An “embarrassing situation”: how the FCA came unstuck at the Upper Tribunal

The Upper Tribunal ruling in Seiler, Whitestone and Raitzin vs FCA was a significant defeat for the financial regulator. In a blog on the case, Tom Bushnell and Olivia Dwan ask whether, by too readily accepting the account of an accused corporate body, the FCA is following in the mistaken footsteps of the SFO.

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The Serious Fraud Office’s repeated failure to convict individuals after it has entered a Deferred Prosecution Agreement with a company it is investigating is a well-acknowledged phenomenon – and an ongoing problem for the agency.

But the SFO is not the only law enforcement body grappling with how to weigh the benefits of accepting a corporate’s account of disputed events against its obligation to respect the rights of an accused individual.

The FCA recently suffered a significant loss in the Upper Tribunal, which allowed three references by former employees of the Julius Baer group of banks who had all been given prohibition orders by the FCA.[1]

The Upper Tribunal’s judgment, published on 12^th June this year, raises a number of interesting issues, sure to be explored again in future cases. Of particular note, however, was the Tribunal’s criticism of the FCA for accepting a narrative advanced by the firm when settling enforcement action which proved to be wrong when the case against the individuals came to be considered.

The parallels between the FCA’s travails in the Julius Baer case, and those of the SFO in its various DPA-related prosecutions, are clear. The Upper Tribunal’s ruling this matter merits close reading by anyone interested in securing the rights of accused individuals in financial crime-related investigations.

Whose investigation is it anyway?

The enforcement action against Julius Baer’s UK entity Julius Baer International (JBI) and its then employees Thomas Seiler, Louise Whitestone and Gustavo Raitzin Rrelated to the group’s dealings with an individual within the Yukos group of oil and gas companies.

This individual was said to have introduced Yukos to Julius Baer companies, in return for commission or “finders’ fees” which, the FCA alleged, were paid through three “vastly inflated foreign exchange transaction charges levied to Yukos by Julius Baer”.

The FCA claimed JBI must have appreciated the risk that these arrangements might amount to facilitating or participating in financial crime. It accused the named JBI employees of lacking integrity by recklessly disregarding the risk that Yukos’ funds were being misappropriated via these arrangements.

As is often the way in these matters, the FCA’s investigation came after JBI was alerted to the potential misconduct and had commissioned its own external investigations into the matter. In this case JBI engaged Deloitte and Eversheds; and it provided the results of these investigations to the FCA. The Upper Tribunal ruling is clear that the agency heavily relied upon them in its own probe.

The FCA case against JBI culminated in the company admitting breaches of Principle 1, Principle 3 and Principle 11 of the of the FCA’s Principles for Business.

The factual basis for these breaches was agreed between JBI and the FCA, and largely followed the findings of the Deloitte / Eversheds investigations. It included criticisms of the three individuals, and attribution of their conduct to the firm. The agreed findings were memorialised in a Final Notice dated February 2022.

The individuals protest

But while JBI agreed to the FCA’s ruling; its employees Thomas Seiler, Louise Whitestone and Gustavo Raitzin did not.

Between 2019 and 2021 the trio contested the proceedings before the FCA’s Regulatory Decisions Committee. They were unsuccessful, and were each given prohibition orders. They referred these to the Upper Tribunal.

The Upper Tribunal took a very different view to the FCA. It found that none of the individuals had acted recklessly, and therefore none should have been prohibited. Its findings of fact also differed markedly to those that the FCA had agreed with Julius Baer.

Most dramatic of all was the FCA’s case on the so-called “Third FX Transaction.” Here, and prior to the issue of the original Warning Notices, the firm had already “admitted to” a version of events in relation to this transaction which was used by the FCA in the Warning Notices against the firm and individuals.

The individuals, however, disagreed with that account and pushed for disclosure. The Upper Tribunal’s judgment explains what happened next:

…when disclosure of documents was made… the Authority realised that its case in respect of the Third FX Transaction was completely wrong. It attempted to recover the situation by substituting a completely different transaction as forming the basis of the Third FX Transaction.

[para 144]

To make matters worse, it appears that the FCA had been sent a list of those crucial documents by the firm five years earlier, but not obtained them. With typical judicial understatement, the Upper Tribunal called this an “embarrassing situation” for the FCA.

Whilst the FCA was able to correct itself on the Third FX Transaction during the RDC proceedings (and thus include a new allegation in its place in the Decision Notices), the Tribunal was less forgiving: it declined to give the FCA permission to rely on this aspect of its case.

What does this mean for FCA’s Final Notice against the firm?

The net result of the individuals’ success before the Upper Tribunal is that the JBI Final Notice, published in February this year, differs markedly from the Upper Tribunal’s findings, published four months later.

But because the action against the firm was not referred to the Upper Tribunal, there was little that  the Tribunal could do to rectify this. It was limited to making these comments:

The Authority will now have to consider how it deals with the JBI Final Notice in the light of our findings. It would clearly be unfair to the Applicants if that notice continues to be published in full on the Authority’s website. We recognise that the outcome as far as the position between JBI and the Authority is concerned cannot be changed, but consideration should be given as to whether a summary of the outcome, which does not refer to the findings against the Applicants which have now been demonstrated not to be justified can replace the Final Notice on the Authority’s website.

