving two long and hard-fought trials. The CMA also secured a total of £535,453 in confiscation orders and prosecution costs from seven of those convicted. The remaining two convicted defendants were

Strategy of Integrated Enforcement: The UK CMA 267 In delivering this mission, the CMA takes a holistic, joined-up approach across its work and tools, bringing them together for maximum positive effect in markets and ensuring that the UK competition, markets and consumer protection regime adds up to more than the sum of its parts.7,8 Enforcement, balanced by the CMA’s compliance and awareness-raising work, is central to this. In particular, the CMA recognises that effective enforcement is key to its credibility and u ­ nderlines its efforts to protect consumers and markets, as well as adding weight to its ­arguments for greater competition.9 Within that, the CMA places a particular emphasis on the importance of ­effective cartel enforcement. Cartels are a major barrier to competition. They artificially increase prices for purchasers (whether consumers, businesses or ­government), reduce output and innovation, disincentivise efficiency and lead to consumer harm. Indeed, academic research suggests that cartels can inflate prices in a market by 30 per cent or more.10

each found to have obtained a benefit from their criminal conduct but to have no realisable assets, and were therefore each ordered to pay the nominal sum of £1. See https://www.gov.uk/cma-cases/ prosecution-of-a-number-of-individuals-involved-in-an-alleged-unlawful-pyramid-scheme, accessed 12 March 2016. 7  Combining the competition and market functions of the Competition Commission and the OFT within a single agency also provides the opportunity to create efficiencies—by streamlining processes, removing duplication and increasing flexibility in resource allocation—thus, enabling the delivery of decisions in a more timely way without a reduction in quality. The CMA is supported in this by a project management office to oversee the progress of cases. For further detail see D Currie ‘The new Competition and Markets Authority: how will it promote competition?’, speech given by CMA chairman to the Beesley Lectures on 7 November 2013, available at https://www.gov.uk/government/ speeches/the-new-competition-and-markets-authority-how-will-it-promote-competition, accessed 12 March 2016. 8  The creation of the CMA has also provided an opportunity to embed procedural improvements and to increase transparency, predictability and certainty for businesses. For example, the CMA has issued a suite of revised guidance, including on Competition Act 1998 (CA98) procedures (including as regards settlement) and transparency. See https://www.gov.uk/government/uploads/system/uploads/ attachment_data/file/288636/CMA8_CA98_Guidance_on_the_CMA_investigation_procedures.pdf, accessed 12 March 2016. The ability to use CMA Inquiry Chairs and CMA Panel members on Case Decision Groups alongside senior members of CMA staff has also significantly increased the CMA’s capacity at a senior level for collective decision making on CA98 cases. 9  At its inception the CMA set itself five key strategic goals. These were set out in its Annual Plan 2014/15, available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/299785/CMA15.pdf, accessed 12 March 2016, and were retained in the CMA’s Annual Plan for 2015/16 and in its Annual Plan for 2016/17. See https://www.gov.uk/government/uploads/system/ uploads/attachment_data/file/416433/Annual_Plan_2015-16.pdf, and https://www.gov.uk/government/ uploads/system/uploads/attachment_data/file/508136/AP2016-17_PRINT.pdf, accessed 14 October 2016. They are to deliver effective enforcement, to extend competition frontiers, to refocus consumer protection, to achieve professional excellence and to develop integrated performance. Enforcement is at the core of two of these goals and integral to the others. 10 See http://londoneconomics.co.uk/wp-content/uploads/2011/09/30-An-assessment-of-the-UKDiscretionary-Penalties-Regime.pdf, accessed 12 March 2016. See also http://www.oecd.org/dataoecd/16/20/2081831.pdf, accessed 12 March 2016, in which the OECD looked at a selection of cartel cases and estimated the median price increase to be between 15 and 20 per cent, with a high of over 50 per cent.

268  Stephen Blake III.  THE CARTEL ENFORCEMENT REGIME

The UK cartel regime is essentially a dual regime: a criminal regime directed at the conduct of individuals and a parallel civil (administrative) regime11 directed at businesses (‘undertakings’).12

A.  The Criminal Regime The UK criminal cartel offence,13 which applies only to individuals, has the aim of criminalising and deterring behaviour by individuals leading to the most egregious and damaging forms of anti-competitive agreements, namely ‘hard core cartels’. These are typically secret arrangements under which competitors agree to fix prices, share markets or customers, restrict production or supply, or rig bids, in each case at the expense of customers and without any countervailing customer benefits, usually in order to preserve or drive up prices. The thinking behind this, as set out in the government’s 2001 Competition White Paper which preceded the introduction of the offence,14 was that without increasing fines to a disproportionate level, fining businesses alone was insufficient to deter hard-core cartels and that sanctions against individuals were required on the grounds that ‘the threat of a criminal conviction and the possibility of a prison sentence means that individuals are more likely to think very carefully before engaging in cartels’.15

11  References in this article to the ‘civil regime’ are to the administrative regime for the enforcement of the EU and UK competition rules applying to undertakings. See also n 22 below. 12  An undertaking for these purposes is any entity engaged in economic activity, regardless of its legal status or how it is financed; see, for example, Case C-41/1990 Höfner and Elser v Macrotron [1991] ECR I-1979, para 21; see also Case T-6/89 Enichem v Commission [1991] ECR II-1623, para 235. Whilst legal persons, such as companies, will often be acting as ‘undertakings’, the notion of an ‘entity’ in this context can be broader than one legal person. A corporate group made up of a number of individual legal persons can constitute a single undertaking; see, for example, Case 170/83 Hydrotherm v Compact [1984] ECR 2999. Note, in addition, that a natural person engaged in economic activity would also be an undertaking. An example of this would be a sole trader selling goods on a market; see, for example, Case C-309/99 Wouters [2002] ECR I-1577. Companies belonging to the same corporate group will generally constitute a single undertaking. 13  The criminal cartel offence is contained in s 188(1) of the Enterprise Act 2002 (EA02). A key element of the cartel offence as originally enacted in 2002 was a requirement to prove that the defendant had acted dishonestly. The Enterprise and Regulatory Reform Act 2013 (ERRA) removed this requirement for conduct on or after 1 April 2014 and replaced it with a number of statutory exclusions and defences. The explicit aim of the reform was to make the criminal cartel offence more effective. This is discussed further in section IV.E. below. 14  Department of Trade and Industry, A World Class Competition Regime CM5233 (July 2001), available at https://www.gov.uk/government/publications/a-world-class-competition-regime accessed 13 March 2016. 15  ibid paras 7.15 and 7.16.

Strategy of Integrated Enforcement: The UK CMA 269 Consistent with this, the consequences for persons convicted of the cartel offence are serious and may include: —— up to five years’ imprisonment and/or an unlimited fine; —— director disqualification for a period of up to 15 years;16 and/or —— the confiscation of assets under the Proceeds of Crime Act 2002. For example, in the Marine Hose case—R v Whittle, Brammar & Allison—three individuals were convicted and sentenced to terms of imprisonment of between 20 months and two and a half years, as well as being disqualified from acting as company directors for periods of between five and seven years. Two of the defendants were also the subject of confiscation orders totalling over £1 million. The third defendant was ordered to pay costs.17 In England and Wales, and in Northern Ireland, prosecutions for the criminal cartel offence may only be brought by the CMA or Serious Fraud Office (SFO), or with the consent of the CMA.18 Decisions whether to prosecute for the cartel offence are taken in accordance with the principles set out in guidance published by the CMA under the Enterprise Act 2002 (EA02)19 and the Code for Crown Prosecutors, which is issued by the Director of Public Prosecutions and is applied in all prosecution decisions by the Crown Prosecution Service (CPS), the principal public prosecution service for England and Wales.20 In Scotland, the decision whether to prosecute is made by the Crown Office and Procurator Fiscal Service (COPFS), the sole prosecution authority in Scotland, which is headed by the Lord Advocate and which applies the COPFS Code.21 B.  The Civil Regime22 Sitting alongside the criminal cartel offence are the prohibitions on anti-­ competitive agreements under EU and national competition law, which the CMA (along with the European Commission and the UK sectoral regulators) is also responsible for enforcing. 16  Disqualification following criminal conviction may be granted by the court, without the need for a CMA application. 17  See https://www.gov.uk/cma-cases/marine-hose-criminal-cartel-investigation, accessed 13 March 2016. 18  The only prosecutions to date have been by the CMA or its predecessor, the OFT. 19  The CMA’s Cartel offence prosecution guidance (CMA9) may be found at https://www.gov.uk/ government/publications/cartel-offence-prosecution-guidance, accessed 12 March 2016. 20  The Code for Crown Prosecutors may be found at http://www.cps.gov.uk/publications/docs/ code_2013_accessible_english.pdf, accessed 12 March 2016. 21  The COPFS Prosecution Code may be found at http://www.copfs.gov.uk/images/Documents/ Prosecution_Policy_Guidance/Prosecution20Code20_Final20180412__1.pdf, accessed 12 March 2016. 22  Public ‘civil enforcement’ in the UK of the EU and UK competition rules applying to undertakings is modelled on the administrative regime that applies to the enforcement of Art 101 and 102 TFEU by the European Commission. See also n 11 above.

270  Stephen Blake Specifically, Chapter I of the Competition Act 1998 (CA98) prohibits a­ greements between undertakings, decisions by associations of undertakings or concerted practices which may affect trade within the UK and which have as their object or effect the prevention, restriction or distortion of competition within the UK, unless they are excluded or exempt. The Chapter I prohibition is based on Art 101 of the Treaty on the Functioning of the European Union (TFEU), which the CMA must also apply to agreements or concerted practices which may affect trade between EU Member States and have as their object or effect the ­prevention, restriction or distortion of competition within the internal market. In contrast with the cartel offence, the civil regime is directed at ­undertakings,23 not at individuals, albeit that the CMA may bring director ­disqualification ­proceedings under the Company Directors Disqualifications Act 1986 against the directors of companies in breach of the prohibitions in the CA98 (or their EU equivalent).24 The civil prohibitions in relation to anti-competitive agreements are wider than the criminal cartel offence. For example: —— they also extend to anti-competitive arrangements that fall short of an agreement but that would amount to a ‘concerted practice’; —— they are not limited to hard core cartels, but extend to any agreement or concerted practice between undertakings whose object or effect is to prevent, restrict or distort competition; and —— the infringing conduct need not have been committed intentionally or knowingly to attract a sanction under the civil regime—negligence will suffice.25 For example, the Loans to Professional Services Firms case concerned the unilateral disclosure of confidential, commercially sensitive pricing information, which was found to be an ‘object’ infringement under civil competition law.26 By contrast, the disclosure to competitors, or exchange amongst them, of ­confidential future pricing information would not in and of itself be caught by the criminal cartel offence (although it may be evidence of an underlying agreement by which the offence is committed).

