OPINION:Regrettably there isn't a uniform regulatory code governing bank officials and their conduct, writes SHELLY HORAN
THE CONDUCT of certain bank officials operating the leading financial institutions in this country has attracted great attention in recent weeks. However, the questions that remain consistently unanswered are whether the following acts could amount to a breach of the law:
1. The provision of loans to directors;
2. Short-term transfers of money from one bank to another before end-of-year reporting;
3. The provision of financial assistance for the purchase of a bank’s own shares; and
4. The provision of loans and information not in the public domain to certain bank customers for the off-market purchase of the bank’s own shares.
A basic rule exists in the Companies Acts prohibiting loans to directors. However, there are two exceptions to this prohibition which allow loans to be given to bank officials in circumstances where: 1. the loan does not exceed 10 per cent of the bank’s assets; and 2. where the loan forms part of the ordinary course of the company’s business and is given to a director on terms no more favourable than it would have been given to any other person of comparable standing. In respect of the former exception, it is unlikely that a loan to a bank official could ever exceed 10 per cent of a bank’s vast assets.
If the loan does not exceed 10 per cent, it is permissible.
With regard to the latter, there is no doubt that a bank’s core business is lending money, easily bringing it within this exception. However, the loan must have been given to the director on similar terms or using similar collateral as would have been given to another person of similar standing.
The next issue is the provision of financial assistance for the purchase of a bank’s own shares. Generally speaking, the provision of a company’s money for the purchase of its own shares is a breach of the Companies Acts, as that money should be held for payments to shareholders as dividends. However, this prohibition against the provision of financial assistance does not apply where a company lends money in the ordinary course of business. A bank’s business is lending money and it would therefore come within this exception.
Curiously, unlike the situation in respect of loans to directors, the Companies Acts do not specifically require that the financial assistance be given on terms no more favourable than those given to other persons of comparable standing.
New market abuse rules implemented in this jurisdiction by an EU directive have far-reaching consequences for any person found to be in breach. The old offence of insider dealing has been repealed and reconstituted under the new rules. It is conceivable that a prosecution for insider dealing could arise in circumstances where a bank official provides loans and information, not freely available on the open market, to a customer to purchase shares in the bank.
Second, a brand new offence of market manipulation has been created under the new rules, which is broad and non-exhaustive in its terms. Market manipulation may include situations where a bank official manipulates a balance sheet or where a bank official provides information to his customers and invites them to purchase shares in the bank on an off-market basis in order to avoid the release of those shares onto the open market. The criminal penalties for breaches of the market abuse rules are stringent: a person found guilty could face a maximum fine of €10,000,000 and/or a maximum prison sentence of 10 years. Further, heavy civil consequences could apply and a person guilty of either offence may be forced to account for profits gained or compensate affected persons.
Banks are required to keep proper books of account under the Companies Acts and breaches under the legislation can be prosecuted on indictment.
However, it is conceivable that a bank official facing investigation for false accounting could argue that auditors had been employed to ensure that accounting books were kept in order. There is no doubt that auditors have duties in tort and pursuant to statute obliging them to keep proper books and to report any suspected breaches. Nonetheless, an auditor is not obliged to seek out breaches and would have a defence to any legal challenge where he relied on representations made by a company’s directors.
Apart from the offences above which carry criminal sanctions, there are also offences under the criminal code which may apply to the afore-stated activities of bank officials. The Criminal Justice (Theft and Fraud) Offences Act 2001 specifically applies to bodies corporate and their officers. That Act incorporates the offences of deception and false accounting and both can be prosecuted on indictment with severe consequences arising for any breach. It is conceivable that the movement of large deposits from one bank to another at financial year-end, in order to artificially enhance the financial health of the receiving institution, could give rise to the offence of market manipulation or false accounting. Criminal conspiracy could arise in circumstances where two banks or a bank official and his customer agree together to commit an unlawful act such as the manipulation of a balance sheet, insider trading or market manipulation.
It should be noted that, under the traditional criminal code, the prosecutor is required to prove criminal intent on behalf of an accused person. By contrast, a presumption exists under the Companies Acts to the effect that a person shall be presumed to have caused a default unless he can show that he took all reasonable steps to prevent it or that circumstances beyond his control existed. Thus, an allegation of an offence under the Companies Acts would no doubt be easier for a prosecutor to prove.
There are two regulatory bodies charged with extensive powers to investigate and sanction bank officials who may be in breach of the law. These are the Irish Financial Services Regulatory Authority (IFSRA) and the Office of the Director of Corporate Enforcement (ODCE). Both are entitled to do anything necessary for the performance of their functions including obtaining search warrants, inspecting premises (including dwellings), and examining persons on oath. Both IFSRA and the ODCE are empowered to impose regulatory sanctions for any breaches and in some cases, can prosecute offences.
Further, inspectors’ reports on the conduct of company affairs can be sent to the Director of Public Prosecutions for prosecution or to the Garda Bureau of Fraud Investigations. It is worth observing that the Financial Regulator of IFSRA has statutory immunity from prosecution for any act or omission caused by him or her unless it can be shown that such activities were conducted in bad faith.
However, the tort of misfeasance in public office is not excluded under statute.
While there is a wealth of powers available to IFSRA and the ODCE to inspect and sanction breaches of the law, it is regrettable that there isn’t a uniform code specifically applicable to bank officials and their conduct. The dual system in place at present may give rise to an overlap causing complexity and confusion. Decisions will have to be reached to ensure that a particular regulatory body prosecuting any perceived breach of the law is the body best-served to do so.
It is likely that reports from the ODCE and from IFSRA will ultimately be sent to the Director of Public Prosecutions, who may then decide to prosecute any perceived breaches of the law. Apart from the famous insider dealing case involving Fyffes and DCC, and the litigation arising from allegations of offshore accounts and concealed charges involving National Irish Bank, there have been few litigated cases of so-called “white-collar” infringements in this jurisdiction.
Thus, for the most part, any prosecutions for perceived breaches of the law will be prosecutions arising for the first time and it will be interesting for members of the legal profession and for members of the public alike to see how matters unfold.
Shelley Horan is a Dublin-based barrister practising in corporate and commercial law