The supervision of offshore mutual funds

1
The supervision of offshore mutual funds

• Day 3
• Problem Cases and Enforcement of Mutual Funds

2
Enforcement of mutual fundsAgenda

• What is enforcement and why is it important?
• When does a routine supervisory matter become a
  matter of enforcement?
• Areas of contravention requiring action
• Matters to consider in enforcement action
• Stages of escalation
• Enforcement options available
• Urgent situations
• Red flags
• Investigations and documentation (including
  affidavits)

3
Enforcement of mutual fundsAgenda (if time
available)

• AML
• Any other issues

4
Enforcement of mutual fundsEnforcement and its
importance

• Plays an important role in pursuit of regulatory
  objectives (although not always appropriate when
  a regulated entity has failed to comply with
  legislative or regulatory requirements)
• Principles underling enforcement are
• Effective regulatory regime depends upon open
  communication between the regulator and its
  regulated entities
• Exercise of enforcement powers must be in a
  manner which is transparent, proportionate and
  consistent with publicly stated polices and
  guidelines
• Subjects of enforcement powers must be treated
  fairly

5
Enforcement of mutual fundsEscalation of
supervisory matter to enforcement

• Ultimate objective is to ensure compliance with
  legislation and regulation but must also ensure
  transparent process through which non-compliant
  regulated entities will be taken
• Role of compliance officer very important
  responsibility for compliance rests with
  regulated entity

6
Enforcement of mutual fundsAreas of
contravention requiring action

• Regulated entity being unable to meets its
  obligations as they fall due (ie is, or is likely
  to become, insolvent)
• Regulated entity conducting business which is, or
  is likely to be, detrimental to the interests of
  the public, stakeholders or any third party
• Contraventions of legislation, regulation, code
  or directive, condition of licence

7
Enforcement of mutual fundsAreas of
contravention requiring action

• Provision of false, inaccurate or misleading
  information to the regulator
• Liquidator appointed, whether by regulated
  entitys directors, its members, or a Court, or
  the regulated entity is dissolved
• Receiver appointed or possession been taken of
  regulated entitys property
• Non fit and proper shareholder, director,
  senior officer or manager
• Refusal or failure to co-operator with regulator

8
Enforcement of mutual fundsAreas of
contravention requiring action

• Failure to pay administrative penalty on or
  before due date

9
Enforcement of mutual fundsMatters to consider
in enforcement action

• Impact on interests of public, stakeholders,
  third parties and market confidence
• Nature and extent of contravention
• Ability and extent to which remedial action will
  rectify the contravention
• Willingness and ability of regulated entity to
  co-operate with the regulator in terms of its
  investigations and recommendations
• Compliance history of regulated entity

10
Enforcement of mutual fundsMatters to consider
in enforcement action

• Amount of loss incurred or any benefit lost as a
  result of the contravention
• Nature and extent of any crime facilitated,
  occasioned or otherwise attributable to the
  contravention
• Nature and extent of civil and/or criminal
  proceedings that have been or are expected to
  commence against the regulated entity or any of
  its directors and/or shareholders

11
Enforcement of mutual fundsMatters to consider
in enforcement action

• Extent to which directors and officers have acted
  in a fit and proper manner
• Whether there are a number of issues which, when
  considered individually may not justify
  disciplinary action, but which do, when
  considered collectively, indicate a pattern of
  unfit and improper behaviour
• Whether any rule or guidance has been issued in
  respect of the contravention and, if so, the
  extent to which the regulated entity has followed
  it

12
Enforcement of mutual fundsMatters to consider
in enforcement action

• Action taken by the regulator or other regulatory
  authorities in previous similar cases
• Escalation process is dependant upon the nature
  of the contravention and upon consideration of
  the matters listed above

13
Enforcement of mutual fundsStages of Escalation

• Stage 1 (preliminary investigations)
• Regulator should write to the regulated entity
  indicating the nature of the contravention and
  requesting remedial action
• For serious contraventions or where time is of
  the essence, the regulated entity should be
  contacted by telephone or requested to attend a
  meeting to discuss the contravention
• Should the regulated entity not respond with
  remedial action, the regulator should advise of
  the necessary action and the timescale in which
  corrective action is required

14
Enforcement of mutual fundsEscalation of
supervisory matter to enforcement

• Step 1 (preliminary investigations) (contd.)
• In the event that the regulated entity does not
  undertake remedial action OR does so in an
  unsatisfactory manner AND there are no valid
  mitigating circumstances, the regulator should
  take appropriate action with or without notice to
  the regulated entity. In the event of mitigating
  circumstances, the regulator may extent the
  period for the implementation of the remedial
  action or amend the nature of the proposed
  remedial action