[para 931]

It appears that the FCA disagreed. At the time of writing, JBI’s Final Notice remains in full on the FCA’s website alongside an accompanying (triumphant) press release. But on 14^th July this year both were updated to include the following note:

The findings in this notice are those of the Authority and are not the subject of any judicial finding. It includes criticisms of Louise Whitestone, Thomas Seiler and Gustavo Raitzin, who each received Decision Notices in relation to such criticisms.

They referred their Decision Notices to the Upper Tribunal, which issued its decision on 13 June 2023. It found that none of them acted with a lack of integrity and rejected all of the Authority’s findings to that effect. The Tribunal remitted their Decision Notices to the Authority with a direction to reconsider and reach a decision in accordance with the findings of the Tribunal. The Authority has decided to take no further action against them.

This public acknowledgment of the FCA’s failure is no doubt embarrassing for agency; its decision to take no further action a public vindication of the individuals’ refusal to accept JBI’s account of what happened.

How did the FCA get itself into this position?

At the heart of a number of the FCA’s difficulties appears to have been its acceptance of JBI’s version of events or case theory, and its preference for that over the denials of the individuals. This is an easy trap to fall into. The Tribunal put it this way:

In essence, the Authority’s case against the three Applicants has been derived primarily from its acceptance of the version of events put forward by JBI, as supported by the Deloitte and Eversheds investigations. As [counsel for Mr Seiler] observed, when a firm is put under investigation and is keen to settle the matter and move on it is common for the firm to blame individuals who were no longer employed for serious misconduct and otherwise accept systems and control breaches.

[Para 141]

Nonetheless, the Tribunal pointed out that the FCA’s problems were avoidable:

… the allegations regarding the activities of the Applicants… could easily have been divorced from the allegations against the firm and investigated thoroughly and independently by the Authority, bearing in mind the clear conflict of interest between the interests of JBI and the three individuals. The failure to do so, has to put it mildly, put the Authority in a very awkward position with different findings against the Applicants as a result of the outcome of these references to those made in the JBI Final Notice.

[Para 143]

But instead, the FCA became “anchored in its initial impressions of what happened” [para 930] and refused to budge.

Echoes of the SFO?

The Julius Baer case is not the first time a law enforcement agency has been criticised for placing too much weight on the admissions of a corporate and failing to prove the same case against senior individuals.

Many have argued that the Serious Fraud Office has fallen into this trap repeatedly following Deferred Prosecution Agreements (DPAs). Introduced in the UK in 2014, DPAs are a mechanism by which a company can avoid prosecution if it accepts guilt, complies with certain conditions and co-operates with the investigation.

For a corporate to be guilty, it is often necessary to establish wrongdoing on the part of its “directing mind and will” – i.e. senior individuals. Sometimes, therefore, individuals get prosecuted following a DPA.

But the SFO does not enjoy a good record in those prosecutions. Indeed, since 2014 it has only secured one conviction of an individual following the signing of a DPA. And it has suffered a series of high-profile losses: for example, Tesco Stores Ltd signed a DPA in April 2017 relating to fraud and false accounting. The subsequent prosecution of the individual senior executives blamed for the wrongdoing, was thrown out at half-time.

The Court of Appeal upheld the trial judge’s decision ([2019] EWCA Crim 29) and noted more than once in its ruling that the SFO had failed to call any independent expert accounting evidence. Was the reason for that failure the fact that the SFO was too blinded by Tesco’s previous admissions?

More recently, the SFO was forced to abandon its prosecution of three G4S executives, which had followed  a DPA with G4S Care & Justice Services (UK) Ltd in relation to the same conduct. One of the defendants said that by agreeing the DPA, G4S had signed a “false confession.”

Our colleague Ross Dixon, who acted for acquitted individuals in both the Tesco and G4S cases, has likened a DPA to “a magnet on a compass, influencing prosecution case theory and the way in which evidence is interpreted when such an agreement is in sight”.

The simple reality is that corporates facing enforcement action by the SFO or FCA have different priorities to individuals whose liberty or livelihoods or reputations are on the line. It is incumbent on law enforcement agencies to avoid being lured into a case theory that comes easily to a corporate, but which might not fairly reflect the underlying evidence.

Independent is best

How, then, can the FCA avoid making this a habit as the SFO appears to have done? The Tribunal answered that question with clarity:

… the Authority should consider the appropriateness of conducting contested proceedings against individuals on the basis of its acceptance of a version of events put forward by the employer of those individuals who is keen to settle the separate proceedings taken against that firm without the Authority conducting its own rigorous investigation into the individuals concerned. Many of the difficulties in this case have arisen as a result of the Authority taking that course of action and relying primarily on the internal investigations commissioned by JBI into the events which are relevant to these references.

[Para 926, emphasis added]

In short: do not let admissions by the firm get in the way of a proper, robust and independent investigation. Only then will we see agencies like the FCA and SFO target the correct individuals in their enforcement action.

Tom Bushnell and Olivia Dwan are associate barristers at Hickman & Rose. They both have considerable experience in representing individuals in cases brought against them by the FCA and SFO, including significant roles in the successful defence of individuals prosecuted following the Tesco and G4S DPAs.

[1] The Financial Services and Markets Act 2000 allows parties who are aggrieved at certain decisions made by the FCA to “refer” their cases to the Upper Tribunal.