Legal and business news analysis - February/March 2019

Legal and business news analysis - February/March 2019

Brexit: banking sector seeking much-needed clarity to minimise disruption


As the date currently set for the United Kingdom’s exit from the European Union approaches, the prospect of a no-deal Brexit at the end of March has become increasingly real. On 15 January, Members of Parliament emphatically voted down the withdrawal deal put forward by Prime Minister Theresa May by an historic majority: 432–202. As Global Insight went to print, MPs were due to vote on the government’s Plan B on 29 January, with key sectors of the economy keen for certainty that is currently distinctly lacking.

Despite months of discussions with the UK banking watchdog – the Prudential Regulation Authority – and the European Central Bank, many banks are still in the dark about how their operations will be affected come Brexit Day.

‘Even in a negotiated deal scenario, the legal impact of Brexit on the financial sector is significant,’ says Giuseppe Schiavello, founder of Schiavello & Co Studio Legale and Co-Chair of the IBA Banking Law Committee. ‘The draft withdrawal agreement approved by the EU is still silent about financial services, and three mere declarations of principle are contained in the outline of the political declaration setting out the framework for the future relationship between the EU and the UK, as agreed at negotiators’ level in November.’

Florian Drinhausen, General Counsel at Deutsche Bank, says the sector is crying out for clarity. ‘The key thing we need is a clear framework of what is legally permitted to do after Brexit,’ he says. ‘What’s not clear is the transition period, what mutual recognition we’ll have, and when we’ll have a final regime in place that’s new. That affects almost every aspect of our business.’

Drinhausen says the question of whether pre-Brexit deals will remain intact after the UK leaves the EU has not been adequately addressed: ‘Our financing transactions, for example – will they be grandfathered and can we continue to service them? The entire financial industry is looking at this. The easiest way would be if people could agree that we simply grandfather this, but that’s clearly a political decision, and that’s a decision that we as a bank, as large as we may be, have little influence over.’

However, some say grandfathering seems an increasingly unrealistic option. ‘There’s a significant risk that existing contracts may turn invalid if the services to be performed would no longer be permitted to the originally passported counterparty following Brexit,’ says Schiavello. He says the potential effects could be disruptive for many banks.

The banking sector needs a clear framework of what is legally permitted after Brexit

Jonathan Herbst is Global Head of Financial Services Regulation at Norton Rose Fulbright and the former Head of European Law at the UK Financial Services Authority. He agrees that grandfathering is off the table now as far as banks are concerned: ‘[The EU] view is that unless it’s significant to their interests – and that’s all their interested in – there will be no movement.’

Some light has been shed elsewhere in the sector though. UK-based clearing houses breathed a huge sigh of relief in November 2018 when the European Securities and Marketing Association said it would make an exception and recognise them for a temporary period from 30 March – the day after the UK leaves the EU. This will ensure firms in the European Economic Area retain access to clearing and settlement services even in a no-deal scenario.

Even without the assurances of grandfathering, Herbst says banks have been quietly preparing for potential cliff-edge risks for some time. ‘UK banks and indeed the European branches have had to work on the assumption of a no-deal for a long time,’ he says. ‘So, theoretically it shouldn’t make a real difference because they’ve been putting plans in place.’

Many banks have already made contingency plans. Some, like Barclays and Bank of America Merrill Lynch, have relocated their European hubs to Dublin to ensure they can continue to service clients in the EU. Drinhausen says a ‘small number’ of staff have been earmarked to move from Deutsche Bank’s London office to its headquarters in Frankfurt.

Peter Snowdon, a specialist in financial services regulatory law at Norton Rose Fulbright, says Brexit may be a wake-up call to some banks operating across Europe. ‘Quite a lot of banks who’ve now mapped their activities have found they’ve been doing things in Europe that, strictly speaking, they haven’t had permission to do,’ says Snowdon. ‘Nobody has really thought about that in terms of cross-border activity, as up until now it hasn’t really mattered. But, of course, in the Brexit world suddenly the barriers go up.’

Assuming Brexit isn’t delayed, Snowdon says banks that find themselves in this scenario will need to work quickly to remedy the situation. ‘Banks in that position [should] start thinking about whether they’re going to put in a formal application before Brexit Day, or notify that they will put in an application on Brexit Day. If you don’t go through the notification or application process, you could find your business undermined.’

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New IBA President and leadership team begin their terms for 2019–2020

Brazilian lawyer Horacio Bernardes Neto has assumed the Presidency of the IBA, as the new leadership begins its two-year term for 2019–2020.

A member of the IBA for almost 40 years, Neto said he would ‘contribute the great skills within the Association towards the advancement of more just and equal societies’.

Neto – who succeeds the Czech Republic’s Martin Šolc – said: ‘My heart swells with pride at being the first Brazilian to hold the position. Like my predecessors, I am able to bring to bear global legal perspective and action on a number of pressing issues.’