15
Enforcement of mutual fundsEnforcement actions

• Step 2 (enforcement action)
• This will be determined by your legislation but
  should include
• Revocation or suspension of a licence
• Issue of a directive
• Removal and substitution of a director or other
  person (eg senior officer, compliance officer)
• Appointment of an examiner to conduct an
  investigation
• Requirement upon the regulated entity to appoint
  a qualified person (at the cost of the regulated
  entity) to (a) advise the regulated entity on the
  proper conduct of its business and affairs and
  (b) provide the regulator with a report on, or on
  any aspect of, the regulated entitys business
  and affairs
• Initiation of an investigation to ensure
  compliance with legislation, regulation, code or
  directive

16
Enforcement of mutual fundsEnforcement actions

• These will be determined by your legislation but
  should include (contd.)
• Application to the Court for a protection order
  (eg ensuring proper custody of property,
  appointing an administrator, ordering a search
  warrant, or ordering required action or
  refraining from action)
• Application to the Court for the appointment of a
  liquidator
• Imposition of administrative penalties
• Requirement upon the regulated entity to pay such
  costs and expenses as are incurred by the
  regulator in the taking of enforcement action

17
Enforcement of mutual fundsEnforcement actions

• The regulator will need to consider which power
  to use and whether to use one or more of the
  powers
• In addition, the regulator may wish to issue a
  public statement regarding the enforcement action
  (as a deterrent to other regulated entities)

18
Enforcement of mutual fundsUrgent situations
(examples)

• Information indicating a significant loss, risk
  of loss, or other adverse effects for
  stakeholders, where action is necessary to
  protect their interests
• Information indicating that a regulated entitys
  conduct has put it at risk of being used for the
  purposes of financial crime or of being involved
  in such crime
• Evidence that the regulated entity has submitted
  inaccurate or misleading information so that the
  regulator becomes concerned about the regulated
  entitys ability to meet its regulatory
  obligations

19
Enforcement of mutual fundsUrgent situations
(examples)

• Circumstances suggesting a serious problem within
  a regulated entity or its management that call
  into question the regulators ability to continue
  to meet its regulatory obligations

20
Enforcement of mutual fundsMatters to consider
in urgent situations

• Seriousness of any suspected contravention and
  remedial action required
• Financial resources of the regulated entity
• Risk that the regulated entitys business may be
  used or has been used to facilitate financial
  crime or to launder the proceeds of crime
• Risk that the regulated entitys conduct or
  business presents to the financial system or to
  confidence in the financial system
• The regulated entitys conduct

21
Enforcement of mutual fundsMatters to consider
in urgent situations

• The extent of any loss, or risk of loss or other
  adverse effect on stakeholders
• Extent to which stakeholders assets appear to be
  at risk
• Nature and extent of any false or inaccurate
  information provided by the regulated entity
• Impact that use of the regulators powers will
  have on the regulated entity and on its
  stakeholders

22
Enforcement of mutual fundsMatters to consider
in urgent situations

• In these cases, it may be more appropriate/effecti
  ve to pass the matter to the Enforcement Division
  immediately
• In order to deal with the matter expeditiously
  the Board of the regulator should delegate
  authority to an Enforcement Division or to the
  Director of Enforcement in pursuing disciplinary
  action

23
Enforcement of mutual fundsRed flags

• High volume of complaints
• Specific complaints about lack of ability to
  redeem shares or dramatic reduction in value of
  shares
• Lack of co-operation by regulated entity
• One director
• Inexperienced director
• Manager responsible for providing valuations
• Unregistered shares
• Guarantees (lack of specific documentation)

24
Enforcement of mutual fundsRed flags

• Resignation of auditor
• Lack of audited accounts
• Change in year end
• No offering document
• Disciplinary action in other jurisdiction
• Lack of corroboration of data
• Failure to produce documents
• Poor performance (will require further
  investigation)

25
Enforcement of mutual fundsInvestigations and
documentation

• Legislation should
• give the regulator the powers to examine the
  affairs or business of any regulated entity
• give the regulator the powers to request
  information of a specific nature from a regulated
  entity
• give the regulator the powers to request specific
  documents or documents of a specific description
• give the regulator the authority to apply to the
  Court to have a person examined on oath and have
  the results of that examination sent to the
  regulator

26
Enforcement of mutual fundsInvestigations and
documentation

• Legislation should (contd.)
• give the regulator the permission to take copies
  of the documents or extracts from them
• require the regulator to treat as confidential
  all information obtained by it of the regulated
  entity and its affairs and business, save in
  specific circumstances (eg in the performance of
  its supervisory duties)
• All requests for information should state the
  statutory basis for the request and be specific
  in terms of information to be provided and
  timescale in which the information should be
  provided

27
Enforcement of mutual fundsInvestigations and
documentation

• Any information obtained should be thoroughly
  reviewed and that review documented in writing
• Any information obtained during the course of a
  telephone conversation or a face-to-face meeting
  must be recorded in full and contemporaneously
• All inadequate or vague responses to requests for
  information or explanations must be pursued until
  a satisfactory response is provided to the
  regulator

