Clifford Chance

The FCA recently lost an Upper Tribunal case against three former employees of Julius Baer. The case is important for two main reasons. First, the FCA lost its arguments on what constitutes recklessness. Second, the Upper Tribunal heavily criticised the FCA's conduct of the investigation and the litigation in a way that is likely to impact future enforcement investigations.

What was the case about?

The case concerned dealings between Julius Baer and an individual connected with the Yukos Group from 2010. It was contemplated that the individual would introduce companies within the Yukos Group to banks within the Julius Baer group of companies, in return for fees. It was alleged that these fees were funded through inflated charges levied on Yukos accounts and that Julius Baer must have known that by entering the arrangements it might be facilitating or participating in financial crime.

In 2022 the FCA took enforcement action against Julius Baer International Limited ("JBI") as an institution. JBI accepted that it breached Principle 1 (A firm must conduct its business with integrity), Principle 3 (A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems) and Principle 11 (A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice).

The Principle 11 breach was based on failing to notify the FCA sufficiently quickly. The FCA's investigation followed an internal investigation conducted by Julius Baer through a third party.

Alongside the disciplinary action against Julius Baer, the FCA sought to prohibit three individuals from working in financial services:

• Louise Whitestone, Yukos Relationship Manager;
• Thomas Seiler, Managing Director at Bank Julius Baer (JBI's parent, "BJB") and Mrs Whitestone's functional line manager as Sub-Regional Head for Russia and Central and Eastern Europe; and
• Gustavo Raitzin, member of BJB's Executive Board and Head of BJB's International Business, Regional Head for Latin America, Spain, Russia, Central and Eastern Europe and Israel and Mr Seiler's line manager.
   

Mrs Whitestone and Mr Seiler were approved persons.

The FCA did not seek to take disciplinary action against the individuals in addition to prohibition. In Mr Raitzin's case he was not regulated and so no disciplinary action for breach of APER would have been possible.

Lack of Integrity – what is recklessness?

The FCA argued that the individuals should be prohibited from working in financial services because their conduct showed that they lacked integrity. In each case it was said that they lacked integrity on the grounds that they were reckless as to the risk of financial crime posed by the fee arrangements.

The FCA argued that the individuals were reckless because a reasonable person in their shoes must have known that the arrangements might involve financial crime.

The Upper Tribunal rejected this argument. Recklessness requires a person actually to appreciate a risk and unreasonably to proceed anyway, or to turn a blind eye. It is not enough that a reasonable person would have appreciated the risk (although this might show negligence). The Authority had sought to extend the concept of a lack of integrity beyond its proper bounds.

On the facts, the Upper Tribunal found that the individuals had not been reckless and therefore had not lacked integrity. The Tribunal remitted the matter to the FCA to reconsider the prohibitions, with guidance that whilst there might be a basis for considering prohibition on competence and capability grounds, prohibition should not be used as a proxy for disciplinary action in circumstances where, as in this case, a disciplinary sanction could not be imposed either because the individual was not an approved person at the relevant time or the relevant limitation period has since expired.

Criticisms of the FCA

The Upper Tribunal went on to make a number of criticisms of how the FCA had handled the investigation and litigation. These are the key points:

1. Delay

The Upper Tribunal found the passage of time between the underlying events in question and the hearing before it (approximately 12 years), was longer than any comparable proceedings in the Upper Tribunal and this was "obviously unsatisfactory". It also held that the passage of 5 years from commencement of the FCA's investigation into Mrs Whitestone, to the issuing of her Decision Notice was "on any view unacceptable". The impact of the delay was compounded by the fact that key individuals were not interviewed by the FCA until many years after the events (and in some cases, not interviewed by the FCA at all). Progress after the FCA's interviews occurred at a "glacial pace". There were long delays in the FCA's decision making process, during which "naturally memories would continue to fade". All of this impacted the ability of the witnesses to recall key evidence before the Upper Tribunal, and therefore impacted the weight the Upper Tribunal was able to give witness evidence.

Delay was partly attributable to significant staff turnover at the FCA, and re-allocation of some staff to other investigations. The Upper Tribunal warned that "when such a situation arises, it is for the Authority to give serious consideration as to whether it is appropriate to continue with an investigation which it does not have the resources to complete within a reasonable period of time and where it has decided that its priorities for limited resource lie elsewhere".