Priorities during his time in office will include developing initiatives on the refugee crisis; dealing with bullying and sexual harassment in the legal profession; considering the role of lawyers from a business perspective; and wellbeing in the legal community.

The change of leadership also sees James Klotz become the Vice-President of the IBA, and Almudena Arpón de Mendívil take up the position of IBA Secretary-General.

Klotz has been a member of the IBA Management Board since 2010, and is also Chair of the IBA Task Force on the Future of Legal Services. Arpón de Mendívil said she will ‘contribute to the continued improvement of this very successful association, to make it even more influential, useful and inspiring’.

For more information, go to tinyurl.com/iba-governance-2019

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Brexit: addressing an uncertain future – podcast


The profound challenges posed by Brexit – from the future of Britain and the European Union, to the impact on global trade – are assessed in the IBA’s latest podcast.

Leading figures address the continuing fallout from the United Kingdom’s withdrawal, the potential repercussions for free trade, and the reshaping of the EU after Brexit:

  • Ken Clarke, former UK Chancellor, Home Secretary and Justice Secretary, considers the struggle to reach a compromise agreement in the national interest;
  • Vanessa Sciarra, Vice President for Legal Affairs and Trade and Investment Policy at the National Foreign Trade Council, examines the future trading relationship between America and the UK;
  • Mary Robinson, the 7th President of Ireland, discusses the continuing uncertainty around Brexit and concerns over the Irish border issue; and
  • Romano Prodi, the 10th President of the European Commission, warns of the difficult and complex transition facing the EU.

Listen to IBA podcasts at tinyurl.com/iba-podcasts-2019

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Sexual harassment in the legal profession – survey report launch

The findings of the IBA’s 2018 global survey on bullying and sexual harassment in the legal profession – the largest-ever survey on this topic – will be unveiled at an event in London on 15 May.

A report setting out the survey results and the IBA’s empirically-informed recommendations will be discussed by a high-profile panel.

Some 7,000 legal professionals from over 130 countries completed the survey, providing global data on the nature and prevalence of the problem.

The event will present the report’s analysis of the findings and its recommendations on how the legal community can revisit policies and training in this area.

To receive further details on the event, register your details at tinyurl.com/iba-harassment-launch

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Structured settlements for foreign bribery – global report

The global spread of structured settlements for corporate corruption offences is examined in a new report from the IBA Structured Criminal Settlements Subcommittee.

Setting out the results of a two-year project, the report maps how settlement practices for foreign bribery have evolved. It also considers the need for global standards for settlements, given the cross-border and complex nature of most corrupt transactions.

Charting what it calls ‘a revolution in the world of anti-corruption’ over the past 40 years, the report features 66 country reports outlining the worldwide enforcement architecture for foreign bribery offences. These national viewpoints outline the diverse approach to a variety of issues, such as: corporate liability; cooperation from corporations; prosecutorial discretion; and the judicial oversight of settlements.

‘Foreign bribery is now a criminal offence in most countries,’ the report says. ‘Corporations are prohibited from engaging in the grand-scale corruption that corrodes social, economic and political development. However, the challenge that strongly persists is how to achieve effective enforcement of international and domestic foreign bribery rules.’

Examining the latest trends, the report considers the key challenges in setting up a global coordinated settlement framework for serious financial crime. It also examines different settlement models, emphasising that de jure frameworks provide a true alternative to criminal trials.

Structured Settlements for Corruption Offences Towards Global Standards can be downloaded at tinyurl.com/iba-structured-settlements

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New guidance for business on International Labour Standards

The IBA Global Employment Institute (IBA GEI) and the International Organisation of Employers have issued a new report offering guidance for business on the International Labour Standards (ILS).

An area of increasing importance to business, the ILS are legal instruments, set by the International Labour Organization, which protect basic worker rights, taking into account the need for sustainable enterprises to create jobs.

International Labour Standards in the Contemporary Global Economy outlines how the ILS are supervised; how they interact with national regulation; and how they affect companies that refer to them in their codes of conduct and international framework agreements (IFAs).

As the report explains, ILO Conventions are increasingly being referenced in IFAs and codes of conduct as corporate social responsibility moves up the agenda. This trend can have a direct impact on day-to-day management decisions and future business projects. But, says Els de Wind, IBA GEI Senior Vice-Chair and joint report editor, ‘the references are not always clear, and there is not full comprehension as to the legal consequences of such inclusion.’

‘The way companies refer to the ILS needs to be carefully considered given the unintended consequences linked to the extensive non-binding guidance produced by some of the supervisory bodies of the ILO on certain subject areas,’ says the report. It goes on to highlight the need to provide ‘credible and balanced guidance’ in a way that is legally consistent.

Download the report at tinyurl.com/iba-ilo-report

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Corporate Summit 2019 – the essential GC toolkit

The IBA Corporate Group Member Summit – an exclusive event for general and corporate counsel – is taking place in London on 6–7 March.