23 

See n 12 above. the Company Directors Disqualifications Act 1986 (CDDA), the court must make a ­director disqualification order against a person if the court considers that (i) an undertaking which is a company of which that person is a director has committed a breach of competition law, and (ii) that person’s conduct as a director makes him or her unfit to be concerned in the management of a company (ss 9A(1) to (3) CDDA). 25  S 36(3) CA98. 26 Case reference CE/8950/08. See https://www.gov.uk/cma-cases/loan-products-to-­ professionalservice-firms-investigation-into-anti-competitive-practice, accessed 12 March 2016. 24 Under

Strategy of Integrated Enforcement: The UK CMA 271 As in the case of the criminal regime, the consequences of civil enforcement action are significant: —— undertakings face penalties of up to 10 per cent of their worldwide turnover; —— individuals may be subject to director disqualification for a period of up to 15 years;27 and —— an infringement decision may be relied on in support of follow-on private actions and claims for damages. For example, a £28.59 million fine was imposed on the Royal Bank of Scotland in the Loans to Professional Services Firms case28 and a fine of £58.5 million was imposed on British Airways in the Airline Passenger Fuel Surcharges civil case.29 In respect of the latter, the Competition Appeal Tribunal published an order, in October 2014, consenting to the withdrawal of a damages action brought by the UK Ministry of Defence against British Airways by way of follow on action to the OFT’s infringement decision, the parties having agreed terms of settlement.30

C.  Relationship Between the Criminal and Civil Regimes The criminal and civil regimes are separate but complement each other. Through the prosecution of individuals and the serious consequences which follow from it, including the possibility of imprisonment, the criminal regime is designed to ensure that individuals are appropriately punished for—and deterred from— engaging in the most egregious and damaging forms of anti-competitive agreements. The civil regime, on the other hand, ensures that businesses—which in cartel cases will usually be the main beneficiaries of the infringing conduct—are equally incentivised to play their part in ensuring compliance with the ­competition rules.31 Cartel cases in the UK may, thus, be investigated exclusively under the c­ riminal or civil regime, but—in appropriate cases—may equally be investigated under both regimes in parallel, either by the CMA or with the CMA investigating the

27 

On application by the CMA to the High Court. See n 26 above. Case reference CE/7691-06. See https://www.gov.uk/cma-cases/airline-passenger-fuel-surchargeson-long-haul-flights-price-fixing, accessed 12 March 2016. The CMA’s predecessor also prosecuted four current and former British Airways executives for the cartel offence: R v Burns and others. The criminal prosecution collapsed on procedural grounds, however, following the discovery after the start of the trial of a large number of electronic documents from the account of a key witness. For more information on the criminal case, see https://www.gov.uk/cma-cases/air-passenger-fuel-surchargecriminal-cartel-investigation, accessed 13 March 2016. 30  The Ministry of Defence v British Airways plc, see http://catribunal.org/239-8537/1231-5-7-14-The-Ministry-of-Defence.html, accessed 12 March 2016. 31  The civil regime predates the criminal regime and is modelled on the pre-existing administrative regime for the application of the EU competition rules by the European Commission. 28  29 

272  Stephen Blake case under the criminal regime and the European Commission or a UK sectoral ­regulator, taking forward a parallel civil investigation.32 By way of example, the Marine Hose cartel was the subject of both criminal enforcement by the CMA’s predecessor against the UK executives involved33 and civil enforcement by the European Commission against the undertakings.34 As discussed in the section IV, conducting parallel criminal and civil investigations in respect of the same cartel presents a number of challenges.

IV.  THE CASE FOR SPECIALIST ENFORCEMENT AUTHORITIES: MEETING THE CHALLENGES OF CARTEL ENFORCEMENT

Cartel enforcement is inherently difficult and criminal cartel enforcement ­particularly so. Cartels are almost invariably difficult to uncover, since they are carried out in secret, with very little written documentation, or documentation that is fragmentary in nature and susceptible to interpretation. Moreover, unlike most instances of fraud, cartel cases cannot be built around an identifiable ‘money trail’ from the victim to the offender. Complaints alone also tend to be of only limited value, given that complainants will mostly be customers or competitors, who are rarely able to provide evidence of collusion. Furthermore, the legal and jurisdictional landscape is a complex one, with: —— parallel criminal and civil regimes, each with their own procedural and evidential rules, including in relation to disclosure; —— both national and directly applicable EU rules; —— at EU level, a system of parallel competence amongst the European Commission, the CMA and other national competition authorities; and —— in the UK, a similar regime involving the CMA and UK sectoral regulators with concurrent powers to enforce the civil competition prohibitions in the regulated sectors. Moreover, cartels will often be global, further widening the international dimension of cartel enforcement beyond Europe. All this requires a quite exceptional level of expertise and specialist k­ nowledge of any authority charged with the task of uncovering, investigating and ­prosecuting cartels. It also calls for specific policies tailored to the challenges of cartel ­enforcement; foremost amongst these, an effective leniency policy, the ­management of which is itself a whole further area of expertise. 32  Where the European Commission or sectoral regulator is best placed to take the civil investigation forward. The allocation of cases within the European Competition Network is governed by the Commission Notice on cooperation within the Network of Competition Authorities (2004/C 101/03). For more information on UK Competition Network see section IV.D.2. below. 33  R v Whittle, Brammar & Allison. See n 17 above. 34  See http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=1_39406, accessed 13 March 2016.

Strategy of Integrated Enforcement: The UK CMA 273 So how does the UK regime seek to achieve this? In this respect the following key elements may be highlighted: —— first, the inclusion of cartel enforcement (both criminal and civil) within an independent, specialist competition authority; —— second, the inclusion to the extent possible of investigatory and prosecution functions within the same agency—not least, but not exclusively, to support an effective leniency policy; —— third, a dedicated cartels group within the competition agency with strong specialist intelligence, investigation, prosecution and civil cartel enforcement expertise; together with the ability to draw on expertise from elsewhere within the wider competition agency; —— fourth, strong relationships and joint working arrangements with other national and international enforcement partners; and —— fifth, political and wider public support reflected in the legislative architecture of the regime and funding for the organisation.

A. Inclusion of Cartel Enforcement Within an Independent Specialist Competition Agency If nothing else, embedding cartel enforcement within an agency committed to promoting competition means that cartel enforcement (both civil and ­criminal, and across the full range of different types of cartel behaviour) can always be expected to be a priority. Given the challenges presented by cartel enforcement, a large generalist agency with a broad criminal portfolio is understandably less likely to have a significant appetite for cartel enforcement work, which will invariably have to compete for resources and attention with other types of crime.35 At the same time, a single integrated competition agency is able to use its wider knowledge and understanding of markets to inform its enforcement activities and priorities, with a view to ensuring that its interventions are appropriately targeted to maximise competition and economic growth.36 Thus, the CMA chooses carefully what to prioritise and progress according to the available evidence and balancing potential impact and strategic significance against risk and resource. This will include aiming to have a portfolio of cases that reflects its strategic priorities, covering sectors from across the economy, and firms of varying sizes and in d ­ ifferent geographic areas. These priorities are set

35  It is notable, for example, that to date the only prosecutions for the cartel offence have been by the CMA or its predecessor, the OFT. 36  The CMA is supported in this by a dedicated intelligence team, with responsibility for developing the CMA’s pipeline, gathering intelligence, providing analysis and for reporting, coordinating and supporting the prioritisation of the CMA’s enforcement, markets and consumer work.

274  Stephen Blake by the CMA’s Board in the light of periodic strategic assessments of the risks to consumers.37 As part of this broader strategic perspective, including cartel enforcement within the CMA also means that, through its competition promotion role, the CMA is well placed to ensure that its enforcement activity achieves maximum impact in terms of deterring anti-competitive agreements and promoting compliance. Thus, the CMA has created a suite of materials to ensure that competition law is better understood across the economy and to help businesses understand what they need to do to comply. More specifically, the CMA has developed guidance on steps businesses can take to comply with competition law, including an ‘at-a-glance’ guide to ­competition law and competition law checklist to help businesses understand where they may be at risk of non-compliance, video guides on illegal anti-competitive practices and guidance on how small businesses can comply with competition law.38 In conjunction with the Institute of Risk Management, the CMA has also produced a short guide to competition law risk.39 This highlights unacceptable business practices by reference to a number of powerful case studies across a range of unlawful anti-competitive conduct, including cartels, other anti-competitive agreements and abuse of dominance. The guide shows how easy it can be to cross the line if risks are not properly understood and managed. It also provides suggestions as to how organisations might approach the management of risk systematically and effectively, including advice on a four-step risk management process. The CMA has also produced materials that highlight key lessons from completed casework and taken steps to ensure that the lessons are understood more widely. By way of example, following the Mercedes-Benz Commercial Vehicles civil case the CMA worked with industry partners to deliver a programme of actions aimed at ensuring that the key messages coming out of that case were understood and disseminated across the sector. This programme included speaking at trade conferences, publishing articles in trade magazines, using social media and sending an open letter to the industry, which was distributed by the National Franchise Dealer Association to approximately 80 per cent of the 200,000 people working in franchised car and commercial vehicle dealers in the UK.40

37  See for example https://www.gov.uk/government/publications/cma-strategic-assessment, accessed 12 March 2016. 38 This guidance can be found at https://www.gov.uk/government/collections/competition-andconsumer-law-compliance-guidance-for-businesses, accessed 12 March 2016. 39  See https://www.gov.uk/government/news/cma-launches-short-guide-on-competition-law-risk, accessed 12 March 2016. 40  See https://www.gov.uk/government/publications/commercial-vehicles-case-cartel-enforcementlessons, accessed 12 March 2016; https://twitter.com/CMAgovUK/status/491179068252237824, accessed 12 March 2016; https://twitter.com/CMAgovUK/status/491587973784555520, accessed 12 March 2016; https://twitter.com/CMAgovUK/status/489706546340065280, accessed 12 March 2016.