2. Reliance on the firm's account

The Upper Tribunal found that the FCA had relied too heavily on the version of events put forward by JBI in the separate regulatory proceedings against JBI. In the JBI proceedings, the FCA had relied heavily on investigations conducted by an accountancy firm and a law firm on behalf of JBI and carried out "little by way of independent investigation itself". The Upper Tribunal was highly critical of this approach stating, "the allegations [against the individuals] could easily have been divorced from the allegations against the firm and investigated thoroughly and independently… bearing in mind the conflict of interest between the interests of JBI and the three individuals". Failing to conduct an independent investigation contributed to gaps in the witness and documentary evidence. For example, the FCA only interviewed one of the three individuals it was seeking to prohibit. The witnesses whom the FCA called to support its case at the Upper Tribunal "only had a peripheral involvement" in the relevant arrangements. The FCA's failure to call one key individual as a witness was questionable on "rationality grounds". It was highly likely that potentially relevant documents had not been gathered and made available. Even in relying on the investigations conducted on JBI's behalf, the FCA had not obtained a full set of the documents considered in those investigations, and "there was a failure to probe the evidence gathering and disclosure made by JBI".

3. Failures relating to disclosure of undermining material

The Upper Tribunal noted there had been a serious failure on the FCA's part with regard to its disclosure obligations, including:

• Failing to obtain and disclose highly relevant documents reviewed by the law firm in its investigation into JBI, until prompted to do so by one individual's solicitors in June 2020 during the course of the RDC proceedings. This was notwithstanding that the FCA was already in possession of an index detailing these documents so had the means of appreciating their existence;
• Identifying and disclosing one highly material email after the Upper Tribunal hearing had taken place. The FCA had previously, on two separate occasions, identified this document as relevant, but it had not been disclosed to the individuals because the reviewer wrongly assessed the document as not undermining of the FCA's case. In the Tribunal's view, "any reasonably competent and properly trained reviewer should of course have identified the document as being disclosable on the basis that it had the capacity to undermine part of the Authority's case. That is immediately apparent from reading the document."

In view of these failures, and despite the FCA's assertions to the contrary, the Upper Tribunal found it could not be satisfied there were no other relevant documents that should have been disclosed.

As regards disclosure failures the Upper Tribunal expressed exasperation that basic errors continued to occur despite "castigation" in a line of prior cases: Hussein v FCA [2018] UKUT 186 (TCC); Alistair Burns v FCA [2019] UKUT 0019; and Forsyth v FCA [2021] UKUT 162.

4. Lack of objectivity in the FCA's approach

The FCA had anchored its theory in the proceedings on an email from one individual's line manager. The FCA continued to follow that theory even when it later doubted the veracity of that evidence and the email was contradicted by other relevant evidence. The Upper Tribunal criticised the FCA for its failure to reassess its own case theory and to consider whether, as against a background of defective systems and controls, it was more likely that the individuals' conduct reflected a lack of competence rather than a lack of integrity. This lack of objectivity was also inconsistent with the FCA's duty to assist the Upper Tribunal including by calling relevant evidence before the Tribunal even if it might exculpate the individuals, finding "it should not be the case that as a tactical decision the Authority declines to call a witness who can assist the Tribunal with relevant information so as to benefit its own theory of the case".

The Upper Tribunal noted the FCA was left in an awkward position whereby its published findings against JBI were different to the Upper Tribunal's decision and suggested that, even though the outcome in respect of JBI could not be changed, consideration should be given to replacing the JBI Final Notice with a summary omitting reference to the unjustified findings in respect of the individuals.

Conclusion

These are stark criticisms which will have an impact on the FCA's conduct of current investigations and litigation. The findings in relation to delay and objectivity, in particular, may have an immediate impact as the new Directors of Enforcement review the Enforcement case load following Mark Steward's departure.

The Upper Tribunal made particularly clear how its ability to discern the facts was impaired by the deficiencies identified in the investigation. Its approach was materially altered, such as the caution it displayed in drawing inferences against witnesses due to its lack of faith in the fullness of the record presented to it.

Challenges to the FCA's investigation process are likely to be resisted by the FCA, however subjects of investigations should not be deterred where they consider the process being followed lacks fairness. Some of the issues noted before the Upper Tribunal would not have come to light had parties not been so clear in holding the FCA to account.

The FCA has stated a clear intention to act more quickly and assertively in responding to misconduct, including by using non-disciplinary measures. Seiler shows that even where the FCA does so, it must still investigate thoroughly and fairly and risks severe criticisms where it does not do so.