Featuring topical seminars and high-profile speakers, the event will explore ‘The essential GC toolkit’. Subjects to be covered will range from trade wars, sanctions and investment obstacles, to the impact of Brexit on the use of English law and courts. There will also be a focus on the challenges of running an in-house legal department, including issues such as change management, millennials and technology.

The Summit opens with an evening dinner featuring a keynote speech by Sir Sherard Cowper-Coles, Group Head of Public Affairs at HSBC Holdings.

For more information on this free event – go to tinyurl.com/iba-corporate-summit

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Anti-corruption: concern over money laundering prompts Europe-wide focus on ‘golden visa’ schemes

In December 2018, the United Kingdom Government announced it would be suspending its ‘tier 1’ visa scheme until new rules are finalised in 2019. The scheme, often referred to as the ‘golden visa’, allowed visitors to stay in the country for 40 months if they invested more than £2m in the UK’s economy.

Under proposed reforms, applicants will have to provide comprehensive audits of their financial and business interests and show they have had control of at least £2m of the amount being invested for at least two years. Applicants will also have to show they’re investing in active and trading UK companies.

However, it subsequently emerged that the suspension had not in fact been implemented, leading to some confusion. Moves like this reflect widespread concerns that ‘golden visa’ or ‘golden passport’ schemes are vulnerable to abuse by money launderers. A number of jurisdictions offer such programmes allowing foreigners to obtain citizenship or residence rights in a country on the basis of local investments or against a flat fee.

‘Such programmes are big business,’ says a new report by anti-corruption organisations Transparency International and Global Witness. Around €25bn in foreign direct investment has flowed into the European Union through these schemes over the past ten years, the groups claim.

‘If you have a lot of money that you acquired through dubious means, securing a new place to call home far away from the place you stole from isn’t just appealing, it’s sensible,’ says Naomi Hirst, a senior campaigner at Global Witness. Golden visa schemes offer a safe haven from authorities who might be looking to seize stolen assets, and the freedom to travel without raising suspicion.

‘These schemes must have the highest standards of due diligence checks, so countries know who they are welcoming and where their money came from,’ she adds. ‘Unfortunately, that’s not what we are seeing.’

In September 2018, for example, police in Finland raided a real estate agency at the centre of a suspected €10m money laundering operation controlled by a Russian businessman who reportedly purchased Maltese citizenship.

Governments need to carry out due diligence on those seeking citizenship residency

Two Ukrainian businessmen who were granted citizenship by Cyprus are alleged to have extracted €4.8bn from a bank they founded together in Ukraine.

Bulgaria, Greece, Hungary, Latvia, Lithuania and Portugal have also been singled out as examples of EU Member States who have assigned a significant number of citizenships to wealthy Africans, Chinese, Russians and Turks in exchange for investment in recent years.

Filippo Ferri is a partner with Italian law firm Cagnola & Associati and Secretary of the IBA Business Crime Committee. ‘The EU uses a minimal level of controls,’ he says. ‘For business purposes, this makes complete sense, but it has not been balanced with juridical tools to prevent unlawful behaviour. The EU needs a “safety controls union”, which is still totally missing.’

The European Parliament’s Special Committee on Financial Crimes and Tax Evasion released a draft report in November that called on EU Member States to phase out all such schemes. Their potential economic benefits ‘do not offset the serious money laundering and tax evasion risks they present,’ said the report.

Leah Ambler, Co-Chair of the IBA Anti-Corruption Committee, says completely phasing them out might simply lead investors to take advantage of similar schemes outside the EU. A better solution would be to tighten up the rules. ‘Governments need to make sure there are adequate controls to make sure [an investment] is not coming from an illicit source,’ she says. ‘They need to carry out due diligence on the individuals or companies seeking to obtain citizenship residency in the way that banks and companies are supposed to do on business partners.’

This problem is obviously not confined to the EU. A recent Organisation for Economic Co-operation and Development (OECD) report, focusing on how golden visa schemes can be used to avoid tax, highlights ‘high-risk’ programmes in jurisdictions such as the Bahamas, Bahrain, Colombia, Malaysia, Panama, Qatar, Seychelles, the United Arab Emirates and Vanuatu.

However, the need for action seems more urgent in Europe. This is primarily because once an individual has citizenship in one EU country, it opens up all kinds of markets and benefits in the 27 other Member States as well.

EU Commissioner for Justice, Consumers and Gender Equality, Vera Jourová, has described the schemes as ‘problematic’ and ‘unfair’, and said that while Brussels has no power to ban them, it can at least advise Member States to be careful.

The OECD report says there is evidence that golden passport schemes are being used to avoid reporting under the Common Reporting Standard (CRS). The CRS is a way for countries to automatically exchange information about non-residents holding bank accounts and other financial accounts offshore, in order to crack down on the use of offshore jurisdictions to facilitate tax evasion. More than 100 jurisdictions have agreed to make annual exchanges of information under the CRS.

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