Strategy of Integrated Enforcement: The UK CMA 275 Furthermore, the independence of the competition agency is also a key i­ngredient for its effectiveness and credibility. Recognition of this in the UK and elsewhere has been an important development over recent decades. Independence provides the CMA with the freedom to prioritise its own resources, choose the right tools for addressing problems, take decisions in particular cases, and set its own annual plans of activity. Moreover, as has been pointed out by David Green, the Director of the UK’s Serious Fraud Office (SFO),41 in a world where ­businesses under investigation can have significant power—economically, p ­ olitically and in the media—visible and demonstrable independence is c­ rucial in creating a level playing field and in ensuring judicial, business and public ­confidence in the authority’s investigations and enforcement.

B. Inclusion of Investigatory and Prosecution Functions Within the Same Agency The second ingredient for the effectiveness of the UK cartel enforcement regime is the inclusion to the extent possible of investigatory and prosecution functions within the same agency. This is a key feature of the CMA and follows the ‘Roskill model’—an operating model first adopted in the UK with the creation of the ­Serious Fraud Office, following recommendations made by an inquiry led by Lord Roskill into fighting serious and complex fraud.42 1.  The Roskill Model One of Roskill’s recommendations was that serious and complex cases should be investigated and prosecuted by a multi-disciplinary office, combining forensic investigators, accountants, lawyers, computer specialists and trial counsel ­working together from the start of a case, right through investigation and prosecution. As Stuart Alford QC, joint head of fraud at the SFO, has commented: ‘This model is intended to ensure that the core skills of forensic analysis and legal ­strategy are deployed together, in unison, throughout the lifecycle of the case.’43 Including investigation and prosecution functions within the same agency allows the CMA to maintain a consistent strategic vision throughout the lifetime of a case, as well as enabling investigations to lead to more effective prosecutions and/or decision making. Thus, the CMA’s cartel cases are overseen by highly 41  See the speech by D Green CB QC to the Pinsent Masons Regulatory Conference 23 October 2014, available at https://www.sfo.gov.uk/2014/10/23/david-green-cb-qc-speech-pinsent-masons-­ regulatory-conference/, accessed 12 March 2016. 42 See https://www.sfo.gov.uk/publications/corporate-information/sfo-historical-backgroundpowers, accessed 13 March 2016 for a short account of the historical background to the SFO, including a link to the 1986 ‘Roskill Report’ (Fraud Trials Committee Report). 43 See https://www.sfo.gov.uk/2014/11/17/stuart-alford-qc-enforcing-uk-bribery-act-uk-seriousfraud-offices-perspective, accessed 12 March 2016.

276  Stephen Blake e­ xperienced senior lawyers, supported by multi-disciplinary teams made up of specialist investigators, case officers, digital forensics and intelligence experts, ­disclosure and case support experts, economists and financial analysts, according to the needs of the case. Specialists work together collaboratively, drawing on a variety of expertise to make the most of the information and evidence available. The oversight of these invariably challenging and frequently hard-fought cases by senior lawyers from the outset also means that teams are able to manage legal risk effectively throughout the investigation of the case to its ultimate presentation in court. 2. Leniency The inclusion of investigation and prosecution functions in the same agency also brings with it benefits for the CMA’s leniency programme. As highlighted earlier, the difficulties of detecting and investigating cartels mean that there is a strong need for ‘inside’ information. Consistent with international best practice in this area and the policies of the European Commission and other leading competition agencies,44 the CMA therefore operates a leniency policy, under which undertakings that have engaged in cartel activity can benefit from lenient treatment if they come forward with information about the cartel, admit their involvement and cooperate with the CMA’s investigation.45 The CMA’s leniency programme has been designed to maximise incentives for would-be applicants to come forward. Under the policy, depending on the ­circumstances, undertakings may benefit from total immunity from financial ­penalties and their employees may benefit from immunity from prosecution from the criminal cartel offence.46 In order for potential applicants to approach an authority for immunity or ­leniency and ‘blow the whistle’ on the cartel, it is essential that they should have maximum upfront certainty as to the outcome for both the business and its employees. This is particularly the case in circumstances where there is no prior investigation. The incentive to apply for leniency will only be as strong as the level of certainty offered; and the alignment of the CMA’s civil and criminal immunity 44  See for example the ECN Model Leniency Policy available at http://ec.europa.eu/competition/ ecn/documents.html, accessed 12 March 2016; ICN guidance available at http://www.internationalcompetitionnetwork.org/working-groups/current/cartel/awareness/leniency.aspx, accessed 12 March 2016; OECD guidance available at http://www.oecd.org/corporate/ca/usingleniencytofighthardcorecartels.htm, accessed 12 March 2016. 45  See OFT423 at para 3.5 and following. 46  Immunity from criminal cartel prosecution in England, Wales and Northern Ireland has a statutory basis in s 190(4) EA02. The types of leniency and immunity available to businesses and individuals are also discussed in the CMA’s leniency guidance. See OFT1495, Applications for Leniency and No-Action in Cartel Cases https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/284417/OFT1495.pdf, accessed 13 March 2016. This was originally an OFT document and has been adopted by the CMA.

Strategy of Integrated Enforcement: The UK CMA 277 policies is essential to this. Put simply, without the upfront certainty of personal immunity from criminal prosecution, company directors and other employees involved in cartel activity would be highly unlikely to come forward simply to avoid a civil fine on the company for which they work. Thus, under the CMA’s policy the current and former directors and employees of the first undertaking to report a cartel and qualify for immunity from civil fines will be guaranteed immunity from prosecution for the cartel offence, provided there is no prior investigation and the conditions under the policy are satisfied, including in particular the requirement to cooperate with the CMA’s investigation. The ability of the CMA to grant criminal immunity and to devise appropriate policies and procedures to enable undertakings to apply for immunity both on their own account and on behalf of their directors and employees is, therefore, a critical feature of the UK cartel enforcement regime and a key for its success. The fact that in England and Wales, and in Northern Ireland, the CMA both investigates and prosecutes the cartel offence is thus enormously helpful to the effectiveness of the leniency regime. In the case of Scotland, where ­prosecutions are brought by the Crown Office and Procurator Fiscal Service, the CMA’s ­Memorandum of Understanding with the Crown Office47 includes provisions for the handling of leniency applications designed to provide applicants with a similar level of upfront certainty, to the extent possible within the applicable constitutional arrangements.48 Moreover, leniency is not a one-off decision: the relationship with the leniency applicant needs to be carefully and consistently managed throughout the lifetime of the case and ultimately depends on the confidence of competition practitioners in the authority, a confidence which can be fragile—difficult to gain and easy to lose. By providing a single gateway for businesses seeking to report cartel activity in the UK, the CMA is able to maintain the trust which companies and ­specialist competition legal advisers now have in the regime, built up over more than a decade. A leniency regime which is operated by a single specialist authority also prevents duplication of resources and potentially conflicting results, for example, through 47 https://www.gov.uk/government/publications/memorandum-of-understanding-between-thecma-and-the-crown-office-scotland, accessed 12 March 2016. 48  In the context of a cartel offence in Scotland, because of the constitutional position of the Lord Advocate, the CMA cannot guarantee immunity from prosecution (unlike in England and Wales, and Northern Ireland). Where the CMA has received an application for immunity from prosecution in respect of a cartel that falls to be prosecuted in Scotland, the CMA will report the circumstances and recommendations to the Lord Advocate, who will accord any recommendation for immunity ­serious weight in exercising his discretion in the grant of criminal immunity in Scotland. In determining whether to grant criminal immunity, the Lord Advocate will take cognisance of the CMA’s own rules on leniency. Where possible the Lord Advocate will also give an early indication at the commencement of a leniency application, and before the applicant’s identity has been revealed, whether criminal immunity is likely to be granted, subject to full ongoing co-operation and on the basis that there are no criminal convictions or associations to be disclosed. Further discussion can be found in: L Miller and E Lindsay ‘Cartels: Raising the Stakes’ (14 July 2014), available at http://www.journalonline.co.uk/ Magazine/59-7/1014186.aspx, accessed 12 March 2016.

278  Stephen Blake differences in procedures for the handling of applications, the prioritisation of cases, allocation of resources and in the application of leniency criteria. This too is important for confidence in the leniency regime and hence its effectiveness.

C. A Dedicated Cartels Group With the Ability to Draw on Expertise from Elsewhere Within the Wider Competition Agency The third ingredient for the effectiveness of the UK cartel enforcement regime consists in ensuring that investigating and taking enforcement action against cartels are the responsibility of a specialist Cartels and Criminal Group (CCG) within the CMA. In this respect the CMA resembles other major competition authorities internationally, including the European Commission and the Antitrust Division of the US Department of Justice. The Group is structured around a number of professional skills groups— criminal prosecution, including disclosure; investigation and intelligence; digital forensics; civil cartel enforcement; and casework support. Successful cartel enforcement requires close team-working between members of all these groups. For example, on a typical cartel matter being investigated both criminally and civilly: —— the skills of the civil team will be required to handle any immunity or leniency applications in such a way as to preserve the integrity of the leniency applicant’s evidence, so that it can be used both for any civil enforcement and in any criminal prosecution; —— the civil team will also take forward any resulting civil case; —— the skills of the intelligence, investigation and digital forensics teams will be required to build the evidence for both criminal and civil enforcement purposes; —— the prosecution team, supported by the criminal disclosure team, will prosecute the case criminally; and —— the casework support team will provide support throughout, including as regards the handling of evidence and management of the file, as well as liaising with witnesses and the court in the run up to and during any trial. An integrated civil and criminal cartel group also provides benefits as regards the making of strategic decisions. The choice of which legal tool to use in dealing with cartels can send important messages to business, whilst insufficiently coordinated choices can send the wrong signals about cartel policy. Particular challenges may arise, for example, in coordinating decisions as to whether to settle cases. Settlement can be an efficient way to resolve cases, but it involves a consideration of the issues as a whole, weighing up the efficiencies that could be generated against the overall impact on deterrence. The timing of such decisions is also critical. Equally, the inclusion of a dedicated cartels and criminal group within the CMA signals a strong commitment to cartel enforcement.