28
Enforcement of mutual fundsInvestigations and
documentation

• Any request for an extension to a deadline for
  submission of information must be reasonably
  considered
• Any explanation for non-provision of information
  must be reasonably considered
• All copies of documents must be dated and sourced
  by the regulator
• No information may be accepted that is not
  understood by the regulator further explanations
  must be sought

29
Enforcement of mutual fundsInvestigations and
documentation

• All files must be kept in chronological order
• All investigations should bear in mind that they
  could be subject to judicial review (reasonable
  man approach)
• All investigations and decisions of the regulator
  should be transparent, except in exceptional
  circumstances, for example
• Information between the regulator and its legal
  adviser
• Information which the Court has directed is not
  to be disclosed

30
Enforcement of mutual fundsInvestigations and
documentation

• Information indicating knowledge or suspicion
  that the regulated entity or another person is
  engaged in money laundering or terrorist
  financing activity
• Information received from a regulatory or law
  enforcement authority
• Information received on a confidential basis
• Where the disclosure of information could
  adversely affect the national interest, including
  the national security of the jurisdiction
• Where it is in the public interest to do so

31
Enforcement of mutual fundsInvestigations and
documentation

• Non-disclosure by the regulator should be
  approved by the Board of the regulator
• Consideration should be given to notification to
  shareholders and other stakeholders
• Consideration should be given to utilising
  foreign regulatory authorities

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Enforcement of mutual fundsInternational
standards and best practice

• EXERCISE
• Review your enforcement measures and practices
  and assess them against the requirements as set
  down in the IOSCO principles.
• What can you do to improve your enforcement of
  mutual funds in order to meet the international
  standards?

33
Enforcement of mutual fundsAML and other issues

• Regulator has pivotal role in fight against money
  laundering and preservation of financial
  stability
• Legislation should give the regulator authority
  to monitor compliance with money laundering
  regulations
• Regulations should prescribe measures to be taken
  to prevent the use of the financial system for
  the purposes of money laundering
• Regulations and guidance notes should be
  consistent with international best practice

34
Enforcement of mutual fundsAML and other issues

• Basle Statement of Principles December 1988
• Financial Action Task Force (FATF) established
  in 1989 by Heads of Governments of G7 countries
  40 recommendations (international standards for
  effective anti-money laundering regimes) 9
  additional recommendations
• Caribbean Financial Action Task Force (CFATF)
  established June 1990 and comprising 27 members,
  6 supporting members and 14 observers 19
  regional specific objectives

35
Enforcement of mutual fundsAML and other issues

• Legislation should provide for
• Mutual legal assistance (exchange of information
  in respect of criminal activity)
• Stemming of flow of illegal proceeds into the
  jurisdiction
• Seizure and confiscation of drug trafficking
  money, and laundered property and assets
• Co-operation with other jurisdictions in relation
  to drug related criminal proceedings and
  investigations
• A code of practice to provide practical guidance
  to financial service providers in the prevention
  and detection of money laundering offences

36
Enforcement of mutual fundsAML and other issues

• Key elements of money laundering regulations
  should include
• Systems and training to prevent money laundering
• Identification procedures
• Record-keeping procedures
• Internal reporting procedures
• Duty to report evidence of money laundering
• Guidance Notes should be drawn up in conjunction
  with industry associations

37
Enforcement of mutual fundsAML and other issues

• Guidance Notes will be taken into account by the
  Court in determining whether a person conducting
  relevant business has complied with the
  regulations
• How do the regulations apply to mutual funds?
• Who is the applicant for business?
• When must identity be verified?
• How might identity of existing clients be
  verified
• Particular issues on verification of identity

38
Enforcement of mutual fundsAML and other issues

• When may a successor administrator rely on the
  client verification evidence obtained by its
  predecessor?
• What specific records should be kept and where?
• When procedures required by the regulations may
  be maintained by a party not based in the
  jurisdiction
• Procedures for reporting of suspicious activity

39
Enforcement of mutual fundsOther issues

• Compliance Officers
• Education of registered agents will assist
  greatly in supervision
• Use of surveys
• Consider electronic reporting
• Build up good relationships with foreign
  regulators
• Be visible encourage dialogue
• Join OGCISS
• Use consultants!

40
Enforcement of mutual fundsWhat next?

• Prepare a plan of work needed to ensure
  compliance with international standards and best
  practices.
• If I can assist you in the development of your
  supervisory functions please do not hesitate to
  contact me
• Miss Ruth M Chadwick
• Offshore Regulatory Consultant
• ruthmchadwick_at_btinternet.com
• 44 (0) 20 7382 1346

41
Ongoing supervision of mutual fundsReview of
Day 3

• Questions and Answers?