In this, the last part of our serialised interview with Sara George of Stephenson Harwood, we look at the protective minutes that compliance officers ought to take, the status of MLROs, the failings of the Regulatory Decisions Committee and the Upper Tribunal cases that matter.

The interview - the last in our series - was conducted a few weeks ago by Chris Hamblin and is presented in the form of questions and answers.

Q: Can you give me some examples of some protective minutes that the compliance officer can take?

A: If you are asked for advice, orally, I would always make a point of either following it up in an email or keeping a contemporaneous note of what you advised, whom you advised and why you advised that including any information you were given at the time because many people won't record the facts as they were given to them and may be advising [others] on a completely erroneous basis. They'll record the advice and not the facts that it was based on. If you saw any documents or viewed any trades before giving that advice, note down what you saw or keep a copy of it with your advice.

Q: Recording everything would probably take as much time as doing it!

A: Lawyers don't give advice without recording what it was and what they saw. Some compliance officers are starting to be more sensible in their approach to keeping good records of what they said, why they said it and, most importantly, the basis upon which they were advising. That's what I find is often missing. I see the email advice, or I listen to recorded calls, but it is not clear what they actually saw. There is not really much point recording the advice unless you record the basis on which the advice was given.

Q: Yes. And presumably every time the compliance officer records that, it's not covered by any kind of legal privilege and he could take the notes home. Could he do that?

A: He could if the terms of his employment permit it. But as long as he keeps all his day books in a place where they could easily be retrieved, and he lets the firm know that if there were to be an investigation he actually does keep good records. He could say: “I keep day books of the advice I give and the reason why I give it, you'll find it here.” Alternatively, if he has a system of filing emails on particular issues or whatever...it's knowing where to find the material when you need it. It's key.

Q: What about whistle-blowing subordinates unjustly or unfairly making life difficult for the compliance officer? Do we have any stories about them?

A: Almost every case has a whistle-blower nowadays because of the 'employment law' consequences. It gives some protection and also an uplift in damages. Some cases have so many whistle-blowers that it's almost impossible to manage! Of course, the vast majority of whistle-blowers will not be 'good faith' whistle-blowers. They may only be in a position to report because they were involved in the wrongdoing. At some point, most compliance officers will have to deal with a whistle-blowing subordinate and that subordinate may be a more junior compliance officer. They will claim that they were a whistle-blower.

Q: Most whistle-blowers are no saints, are they?

Not always. There are occasions when whistle-blowers are genuinely not self-interested and are genuinely interested in the public good, doing things for absolutely the right reasons and willing to accept the often seriously detrimental consequences for them of having made a disclosure. They are, however, very few and far between and there are relatively few of them in financial services. You tend to find them more in medicine or the intelligence community.

The former Olympus CEO is the obvious one. He was the perfect example of someone who said: “I can't live with this. This isn't right. We're going to resolve it.” I'm representing someone like that at the moment but there are very very few people who are genuinely motivated by the public good. Those people who are will blow the whistle in the right way. They will go to a regulator. They will provide witness statements. They will set out evidence chronologically and they will not have any expectation of any personal benefit or interest in doing so. They will be willing to take the consequences of it, which they know will probably mean they don't work again in the same sector and/or the same job.

Q: Are the FCA regulators good at picking their fights?

A: I think they are. Generally, I think they are. Case selection is key.

Q: That's half the battle, isn't it?

A: Yes, picking the cases that you know you have a pretty good chance to win. But also, you shouldn't be putting people through the pain and anguish of a criminal trial or regulatory sanction unless the evidence is there to support it. I think they are getting quite good at choosing cases.

Q: What do you think about the FCA's 'scientific' calculation of penalties? [See Compliance Matters passim]

A: The calculation of financial penalties, then as now, is cod science. There is no merit in it whatsoever and it has been interesting to see that in the recent case of Karimjee, Judge Herrington of the Upper Tribunal said “we are not bound by the FCA's penalty policies, we take them into account, but our intention is to do justice between the parties in all the circumstances of the case.”

So if the Upper Tribunal is not going to be bound by the FCA's penalty policies, why are there so few referrals to the Upper Tribunal? The likelihood is that the penalty is going to go down, not up, although the Upper Tribunal can increase penalties it very rarely does not so as not to inhibit references to the Upper Tribunal in meritorious cases.

Q: What is your take on Karimgee? [See Compliance Matters latest PDF.] It's a very important case.

A: It's a really, really important case. It basically sets out – because it was the first case that came out after a change in the law – how the Upper Tribunal is going to be approaching these cases in future. The big issues are...

(i) like cases are to be treated like – there must be consistency in decision-making;

(ii) the FCA cannot reopen its own decisions and then argue in the [Upper] Tribunal a case more severe than it accepted in the Regulatory Decisions Committee (this is new); and

(iii) the Upper Tribunal does not consider itself bound by the FCA's penalty-making policy.