Strategy of Integrated Enforcement: The UK CMA 279 Importantly, by being embedded within the CMA, the CCG is also able to draw on specialist knowledge and expertise from across the wider o ­ rganisation, including expert economic, financial analysis and litigation advice from ­ ­competition ­specialists. Equally, the CMA as a whole benefits from the CCG’s ability to provide expert investigatory advice and support to enforcement teams across the CMA, for example, in such areas as the conduct of searches and ­on-site inspections and interviewing witnesses. The CCG provides similar support to UK sectoral ­regulators in relation to the exercise of their concurrent competition enforcement powers.49

D. Strong Relationships and Joint Working Arrangements With Other National and International Enforcement Partners As well as having its own cartels and criminal group, the CMA also benefits from strong relationships with its UK and international enforcement partners. Such relationships enable the CMA to access valuable experience, expertise and sources of information, and the CMA has strong relationships—and is working increasingly closely—with national agencies such as the police, the National Crime Agency, the SFO, the Financial Conduct Authority and Trading Standards, as well as key enforcement partners within the UK’s Devolved Nations, and with overseas enforcement agencies such as the European Commission and other national competition authorities. 1.  Coordination with International Counterparts Starting with the international dimension, in increasingly globalised markets, where businesses operate within multiple jurisdictions, there is an obvious need to help facilitate an environment in which markets can develop efficiently across borders and in which UK business can compete effectively. The internationalisation of cartels means that agencies must work closely together, based on a common understanding of approaches and trust built through regular interactions. Including cartel enforcement (both criminal and civil) within a specialist competition agency greatly facilitates this. As a member of the European Competition Network (ECN) and the International Competition Network (ICN), and through its participation in the OECD, the CMA frequently interacts with its international counterparts on particular issues, and is able to share ideas, information and (in some instances) evidence, and to disseminate best practice, as well as actively engaging and cooperating on cases. In the context of cartel investigations involving the European Commission, the close relationship between the CMA and the European Commission’s Directorate 49 

See n 3 above.

280  Stephen Blake General for Competition (DG COMP)—including through the ECN—is a key factor in the CMA’s ability to conduct criminal investigations in parallel with civil investigations by the Commission. By way of example, an investigation into the supply of commercial vehicles in the UK ultimately led to a major EU investigation,50 which in July 2016 resulted in the issue by the European Commission of an infringement decision fining five truck producers over €2.9 billion for having participated in a cartel in breach of EU antitrust rules.51 A number of UK criminal cartel investigations have also required, at relatively short notice, the organisation and conduct of simultaneous inspections of the same premises alongside the European Commission. This calls for a high level of coordination and trust between the two agencies, built on a solid understanding of each other’s procedures and concerns. The CMA has also worked in parallel with other overseas agencies such as the US Department of Justice, the Japan Fair Trade Commission and others. The Marine Hose case is perhaps the clearest example of such international c­ooperation, with parallel investigations and proceedings by the European Commission, the US Department of Justice, the Japan Fair Trade Commission and other national ­competition authorities, along with the UK. That case involved coordinated searches of offices and homes, the arrest of eight suspects in the US, including three UK nationals, and an unprecedented US plea agreement in which the three UK nationals pleaded guilty in the US but were allowed to return to the UK, where they were prosecuted and pleaded guilty to the cartel offence.52 The CMA’s strong relationships with its international partners is also important for ensuring that cartel policies internationally are consistent and mutually ­supporting. This is particularly true of leniency, since before deciding to selfreport and apply for immunity in one jurisdiction, a leniency applicant in the case of an international cartel will invariably want to be confident of being able to do so in all other jurisdictions where it faces the risk of sanction; any weakening of one regime also weakens those of the others. Thus, the leniency regime in the UK benefits from the CMA’s international network, both in terms of ensuring to the extent possible a consistent approach to key common issues and for establishing a high level of trust between agencies that is essential when handling i­ndividual

50 See http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/OFTwork/competition-act-and-cartels/ca98-current/commercial-vehicle-civil/, accessed 13 March 2016. 51  See http://europa.eu/rapid/press-release_IP-16-2582_en.htm, accessed 14 October 2016. 52  Under the terms of the US plea agreements the US prison sentences accepted by the defendants were reduced by the amount of any jail sentence imposed in the UK. All three defendants therefore accepted that a custodial sentence was appropriate. In the Crown Court the trial judge His Honour Judge Rivlin QC imposed prison sentences of between two-and-a-half and three years, which exceeded those provided for in the US plea agreements. These were subsequently reduced by the Court of Appeal to between 20 months and two-and-a-half years, the same as the sentences imposed in the US. See Crown Court sentencing remarks transcript 11 June 2008, available at http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft.gov.uk/shared_oft/prosecutions/remarks.pdf, accessed 13 March 2016, and R v Whittle, Brammar and Allison [2008] EWCA Crim 2560.

Strategy of Integrated Enforcement: The UK CMA 281 cases. This is particularly important in the EU context where, in the absence of full EU harmonisation in the area of sanctions or procedures, the scope for the ­convergence of leniency policies across the EU is limited, necessitating close ­working relationships between ECN members to resolve any practical difficulties that may arise from differences between their respective regimes. 2.  Building Relationships at Home Within the UK, the CMA equally recognises that its enforcement goals cannot be achieved in isolation. A successful enforcement regime requires close ­cooperation with others; better enforcement is achieved through combining efforts and ­sharing best practice. In the case of enforcement of the civil competition law rules, the CMA shares information and agrees the allocation of cases with sectoral regulators through the UK Competition Network (UKCN); with some similarities between this and the CMA’s involvement in information sharing and case allocation with the European Commission and other EU national competition authorities through the ECN.53 In the case of its criminal enforcement activities, the CMA, is able to draw on police expertise in the conduct of searches and has, for instance, co-operated extensively with the City of London Police and other police forces on a number of criminal cartel cases, including with the execution of warrants and the arrest of suspects. The CMA is also building on existing relationships with key enforcement partners within the UK’s Devolved Nations. For example, it has worked closely with the Crown Office and Procurator Fiscal Service (COPFS) in Scotland and the Crown Solicitors Office in Northern Ireland in obtaining and executing criminal cartel warrants for business premises in those jurisdictions. The CMA has also adopted a Memorandum of Understanding with the Crown Office, governing the basis on which the CMA and Crown Office cooperate to investigate and/or prosecute individuals in respect of the cartel offence where such an offence may have been committed within the jurisdiction of the Scottish Courts.54 Recognising the challenges posed by its relatively limited caseload (when compared to that of a larger, generalist enforcement agency), such partnerships also ensure that the CMA has access to the right mix of skills and experience. The CMA also recruits staff from a broad range of backgrounds, including from the police and other enforcement agencies such as the SFO, and invests in extensive training and development initiatives to strengthen its in-house capabilities, as well as 53  The CMA has concluded a number of Memoranda of Understanding (MoUs) with the sectoral regulators. For links to these and more information on the UKCN, see https://www.gov.uk/­government/ collections/uk-competition-network-ukcn-documents, accessed 13 March 2016. The CMA also has a Memorandum of Understanding with the SFO. See https://www.gov.uk/government/uploads/system/ uploads/attachment_data/file/307038/MoU_CMAandSFO.PDF, accessed 13 March 2016. 54  See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/328403/CMA_ and_COPFS_MOU.pdf, accessed 13 March 2016.

282  Stephen Blake drawing on external specialist expertise, such as for example from expert external counsel. 3.  The Cartel Offence and Other Criminality: A Mutually Reinforcing System The CMA also recognises that the facts giving rise to cartel activity can overlap with other forms of economic crime, such as bribery and corruption. For ­example, bid rigging might include bribery of a corrupt procurer or agent or of others ‘on the inside’; or cartelists might make ‘compensation payments’ to each other in exchange for cartel involvement. Cartel activity might also be associated with fraud, such as for example rigging bids or fixing prices and then falsely ­representing to the purchaser that the bid or price was reached independently. More broadly, ­businesses involved in other forms of economic crime can be involved in cartels, and vice versa—cartels can be an indicator of a corporate culture of ­rule-breaking. One of the companies involved in the Marine Hose cartel, for example, was also found to have been involved in a separate conspiracy to make corrupt payments to Latin American government officials, in relation to which it pleaded guilty in the US courts and was fined $28 million in 2011.55 Where there are overlaps with other forms of economic crime, the CMA works on cases in parallel with other UK agencies, and continues to liaise with them so long as the respective investigations are ongoing. Thus, recognising that it has a more limited perspective than larger, generalist enforcement agencies, the CMA seeks to ensure—by partnership working, together with its mix of internally and externally recruited staff—that it is nevertheless able to identify broader crimes in the fact patterns that it is considering, and to refer appropriate cases to its ­partner agencies, including in particular the SFO which can also prosecute the cartel offence.56 For example, the SFO’s successful prosecution of Christopher Ronnie, a former Chief Executive of JJB Sports plc, together with two other individuals, for non-cartel offences arose from a referral by the CMA’s predecessor in the course of an investigation into suspected infringements of the Competition Act 1998 (CA98) by Sports Direct International plc and JJB Sports. The CMA and

55 See https://www.justice.gov/opa/pr/bridgestone-corporation-agrees-plead-guilty-participatingconspiracies-rig-bids-and-bribe-0, accessed 13 March 2016. 56  The decision whether to refer is considered on a case-by-case basis having regard to all the circumstances of the case. Under the CMA’s leniency policy, where information derives from a leniency applicant, the CMA would inform the applicant or its legal adviser first. Moreover, whilst the grant of immunity from prosecution for the cartel offence cannot prevent prosecution for conduct which amounts to a separate and distinct offence, such as bribery, to the extent that the cartel conduct for which the CMA has granted immunity would also be capable of being prosecuted as another offence (for example under the Fraud Act 2006), the CMA will only refer the case to another UK agency on the understanding that that agency will not circumvent the effect of the CMA’s grant of immunity by using that other offence to prosecute the immunity recipient for the conduct covered by the immunity agreement. See OFT1495, Applications for Leniency and No-Action in Cartel Cases https://www.gov.uk/ government/uploads/system/uploads/attachment_data/file/284417/OFT1495.pdf, accessed 13 March 2016, paras 7.30 and 8.20.

