On 12 September 2019, the South African Financial Sector Conduct Authority (FSCA) announced the conclusion of its investigations into Steinhoff International Holdings N.V. (Steinhoff). The FSCA found that Steinhoff provided false, misleading or deceptive statements to the market and accordingly breached the provisions of the Financial Markets Act No. 19 of 2012 (the FMA). As a consequence of this breach, the FSCA has fined Steinhoff R1.5 billion but has remitted a portion of the fine due to the precarious financial position of the Steinhoff group, resulting in Steinhoff paying a penalty of R53 million. This is the largest fine ever to be levied by the FSCA.
The Steinhoff investigation and enforcement action
In December 2017, Steinhoff’s shares plunged following the sudden resignation of its CEO, Markus Jooste, and allegations of accounting irregularities. Following a lengthy internal investigation conducted by an independent expert, it was revealed that a range of “fictitious and/or irregular” transactions “substantially” inflated the profits and assets of the group by over €6.5 billion between 2009 and 2017. The investigation also found “a pattern of communication” showing that executives “instructed a small number of other Steinhoff executives to execute their instructions, often with the assistance of a small number of persons not employed by the Steinhoff Group”. These “fictitious and/or irregular transactions were entered into with parties said to be, and made to appear to be, third party entities independent of the Steinhoff group and its executives” but which the investigation found appeared instead to be “closely related to” those executives who were issuing the instructions to perform these transactions.
Although the fine’s quantum remains R1.5 billion, the FSCA took into consideration Steinhoff’s financial position, the losses already sustained by Steinhoff’s shareholders and the cooperation of the current management of Steinhoff in the investigations, and decided to remit a portion of the penalty resulting in Steinhoff being required to pay an amount of R53 million. Brandon Topham, the divisional executive for investigations and enforcement at the FSCA, said in an interview that “if you look at the financial statements you will see that it is actually insolvent and there is just no way it would have been able to pay a fine of R1.5 billion.”
While the investigations into Steinhoff itself have been concluded, Mr Topham confirmed that “the perpetrators behind the actual misrepresentation … are still on our radar and we are busy with investigations into that”. Mr Topham also warned that those behind the fraudulent actions are unlikely to receive the same treatment that Steinhoff did in respect of the remission of a portion of the fine, and that the FSCA would be making further announcements in this respect in the next 8-12 months.
Going forward – higher fines to come from the FSCA?
The magnitude of the fine issued by the FSCA against Steinhoff not only demonstrates the significant impact that the Steinhoff scandal had on millions of South Africans (through losses in investments and retirement/pension savings) but also suggests a change in behaviour of the FSCA – issuing fines far beyond the levels previously seen and more in line with the penalties administered by foreign regulators such as the US Securities and Exchange Commission. While the FSCA did remit a large portion of the fine in order to assist the embattled company, the comments from Mr Topham suggest that the fines to be issued against the individuals involved may be as significant and with no remittance possible. Entities subject to the provisions of the FMA should be cautious of this development and ensure that their corporate governance protocols relating to insider trading and other market abuse matters adequately protect against any conduct which may expose such entities or their management to the new agenda of the FSCA.
Financial services firms conduct their business activities across markets and borders, often performing services and holding data in locations other than those in which they interact with their clients. Over a decade after the financial crisis, their regulators remain under sustained public and political pressure to improve customer outcomes and punish poor conduct. When issues arise, those regulators frequently need to seek assistance from their global counterparts to be able to unravel what has occurred, irrespective of where it took place.
Understanding how and when regulators interact with each other and with firms across borders, how firms are required, or expected, to respond, and how to handle multiple proceedings in different jurisdictions, is more critical than ever.
This fourth edition of “The Long Arm of Regulation: Responding to Cross-Border Financial Services Investigations”, Herbert Smith Freehills’ guide to cross-border financial services investigations, gives an overview of how to approach these issues, and aims to assist firms in navigating the differing regimes across 15 key jurisdictions, including, for the first time in this edition, South Africa. The guide covers a range of important topics, including the regulators’ breadth of powers, mechanisms for obtaining – and withholding – information, consequences for failing to comply, and the management of competing confidentiality and reporting obligations.
In producing this publication, we have drawn on the expertise of our financial services regulation practice across our international network of offices and through our formal alliance with Prolegis (Singapore). In addition, we are enormously grateful for contributions from law firms Anderson Mori & Tomotsune (Japan), Stibbe (the Netherlands) and Homburger (Switzerland).
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation which are expected for September 2019.
Please click here to access a preview of the Guide.
We are pleased to launch the 2019 edition of our Asia Pacific Guide to Privilege.
Businesses are increasingly faced with multi-jurisdictional disputes where evidence rarely falls within the borders of a single country and complex legal privilege issues often surface when dealing with communications across multiple jurisdictions.
Compiled by our network of Herbert Smith Freehills lawyers and trusted local counsel, the updated Guide takes account of the latest developments across Asia Pacific and covers 21 jurisdictions.
This newsletter summarises recent Russian regulation, enforcement and court practice developments which may be relevant for doing business in Russia from a corporate crime and investigations perspective.
Additionally, this newsletter spots some US and other relevant developments which should be kept in mind by Russian businesses having foreign parents or operations.
Welcome to the Spring 2019 edition of our corporate crime update – our round up of developments in relation to corruption, money laundering, fraud, sanctions and related matters. Our update now covers a number of jurisdictions.
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation for July 2019.
Author: Hanne Gundersrud
The FCA and PRA have announced their second enforcement action in relation to outsourcing failures by the retail bank R. Raphael & Sons plc (“Raphaels“). The firm failed to manage its outsourcing arrangements properly, in breach of FCA Principles 2 and 3, the applicable provisions of Chapter 8 of the FCA’s Senior Management Arrangements, Systems and Controls sourcebook (“SYSC 8”), and PRA Fundamental Rules 2, 5 and 6. Raphaels received separate fines of £775,100 from the FCA and £1,112,152 from the PRA in respect of the breaches, resulting in a combined fine of £1,887,252. Raphaels agreed to resolve the matter with its regulators and therefore qualified for a 30% discount in the fines imposed by both regulators.
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation for June 2019.
Authors: Benedicte Perowne and Kimberly Everitt
On 24 April 2019 the FCA published its final “Approach to Enforcement” document, following a consultation period which ended in June 2018. The approach document attempts to provide transparency and explain the FCA’s approach in greater depth.
The FCA’s overriding principle in its approach to enforcement is substantive justice – a commitment to achieve fair and just outcomes in response to misconduct. It intends to conduct consistent and open-minded investigations in order to achieve the right outcomes. Continue reading