The other decision that came out on the same day, the Rosier case, about the FCA's treatment of publication of decision notices, is also a really important case. It basically says that the FCA, when it is issuing decision notices, must make it clear that this is subject to referral to the Upper Tribunal. That the decision notice is only the FCA’s opinion and their view of the facts and that the Tribunal may disagree.

This guidance was necessary because the FCA put out notices and a press release worded in such a way as to damage the person making the reference by making a presumption of guilt, when actually the individual is still challenging it and the Upper Tribunal often doesn't uphold it.

Q: Well there was a new rule that came in – was it in 2012, in some order or something, the update to the FSMA? – and that was the thing that allowed them to publish decision notices before all was over.

A: Yes but...there's been guidance by the tribunal as to how this is to be done. You cannot suggest that a “decision” is final when it has been referred to the Upper Tribunal. It is the Upper Tribunal that has the final word. The problem is the name “decision notice” which is in the statute. Perhaps we should have had a more neutral term: “the FCA's initial findings,” or “the FCA's submissions to the Upper Tribunal” or something like that. “Decision notice” rather implies that the matter is final when actually the decision notice is the second stage of the notices, followed by a final notice. The court made it absolutely clear in Rosier that you must make it clear, in a very neutral way, that these notices are subject to review by the Upper Tribunal and the Tribunal may disagree with the FCA's view.

Q: This tribunal looks at other cases, not just financial regulation, doesn't it?

A: Well tax is the other major area.

Q: It certainly has a wide purview. Is it one Appeal Court judge and a lot of High Court judges?

A: They are equivalent in status to the High Court but are specialised with a high level of expertise in their respective areas. Judge Herrington was the former RDC chairman.

Q: What are the failings of the RDC's legal assessor?

A: The problem is that they're entirely dependent on the information that they're given by the enforcement team and if matters are not drawn to their attention it is unlikely that they will be alerted to lines of enquiry which ought to be followed. I have some examples of them asking clearly pertinent questions but there have been a number of cases that were time-barred, where the financial penalties could not be imposed but were. The RDC legal advisors were clearly in doubt about this, but what they didn't do was challenge the enforcement team's lawyers to ascertain whether or not there could be any financial penalty imposed. So I think a more robust challenge needs to be made there.

Q: Have you ever taken part in any case, any occurrence, where an AML director was being held to account?

A: Yes. They are very common. There was a series of [FSA] thematic reviews a while back where they focused heavily on criticisms of AML functions and AML officers, so yes I have represented quite a few.

Q: The Money Laundering Regulations 2007 (as amended) dictate that every reporting firm should have a member of its senior management team who takes responsibility for its AML effort. When they first mooted the idea of an 'AML director,' as the post is sometimes called, people thought it could go two ways. One way would be to get a very very clued-up AML expert doing it, so he might be the same person as the 'nominated officer' required by the Proceeds of Crime Act 2002; the other way it could have gone would have been to set up some 'patsy' to take the rap for that kind of thing and pay him an inflated salary as 'danger money'. Which way has it gone at the firms you have seen?

A: First job and last job, yes. Well the problem of course for MLROs is that they have potential criminal liability.

Q: Well that's true, and this is the only country where it happens.

A: It's not something to do badly lightly! My experience is that most MLROs are very dedicated. They are very conscious of the personal risks they are running, they are very often in a situation where they simply cannot win. [If they] make too many reports, they are at risk of being criticised for being over-zealous; [if they] make too few, they're running personal risks on the compliance front. [If they] miss the 'smoking gun' one, they have personal criminal liability. It's an unenviable position to be in and I think most try very hard with very limited resources and perhaps are more reluctant than most to ask for assistance.

However, I think that the recent change in the law where if you make a 'good faith' disclosure you have civil immunity from claims is really important. That happened a few weeks ago, as the result of a case called HSBC v Shah. Mr Shah sued the bank and it was alleged that a report had been made that shouldn't have been, causing Mr Shah losses.

Q: Surely you can't mention suspicious transaction reports in a court case, can you?

It depends. You've always got to be conscious of the 'tipping off' provisions [of s333 Proceeds of Crime Act 2002]. However, if it's many years later and there's no realistic risk of prejudicing an investigation, then it may form part of the disclosure, but you have to be very careful. You would have to be very sure that you were not prejudicing an investigation before you did it.

Q: So the AML 'senior management person' [as dictated by the Money Laundering Regulations] is typically the same person as the MLRO [as required by POCA] and he's on the board. He's not a mere front-man, he's the firm's AML expert.

A: Yes.

* Sara George can be reached on +44 20 7329 4422 or at Sara.George@shlegal.com