Strategy of Integrated Enforcement: The UK CMA 283 its p ­ redecessor assisted the SFO with its investigation.57 No charges were brought by the SFO against the companies and the OFT’s competition investigation was closed in 2011 on prioritisation grounds.58

E.  Political and Wider Public Support Finally, the fifth ingredient for the effectiveness of the UK cartel enforcement regime is its political and wider public support, which is reflected in the legislative architecture of the regime and in the funding of the agency. The CMA is fortunate in enjoying broad political support for its mission. This is reflected not only in the creation of the CMA but also in recent reforms to the UK cartel offence to improve its effectiveness as a deterrent, as well as the strengthening of the CMA’s civil competition enforcement powers. As originally enacted, the cartel offence included a requirement to prove that the defendants had acted dishonestly. This requirement was originally included to provide a signal as to the seriousness of the offence, to exclude the need for detailed economic analysis and evidence, to distinguish the offence from EU and national competition law, and to ensure that it did not apply to agreements that might have countervailing benefits, making them lawful under competition law. However, the inclusion of the dishonesty requirement also made it considerably harder in practice to bring cases than originally anticipated, thereby undermining its effectiveness as a deterrent. When the UK Government came to review the specific reasons behind the dishonesty requirement, it also found that the requirement was either unnecessary or ineffective.59 The ERRA therefore removed the dishonesty requirement and introduced a number of statutory exclusions and defences in its place.60 57 See https://www.sfo.gov.uk/cases/jjb-sports-c-ronnie-d-ball-d-barrington/, accessed 13 March 2016. 58  For further information on the OFT’s competition investigation, including its reasons for discontinuing the case, see http://webarchive.nationalarchives.gov.uk/20140402142426/http://www.oft. gov.uk/OFTwork/competition-act-and-cartels/ca98/closure/sports-goods/, accessed 13 March 2016. 59  See Department of Business, Innovation and Skills (BIS), A Competition Regime for Growth—a Consultation on Options for Reform (March 2011), available at https://www.gov.uk/government/uploads/ system/uploads/attachment_data/file/31411/11-657-competition-regime-for-growth-consultation. pdf, accessed 13 March 2016; Department of Business, Innovation and Skills (BIS), Competition and the Competition Regime, Government response to Consultation (March 2012), available at https:// www.gov.uk/government/uploads/system/uploads/attachment_data/file/31879/12-512-growth-and-­ competition-regime-government-response.pdf, accessed 13 March 2016. 60  Specifically, the ERRA created two new exclusions: the notification exclusion (s 188A(1)(a) EA02) and the publication exclusion (s 188A(1)(c) EA02), as well as retaining the bid rigging notification exclusion (s 188A(1)(b) EA02). In addition, the ERRA also introduced a number of statutory defences. These apply where the defendant can show that he or she did not intend to conceal the arrangements from customers, did not intend that the arrangements would be concealed from the CMA, or before entering the agreement, took reasonable steps to ensure that the arrangements would be disclosed to a professional legal adviser for the purpose of obtaining advice about them before they were made or implemented (s 188B EA02).

284  Stephen Blake Indeed, the difficulty of proving dishonesty in cartel cases has since been underlined by the Galvanised Steel Tanks case, in which the two defendants who pleaded not guilty were acquitted by a jury following a three week trial which focused exclusively on whether they had acted dishonestly and in which the various factors raised by the defendants—such as that their motivation was to preserve jobs and that they did not benefit personally from their conduct—were precisely of the kind which (as the OFT argued in its response to the government’s consultation on the proposed reform of the offence) may have some bearing on whether an individual was acting dishonestly but are irrelevant to the wrongdoing that the cartel offence is designed to address, namely the serious harm that cartels do to competition and markets, and consequently to consumers, businesses and the wider economy. In fact, the Galvanised Steel Tanks case provides the evidence in support of the decision to amend the offence which those opposing the reform argued was missing.61 As regards the CMA’s civil competition enforcement powers, the ERRA provides for new powers under the CA98 to impose civil penalties for failing to comply with investigations62 and to require individuals to answer questions.63 The threshold for imposing interim measures to stop alleged infringing conduct during an investigation was also lowered.64 Equally significantly, the CMA was also provided with additional funding to enable it to deliver what UK Government Ministers described as a ‘step change’ in terms of the scale and sophistication of its competition enforcement activities, including in tackling cartels.65 As a result, the CMA has invested further in building its intelligence, inves­ tigation and enforcement capacity to enable it to increase the number and speed of cartel cases that it is able to pursue. In particular, whilst the CMA’s leniency programme is a key tool for detecting cartels and an important source of intelligence, it is not the CMA’s only detection tool and nor is it without limitations.

61 See https://www.gov.uk/cma-cases/criminal-investigation-into-the-supply-of-galvanised-steeltanks-for-water-storage, accessed 13 March 2016. For a fuller account of the Galvanised Steel Tanks case and its implications for the evolution of the UK criminal cartel regime, see https://www.gov.uk/government/speeches/stephen-blake-on-the-uk-steel-tanks-criminal-cartel-case, accessed 13 March 2016. 62  S 40A CA98. 63  S 26A CA98. Under s 30A(2) and (3) CA98, a statement obtained from an individual through the use of the CMA’s formal interview powers may only be used as evidence against that individual on a prosecution for an offence in providing false or misleading information, or on a prosecution for some other offence where in giving evidence in the proceedings the individual makes a statement that is inconsistent with the statement obtained by the CMA and evidence relating to the latter statement is adduced, or a question relating to it is asked, by or on behalf of the individual. 64  S 35 CA98. Specifically, the requirement that the measures should be necessary to prevent serious, irreparable damage was amended to provide that the damage need only be significant. As previously, interim measures may also be imposed, where it is necessary to protect the public interest. 65  See HM Treasury, Autumn Statement 2013, available at: https://www.gov.uk/government/uploads/ system/uploads/attachment_data/file/263942/35062_Autumn_Statement_2013.pdf, accessed 13 March 2016, para 1.212.

Strategy of Integrated Enforcement: The UK CMA 285 For instance, leniency relies on companies and individuals choosing to come forward and tends to catch ‘late stage’ or failing cartels. Aside from leniency, the CMA, as a specialist competition agency, has access to a broad range of information flowing from its market investigations and mergers work. Strong relationships with UK and international enforcement partners also provide further opportunities for the CMA to access valuable sources of intelligence. In addition, the CMA has a dedicated ‘cartels hotline’ and is one of the few competition authorities which has adopted an informant rewards programme, offering rewards of up to £100,000 for information about cartel activity. The CMA also has covert investigation powers under the Regulation of Investigatory Powers Act (RIPA), under which the CMA can require the production of communications data, carry out surveillance (directed and intrusive), and use covert human intelligence sources (CHIS). Building on the legacy of its predecessor organisations and taking advantage of the broader range of information now available to it as a result of their merger, the CMA is taking an increasingly proactive approach to cartel detection and looking further to reduce its reliance on leniency, including through the recruitment of additional staff and investment in a more sophisticated digital forensics and intelligence capability, including the recruitment at the end of 2014 of a Director of Intelligence and Director of Digital Forensics and Intelligence.66 The CMA and its predecessor have already had some early success—almost half of cartel investigations opened by the CMA and its predecessor since 2010 have been intelligence led. These have also involved larger scale operations, for example, the execution in 2013 of search warrants across seven sites throughout the UK, including Scotland and Northern Ireland, with the involvement of six police forces and the simultaneous arrest of seven individuals. Most recently a man was charged in March 2016 with the cartel offence in a case involving Precast Concrete Drainage.67 This follows the prosecutions in the Galvanised Steel Tanks case, which concluded in 2015.68 It is anticipated that a larger, more resilient criminal prosecution function will be able to handle more such cases. Having a strong and specialised cartel enforcement function within the CMA also means that, through its engagement with government as well as the ­European Commission, the CMA is well placed to act as an advocate for the cartel enforcement regime and to advise on how it interacts with the broader competition regime, as well as other species of economic crime. The CMA is thus able to c­ ontribute to ensuring that the cartel enforcement regime is fit for purpose

66  Recent appointments also include the appointment of a Director of Criminal Enforcement, see https://www.gov.uk/government/news/cma-announces-two-senior-cartel-appointments, and https:// www.gov.uk/government/news/cma-appoints-to-new-senior-cartel-role, accessed 13 March 2016. 67 See https://www.gov.uk/government/news/man-charged-in-cma-criminal-cartel-investigation, accessed 13 March 2016. This case is subject to reporting restrictions. 68  See n 61 above.

286  Stephen Blake and sits comfortably within the broader competition landscape and the wider UK criminal justice system.

V. CONCLUSION

In conclusion, embedding cartel enforcement within the CMA as a specialist competition authority brings with it clear benefits. As well as creating efficiencies, it ensures an informed and consistent approach to tackling cartels within the broader UK competition regime, as well as enabling the CMA to draw on and develop the range of specific skills and expertise required for effective cartel enforcement, both criminal and civil. This is particularly important given the inherent difficulties in detecting, investigating and prosecuting cartels, as well as the complex enforcement landscape at a national, EU and wider international level. The establishment of the CMA as a strong independent competition agency, with the necessary functions, powers and capabilities, adequately funded and supported by effective partnership working with other national and international enforcement agencies, provides the UK with the best opportunity to meet the challenges that cartels present, and to ensure that cartel enforcement is appropriately prioritised and supported by effective policies. Providing for strong and effective cartel enforcement also represents a strengthening of the UK’s capability for tackling economic crime overall. Through a combination of specialist agencies and strong partnership working between them, the UK model—when operating at its best—allows for competition and other forms of economic and financial crime enforcement to be mutually reinforcing, strengthening the UK’s capability for tackling economic crime overall. As a specialist independent agency the CMA is also ideally placed to act as a single, strong advocate for competition compliance both nationally and internationally; and to ensure that its enforcement work is made visible to, and is understood by, businesses, so as to maximise compliance for the benefit of consumers, businesses and the wider economy.

Index NB–page locators in bold indicate references in tables accumulation of sanctions: double jeopardy, 212–15 Europe, 11–13 dual sanctioning schemes, 218–21 substantive approach, 215–18 ne bis in idem principle, 11 proportionality principle, 11–12, 214 USA, 12, 13, 212–15 see also ne bis in idem principle administration of justice, 6 investigative techniques, 6, 83–84 access to databases, 89 administrative and judicial cooperation, 91–92 detection of economic crime, 84–86 ‘mini-instruction’, 88–89 pre-trial, 87–88 special investigative measures, 90 access to past and present financial information, 90 access to past financial transactions, 90–91 compliance of banks, 91 electronic transmission of investigative orders, 91 monitoring of bank accounts, 90 traditional tools, 87–88 recent reforms, 85 sanctions, 92–94 negotiated justice, 6–7 prosecutions and convictions, 6 technical nature of offences, 7 see also leniency programmes; negotiated justice; procedural safeguards Akerberg Fransson case, 11–12, 219 anti-fraud coordination service (AFCOS) (EU), 143, 149, 164 anti-fraud measures: anti-fraud coordination service, 143, 149, 164 cooperation between national authorities, 156 customs cooperation, 156–59 proposals for multi-disciplinary transnational instruments, 160–63 EU, 135–37 European Anti-Fraud Office, 135–36 cooperation with national authorities, 138–55

European Investigation Orders, 136 European Public Prosecutor’s Office, 135–36, 137 Lisbon Treaty, 135–36 member states, 135 TFEU, 136 see also European Anti-Fraud Office anti-money laundering obligations: detection tool, as, 85–86 Area of Freedom, Security and Justice (AFSJ) (EU): enforcement practice, 174–75 jurisdictional issues, 179–83, 200, 209 attorney-client privilege, 24, 37–38 autonomous compliance organisation, 72 Basel Committee on Financial Supervision, 248 transnational investigations, 187–88 BNP Paribas case, 61–62, 173 cartel enforcement regime (UK), 268 advantages and effectiveness of, 272–73 creation of Cartels and Criminal Group, 278–79 domestic and international cooperation, 279–83 inclusion of investigatory and prosecution functions, 275 leniency, 276–78 Roskill Model, 275–76 inclusion within specialist competition agency, 273–75 political support and public support, 283–86 Competition and Markets Authority, 11, 265–67, 286 cartel activity and other crimes, 282–83 civil regime, 269–71 cooperation, 279 domestic cooperation, 281–82 international cooperation, 279–81 criminal regime, 268–69 relationship between two regimes, 271–72 Charter of Fundamental Rights (EUCFR) (EU), 176, 194, 201, 208–09, 215, 228 dual sanction schemes, 218–21

288  Index choice of forum, 181–82 forum shopping, 181, 205–06 nullum crimen, nulla poena sine lege, 193–94 nullum judicium sine lege, 194 transnational investigations, 179–83 Competition Act 1998 (UK), 270, 282 Competition and Markets Authority (CMA) (UK), 11, 265–67, 286 advantages of a specialist enforcement authority: creation of Cartels and Criminal Group, 278–79 domestic and international cooperation, 279–83 inclusion of investigatory and prosecution functions, 275 leniency, 276–78 Roskill Model, 275–76 inclusion of cartel enforcement, 273–75 political support and public support, 283–86 cartel enforcement, 265–68 civil regime, 269–71 criminal regime, 268–69 relationship between two regimes, 271–72 cartel activity and other crimes, 282–83 Cartels and Criminal Group, 278–79 cooperation, 279 domestic cooperation, 281–82 international cooperation, 279–81 criminal prosecutions, 268–29 DG COMP, 279–80 European Competition Network, 279–80 establishment, 265–66 International Competition Network, 279–80 parallel civil and criminal investigations, 271–72 prohibition on anti-competitive agreements, 269–71 role and powers, 266–67 see also cartel enforcement regime Commerzbank case, 61–62 competition authorities, 9, 285, 286 leniency programmes, 106, 108–09 multi-jurisdictional task forces, 189 see also Competition and Markets Authority Competition Commission (UK), 11, 265 see also Competition and Markets Authority compliance management systems (CMS), 57–58, 78–79 advantages, 74 reduced risk for companies, 75–76 reduced risk for employees, 74–75 background, 62–63 cost effective CMS: implementation of, 76–78

German legal provisions, 64–69 administrative law, 66–68 corporate law, 65–66 criminal law, 69 future legislative initiatives, 69–71 implementation challenges: autonomous compliance organisation, 72 compliance resources, 72 corporate structure, 72 guidelines, implementation of, 73 matrix compliance organisation, 72 sanctions for non-compliance, 73–74 sufficient systems, implementation of, 73 supervision, 73 training, 73 sanctions for non-compliance, 73–74 see also Germany confiscation orders, 83–84, 269 Luxembourg, 92 Asset Recovery Office, 93–94 international cases, 93–94 national cases, 93 conflicts of interest, 28, 34 corporate monitors, 38, 42–43, 52–53 selection of monitors, 50–51 corporate monitors: attorney-client privilege (lack of), 37–38 authority of, 36–37 background: authority to appoint, 20–21 criminal cases, 21 evolution of role, 20 Racketeer Influenced and Corrupt Organizations Act (RICO), 21 ‘special masters’, 20 conflicts of interest, 38, 42–43, 50–53 court-orders corporate probation compared, 24–25 disclosure duties, 37–38 disputes with corporations, 38–39 DoJ and dispute resolution, 30 duration of monitorships, 34–35 evaluation of monitorships: cooperation, 41 detailed work plans, 40–41 knowledge of business, 40 monitor is too close to corporation, 42–43 reports, 41 settlement agreements, 39 whether effective as a sanction, 39–40 factors influencing government decision to appoint: existence of effective compliance programme, 33–34 extent of corruption, 32–33 forfeiture cases, 31 role of trustees and monitors, 31 selection and appointment, 31

Index 289 gatekeepers compared, 23–24 Holder memo, 22 improving monitorships: access to records, persons and information, 52 compensation of monitors, 48–49, 51 judicial oversight of agreements, 53–54 proposed legislation and reforms, 46–58 public disclosure of fees and expenses, 51–52 public disclosure of reports of monitors, 54–56 restrictions and agreements, 52–53 selection of monitors, 48–51 independence, 37–38 independent private sector inspector general, 26–27 internal investigators compared, 24 modern monitors, 21–23 potential application to EU, 56 Prudential Securities case, 21 justification of DPA, 22 reporting duties, 38 selection and use of monitors, 35–36 DoJ and dispute resolution, 30 forfeiture cases, 31 Grindler memorandum, 30 Morford memorandum, 28–30 Standard Chartered Bank case, 43–46 Thompson memo, 22–23 trustees in bankruptcy compared, 25 court-ordered corporate probation: corporate monitors compared, 24–25 Crown Office and Procurator Fiscal Service (COPFS) (Scotland): cartel enforcement regime, 269 Competition and Markets Authority, 281 Crown Solicitors Office (Northern Ireland): Competition and Markets Authority, 281 customs cooperation, 156 criminal matters, 159 mutual administrative assistance, 156–58 deferred prosecution agreements (DPAs) (USA), 19–20 Holder memo, 22 judicial oversight of agreements, 53–54 negotiated justice, 124 Thompson memo, 22–23 see also corporate monitors Department of Justice (DoJ) (USA), 11–13 anti-cartel enforcement, 106, 278 Assets Forfeiture Fund (AFF), 31 cooperation with Competitions and Markets Authority, 280–81 corporate monitors, 30–31 dispute resolution, 30, 38–39

Morford memorandum, 28–30 public disclosure relating to reports of monitors, 54–56 dispute resolution, 30, 38–39 forfeiture cases, 31 independent private sector inspector general, 26–27 Morford memorandum, 28–30 Rabobank case, 172 see also deferred prosecution agreements; non-prosecution agreements Directorate-General Competition (DG-COMP) (EU): cartel activity, 279–80 Competition and Markets Authority, 279–80 investigative powers, 140, 144–48 OLAF’s powers compared, 140 disclosure duties, 7–8 corporate monitors, 37–38 see also privilege against self-incrimination double jeopardy clause, 212–14 consequences, 214–15 formal understanding, 214 Helvering v Mitchell, 212, 214 Hudson v United States, 214, 215 scope, 212–13 United States v Harper, 213, 214 United States v Ward, 213 ‘economic and financial criminal law’ defined, 2–3 national subtleties, 3–5 enforcement, 169–70 administrative enforcement v criminal enforcement, 10–11 BNP Parisbas Bank case, 173 conflicts of jurisdiction, 175–83 cumulative sanctions, 10 EU bowing to US authorities, 174–75 Fortis Bank case, 170–71 foreign enforcement: EU, by, 183–85 member states, by 176–83 right to apply blocking statutes, 189–99 USA, 185–87 forum shopping, 181, 205–06 interest rate rigging, 171–73 lack of coordination, 174 Libor/Euribor cases, 171–73 market abuse, 170–71 multiple investigations, 181–82 national authorities pursuing national interests, 174 protection of interests of citizens, 182 punitive administrative law, 11 violations of state embargos, 173 see also integrated enforcement

290  Index Engel criteria: ne bis in idem principle, 216–17 European Court of Justice, 218–19, 250–51 EU law: impact on national economic and financial criminal law, 13 ne bis in idem principle, 222 Akerberg Fransson case, 219 Charter of Fundamental Rights, 215, 218–21 Common Agricultural Policy, 218 Engel criteria, 218–19 European Court of Justice, 218–19 OLAF, 138–43 protection of whistleblowers, 102 transnational investigations, 183–85 EU territoriality, 175 EU as a single territorial entity, 183–85 member states: choice of jurisdiction, 179–83 coordination of enforcement actions, 179–80 criminal enforcement of substantive policies, 176–77 forum shopping, 181, 205–06 harmonisation of applicable law, 177–79 multiple investigations, 181–82 national v supranational competences, 176 overlapping and conflicting jurisdictions, 178 protection of interests of citizens, 182 Euribor case, 171–73 European Anti-Fraud Office (OLAF), 9, 135–37 administrative investigation powers, 139–40 admissibility of OLAF evidence, 150–51 cooperation, 138 EU law, 138–43 Regulation 883/2013, 138–40 DG COMP’s powers compared, 140, 144–48 EPPO reform proposals, 141–43, 144–48 ESMA’s powers compared, 141, 144–48 investigative powers, 144–48 national criminal investigation authorities, 149–50 admissibility of OLAF evidence, 150–51 reforms: EPPO proposals, 141–43, 144–48 requests for information and assistance, 143, 149 status, 155 support of national criminal investigation authorities, 149–50 operational assistance, 154–55 technical assistance, 154 vertical cooperation with national authorities, 138–56

European Banking Union, 14–15, 233–34 enforcement mechanisms, 234–35 administrative and criminal enforcement interaction, 246–48 intersystemic, 248–49 intrasystemic, 249–52 CRD IV, 235 enforcement mechanisms, 234–35, 256–58 investigatory powers within SSM and SRM, 235–38 judicial protection within SSM and SRM, 245–46 sanctioning powers within SSM and SRM, 238–45 single resolution mechanism, 235–46 single supervision mechanism, 235–36 single resolution mechanism, 235 investigatory powers, 235–38 judicial protection, 245–46 sanctioning powers, 238–45 single supervision mechanism, 235 investigatory powers, 235–38 judicial protection, 245–46 sanctioning powers, 238–45 European Competition Network (ECN), 279–80 European Convention on Human Rights (ECHR), 176 ne bis in idem, 215–17 nullem crimen, nulla poena sine lege, 193–94 procedural safeguards, 195, 196–98, 206–09, 250–51 European Court of Human Rights (ECtHR): administrative penalties, 250–51, 253 choice of forum, 193–94 criminal sanctions, 230–31 multi-disciplinary investigations, 193–96, 206, 209 procedural safeguards, 197–99 ne bis in idem principle, 218–20 nullem crimen, nulla poena sine lege, 193–94 pecuniary penalties and fines, 250–51 procedural safeguards, 197–99, 250–51 European Court of Justice (ECJ) (EU): Akerberg Fransson case, 11–12, 219 criminal sanctions, 230–32 dual sanctioning schemes, 218–21 European Investigation Orders (EIO), 136, 150, 152–53 European Public Prosecutor’s Office (EPPO) (EU), 135–37, 164–65 investigative powers, 144–48 market abuse rules, 203 procedural safeguards, 203–04 proposals for OLAF reforms, 141–43

Index 291 European Securities and Markets Authority (ESMA) (EU), 14 investigative powers, 141, 144–48 OLAF’s powers compared, 141 European Union, 225 complementary enforcement regimes, 228 criminal and administrative sanctions, 228–29 Market Abuse Directives, 228–29 criminal law, 226 complementary enforcement regimes, 228–29 legislating guidelines, 227–28 TFEU, 226–27 criminal sanctions CJEU, 230–31 defined, 230–31 ECHR, 230 EU, 230 sanctions, 11–13 complementary enforcement regimes, 228–29 criminal sanctions, 230–31 dual sanctioning schemes, 218–21 substantive approach, 215–18 outlook, 231–32 see also EU law Eurozone, see Prudential Banking Regulations fees and expenses: corporate monitors, 51–52 forfeiture cases, 31 role of trustees and monitors, 31 selection and appointment, 31 Fortis Bank case, 170–71 forum shopping, 181, 205–06 fraud, see anti-fraud measures gatekeepers: corporate monitors compared, 23–24 Germany: compliance management systems: administrative law, 66–68 advantages, 74 reduced risk for companies, 75–76 reduced risk for employees, 74–75 implementation, 58–59 corporate law, 65–66 criminal law, 69 current legal provisions, 64–69 administrative law, 66–68 Corporate Governance Codex (GCGC), 64 corporate law, 65–66 criminal law, 69 German Act on Regulatory Offences, 66–67 German Companies Act, 65

German Federal Financial Supervisory Agency guidelines, 68 German Foreign Trade Act, 67–68 Limited Liability Companies Act, 65 future legislative initiatives: Draft Law of North Rhine-Westphalia on Corporate Criminal Liability, 69–70 German Association of In-house Lawyers, 70–71 German Institute of Compliance, 71 governance and organisational theory, 96–97 role of individuals in organisations, 97 role of whistleblowers, 98 economically-motivated whistleblowers, 98 ethically-motivated whistleblowers, 98 Grindler memorandum, 30 Holder memorandum: corporate monitors, 22 HCBS case, 61–62 Independent Private Sector Inspector General (IPSIG) (USA): corporate monitors compared, 26–27 integrated enforcement: frameworks: background, 175–77 harmonisation of applicable laws, 177–78, 179–81 overlapping and conflicting jurisdictions, 178–79 see also Competition and Markets Authority internal investigators: corporate monitors compared, 24 International Competition Network (ICN), 279–80 investigations, 2, 84–85 access to databases, 89 Competition and Markets Authority, 271–72, 275–78 confiscation orders, 92 Asset Recovery Office, 93–94 international cases, 93–94 national cases, 93 cooperation between administrative and judicial authorities, 91–92 criminal justice system, 86–87 pre-trial investigations, 87–88 detection of economic crime, 84 anti-money laundering obligations, 85–86 reporting obligations of civil servants, 85 whistleblowing, 86 Luxembourg: detection of economic crime, 84–86 investigations, 86–92 recent reforms, 85 mini-instruction, 88–89 search and seizure warrants, 87–88

292  Index special investigative measures, 90 access to past and present financial information, 90 access to past financial transactions, 90–91 compliance of banks, 91 electronic transmission of investigative orders, 91 monitoring of bank accounts, 90 see also transnational investigations jurisdiction, 167–68 enforcement issues, 168–70 administrative enforcement v criminal enforcement, 10–11 BNP Parisbas Bank case, 173 conflicts of jurisdiction, 175–83 cumulative sanctions, 10 EU bowing to US authorities, 174–75 Fortis Bank case, 170–71 forum shopping, 181, 205–06 interest rate rigging, 171–73 lack of coordination, 174 Libor/Euribor cases, 171–73 market abuse, 170–71 multiple investigations, 181–82 national authorities pursuing national interests, 174 protection of interests of citizens, 182 punitive administrative law, 11 violations of state embargos, 173 EU as a single territorial entity, 183–85 international community, 187–88 member states, 179–83 harmonisation of applicable law, 177–79 national v supranational competences, 176 overlapping and conflicting jurisdictions, 178 USA, 185–87 see also enforcement; EU territoriality leniency programmes, 8, 112–13 background, 106, 107 EU, 106–07 USA, 106 Competition and Markets Authority, 276–78 systemic risks, 114–15 see also whistleblowers Libor/Euribor cases, 171–73 Lisbon Treaty, 13 anti-fraud measures, 135–36 criminal law enforcement, 177, 226, 227 Luxembourg: Asset Recovery Office, 92–94 confiscation orders, 92–94 detection of economic crime, 84 anti-money laundering obligations, 85–86 reporting obligations of civil servants, 85 whistleblowing, 86

investigating economic crimes, 86 access to databases, 89 administrative and judicial cooperation, 91–92 ‘mini-instruction’, 88–89 pre-trial, 87–88 special investigative measures, 90 access to past and present financial information, 90 access to past financial transactions, 90–91 compliance of banks, 91 electronic transmission of investigative orders, 91 monitoring of bank accounts, 90 traditional tools, 87–88 recent reforms, 85 sanctions, 92–94 market abuse, 170–71 BNP Parisbas Bank case, 173 EPPO rules, 203 EU Directives, 228–29 Fortis Bank case, 170–71 Libor/Euribor cases, 171–73 matrix compliance organisation, 72 misconduct: compliance management systems, 75–76, 77 corporate monitors and disclosure duties, 7, 11–12, 23, 28–29, 37–38 disclosure of, 7, 11–12, 23 systemic misconduct, 1–2 mobility: availability of evidence, 199, 206 offenders, 1–2, 7 Morford memorandum, 28–30 multi-agency cooperation: horizontal cooperation, 156 competent authorities, 160 mutual assistance and information exchange, 162 objectives under (amended) proposal, 160–62 VAT infringements, 162–63 customs cooperation, 156 criminal matters, 159 mutual administrative assistance, 156–58 Luxembourg, 91–92 mutual assistance and exchange of information, 153–54 obstacles, 8–9 OLAF, 138 admissibility of OLAF evidence, 150–51 DG COMP’s powers compared, 140, 144–48 EPPO proposals, 141–43, 144–48 ESMA’s powers compared, 141, 144–48 EU law, 138–43

Index 293 mutual assistance and exchange of information, 153–54 national criminal investigation authorities, 149–51 Regulation 883/2013, 138–40 requests for information and assistance, 143, 149 status, 155 support of national criminal investigation authorities, 149–50 operational assistance, 154–55 technical assistance, 154 vertical cooperation with national authorities, 138–56 operational assistance, 154–55 requests for information and assistance, 143, 149 second PIF Protocol, 151–53 data transfers, 152 technical assistance, 154 vertical cooperation between OLAF and national authorities: admissibility of information from OLAF, 150–51 investigative support by OLAF, 149–50 OLAF investigations under EU law, 138–43 requests for information and assistance, 143–49 see also multi-disciplinary investigation multi-disciplinary investigations, 9–10 amended proposal, 160–62 general concepts, 162–63 anti-fraud coordination service, 164 mutual administrative assistance, 9, 156–58 information exchange, 153–54, 162, 165 procedural safeguards, 191–92, 208–09 EU, 200–08 international criminal law, 196–200 nation-state, 192–96 see also enforcement; jurisdiction; multi-agency investigation mutual administrative assistance, 9 customs cooperation, 156–58, 159 information exchange, 153–54, 162 proposed multi-disciplinary transnational instruments, 160 mutual legal assistance, 9, 181–82, 183–84, 187 anti-fraud cooperation, 136 confiscation, 93 national criminal investigation authorities, 149–51 OLAF support: operational assistance, 154–55 technical assistance, 154

ne bis in idem principle, 11, 182, 211–12, 221–22 Charter of Fundamental Rights, 215, 218–21 Council of Europe: ECHR, 215–16, 216 ECtHR, 216 Grande Stevens v Italy, 217 ratione materiae, 216 Zolotukhin v Russia, 216–17 EU, 222 Akerberg Fransson case, 219 Charter of Fundamental Rights, 215, 218–21 Common Agricultural Policy, 218 Engel criteria, 218–19 European Court of Justice, 218–19 European Court of Justice: restrictive interpretations, 218–20 USA, 221–22 double jeopardy clause, 212–14 consequences, 214–15 formal understanding, 214 Helvering v Mitchell, 212, 214 Hudson v United States, 214, 215 scope, 212–13 United States v Harper, 213, 214 United States v Ward, 213 nature of sanction, 213 negotiated justice, 6–7, 117–18 aiming to drop a case, 129 deferred prosecution agreements, 124 endangering procedural safeguards, 120, 126–27, 130–31 features, 121–23 Germany: aiming to drop a case, 129 efficiency and procedural safeguards, 130–31 negotiated agreements, 127–28 provisional termination of proceedings, 127–28 guilty pleas, 125 lack of transparency, 131–32 negotiated agreements, 127–28 provisional termination of proceedings, 127–28, 130 terminology: ‘efficiency’, 119–20 ‘justice’, 118–19 ‘negotiated justice’, 119 transparency, lack of, 131–32 USA: deferred prosecution agreements, 124 efficiency and procedural safeguards, 126–27 endangering procedural safeguards, 120, 126–27 guilty pleas, 125

294  Index non-prosecution agreements, (NPAs) (USA) 19–20 Holder memo, 22 judicial oversight of agreements, 53–54 Thompson memo, 22–23 see also corporate monitors Office of Fair Trading (OFT) (UK), 11, 265–66 see also Competition and Markets Authority OLAF, see European Anti-Fraud Office privilege against self-incrimination, 7–8, 68, 120, 195–96, 199–200, 204, 206–07, 213 procedural safeguards, 191–92, 208–09 criminal law safeguards, 194–95, 196–97 individual state responsibility, 198–99 rule of comity, 197–98 EU, 200–02 EPPO, 203–04, 208 harmonisation of defence rights, 205 mutual recognition regime, 207–08 OLAF investigations, 202–03 protection of fundamental rights, 205 institutional dimension, 207 procedural dimension, 206–07 substantive element, 205–06 right to a fair trial, 204–05 right to silence, 195–96, 199–200, 204, 206–07, 213 Germany, 130–31 nation-state, 192–93 clarity of law, 193 judicial organisation and independence, 193 procedural fairness, 193 rule of law, 193 negotiated justice, 120, 126–27, 130–31 non-criminal proceedings, 195 overlapping competencies, 199 parallel investigations, 195–96 privilege against self-incrimination, 199–200 rule of law, 193, 196–200 transnational multi-disciplinary investigations: choice of forum, 179–83 EU, 200–08 international criminal law, 196–200 nation-state, 192–96 nullum crimen, nulla poena sine lege, 193–94 nullum judicium sine lege, 194 USA, 120, 126–27 proportionality principle, 11–12, 127–28, 203–04, 254–55 double jeopardy principle, 213–14 necessity and proportionality test, 227–28 ultima ratio principle, 260–62

Prudential Banking regulations, 233–34 administrative and criminal enforcement interaction, 246–48 intersystemic, 248–49 intrasystemic, 249–50 administrative pecuniary penalties, 250–51 periodic pecuniary payments, 251–52 criminal law enforcement: arguments against, 259–60 arguments for, 258–59, 260 proportionality principle, 260–62 ultima ratio principle, 260–62 European Banking Union: administrative and criminal enforcement interaction, 246–48 intersystemic, 248–49 intrasystemic, 249–52 CRD IV, 235 enforcement mechanisms, 234–35, 256–58 investigatory powers within SSM and SRM, 235–38 judicial protection within SSM and SRM, 245–46 sanctioning powers within SSM and SRM, 238–45 single resolution mechanism, 235 single supervision mechanism, 235 non-criminal enforcement, 262–64 procedural principles: intersystemic interactions, 254–55 presumption of innocence, 255–56 publication of sanctions, 255–56 right against self-incrimination, 255 proportionality, 256 single resolution mechanism, 235 investigatory powers, 235–38 judicial protection, 245–46 sanctioning powers, 238–45 single supervision mechanism, 235 investigatory powers, 235–38 judicial protection, 245–46 sanctioning powers, 238–45 substantive criminal law: principle of culpability, 254 principle of legality, 253–54 Prudential Securities case, 21 justification of DPA, 22 Public Interest Disclosure Act 1998 (UK), 102 reporting and reporting duties, 7–8 corporate monitors, 38, 41 public disclosure of reports of monitors, 54–56 detection tool, as, 85 see also disclosure duties Resolution and Recommendation on the Protections of Whistle Blowers (EU), 102

Index 295 sanctions: accumulation of sanctions: double jeopardy, 212–15 Europe, 11–13 dual sanctioning schemes, 218–21 substantive approach, 215–18 ne bis in idem principle, 11 proportionality principle, 11–12, 214 USA, 12, 13, 212–15 administration of justice, 92–94 compliance management systems: sanctions for non-compliance, 73–74 confiscation orders: Asset Recovery Office, 93–94 international cases, 93–94 Luxembourg, 92–94 national cases, 93 cumulative sanctions, 10 dual sanction schemes, 218–21 European Court of Human Rights (ECtHR): administrative penalties, 250–51, 253 criminal sanctions, 230–31 pecuniary penalties and fines, 250–51 European Court of Justice (ECJ) (EU): criminal sanctions, 230–32 dual sanctioning schemes, 218–21 monitorships as, 39–40 necessity and proportionality, 228 non-compliance of CMS, 73–74 proportionality, 228 publication of sanctions, 255–56 single resolution mechanism, 238–45 single supervision mechanism, 238–45 see also ne bis in idem principle Second Protocol of the Convention on the Protection of the European Communities’ Financial Interests (Second PIF Protocol) (EU), 151–53 Securities and Exchange Commission (SEC) (USA), 11 Sarbanes-Oxley Act 2002, 185 Serious Fraud Office (SFO) (UK), 269, 275, 281–82 single resolution mechanism (SRM), 235 investigatory powers, 235–38 judicial protection, 245–46 sanctioning powers, 238–45 single supervision mechanism (SSM), 235 investigatory powers, 235–38 judicial protection, 245–46 sanctioning powers, 238–45 specialisation of prosecuting authorities, 7–8, 13 Standard Chartered Bank case, 43–46 substantive criminal law, 5–6 Germany: compliance programmes, 57–78

USA: corporate monitors, 19–33 efficacy of monitorships, 39–45 improving monitorships, 46–55 monitorships, 34–38 technological advances, 1–2, 87–88, 97 Thompson memorandum: corporate monitors, 22–23 transnational investigations: EU as a single entity, 183–85 EU member states: choice of jurisdiction, 179–83 coordination of enforcement actions, 179–80 criminal enforcement of substantive policies, 176–77 forum shopping, 181, 205–06 harmonisation of applicable law, 177–79 multiple investigations, 181–82 national v supranational competences, 176 overlapping and conflicting jurisdictions, 178 protection of interests of citizens, 182 international community, 187–88 redefining concepts, 188 re-orientating jurisdictional doctrine, 188 blocking statutes, 189–90 duties of states, 189–90 protection of individual rights, 188–89 USA: Bank Holding Company Act, 185–86 Dodd-Franck Act, 185 effect doctrine, 185–87 jurisdiction to adjudicate, 186 jurisdiction to enforce, 186 prescriptive jurisdiction, 185–86 Sarbanes-Oxley Act 2002, 185 Treaty on the Functioning of the European Union (TFEU), 13–14 anti-fraud measures, 136–37, 160–61, 226–27 customs cooperation, 156 criminal cooperation, 159 mutual administrative assistance, 156–58 Naples II Convention, 159 Regulation 515/97, 156–58 harmonisation measures, 179, 201 judicial review, 245 jurisdictional conflicts, 178, 179 OLAF, 138, 149 prohibition on anti-competitive agreements, 270 second PIF Protocol, 151–52 subsidiarity, 226 trustees in bankruptcy: corporate monitors compared, 25

296  Index UK Competition Network, 281 United Kingdom: deferred prosecution agreements, 56 risk assessments, 77 see also Competition and Markets Authority United States of America: aggressive extraterritorial enforcement actions, 59–60 BNP Paribas case, 61–62 Commerzbank case, 61–62 HCBS case, 61–62 corporate monitors: background, 20–21 court-orders corporate probation compared, 24–25 DoJ and dispute resolution, 30 evaluation of monitorships, 39–46 factors influencing government decision to appoint, 32–34 forfeiture cases, 31 gatekeepers compared, 23–24 improving monitorships, 46–56 independent private sector inspector general, 26–27 internal investigators compared, 24 modern monitors, 21–23 operation of monitorships, 34–39 potential application to EU, 56 selection and use of monitors, 28–30 trustees in bankruptcy compared, 25 deferred prosecution agreements, 19–20, 124 negotiated justice, 6–7, 117–18 deferred prosecution agreements, 124 guilty pleas, 125 non-prosecution agreements, 19–20

protection of whistleblowers, 101–02 see also deferred prosecution agreements; non-prosecution agreements Whistleblower Protection Act 1989 (USA), 101–02 Whistleblower Protection Enhancement Act (USA), 101–02 whistleblowers, 8, 86, 98 balancing interests, 104–05 contexts: business, 99, 100–01 government and public bodies, 99–100 organised crime, 99, 100 legal framework: legal defence, 101–02 legal reward, 103–04 legal security, 102–03 witness protection, 102–03 legal reward, 103–04 leniency whistleblowers: business opportunist, as, 111–12 profile and characteristics, 108–09 serial cheats, as, 109 principled betrayers compared, 109–10 turncoat, as, 110–11 moral character, 113 legal entitlement, 113–14 motivations, 96 economically-motivated whistleblowers, 98, 105–06 ethically-motivated whistleblowers, 98, 106 risks, 101–05 systemic risks, 114–15 see also leniency programmes