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Enforcement to toughen in Bermuda and the Cayman Islands

Mark Chudleigh and Alex Potts, Sedgwick Chudleigh, Partners, London, 25 October 2016

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Offshore financial service regulators have been baring their teeth and threatening to 'get tough' with recalcitrant firms in recent months. Bermuda and the Cayman Islands seem to be leading the charge.

In its business plan for 2016, which it published in March this year, the Bermuda Monetary Authority announced its intention to "assume a more visible role in enforcement actions." This was a clear warning of a tougher new approach, which the BMA itself subsequently described as a "pivotal change of policy in relation to enforcement decisions."

Further evidence of the regulator's resolve came in its recent appointment of a former criminal prosecutor from the Director of Public Prosecution’s office to the post of chief enforcement officer, along with a promise to augment the enforcement department’s legal staff.

Publicity for the details of cases

In the past, except for one enforcement action that it reported in public in 2010, and various compulsory winding-up petitions that it made to the Supreme Court of Bermuda on the grounds of public interest, the BMA has limited the adverse publicity associated with its previous enforcement actions to fairly brief, and usually anonymised, notifications in its annual reports.

In 2015, for example, the regulator imposed civil penalties on three regulated entities in Bermuda (one of which has an appeal pending) for breaching their licence conditions or statutory obligations, but made it hard for the public – including high-net-worth investors – to ascertain their identities. It also imposed certain conditions and restrictions on the licences of regulated entities in a number of other unreported instances.

Change, however, is on the way. This year, the BMA has been warning regulated entities that it will publish the details of the use it makes of its enforcement powers against them. Such publicity will come in the form of a press release that it will issue whenever an appeal against an enforcement decision has ended, or after an appeal period has expired. This report will specify the nature of the enforcement action, the size of any penalty, the identity of the entity or person involved and the circumstances of the breach. The BMA will also include the details in its annual report and on its website.

The regulator believes that its decision to give the public more information about its enforcement activity is crucial to Bermuda’s reputation as an international financial centre. It considers this to be a way of showing regulated entities, the general public, internationally active investors, international media outlets and the world's regulators that Bermuda-based regulated entities found to be in breach of their regulatory obligations run the risk of having to account publicly for their actions.

The BMA has also drawn attention to the fact that, from this year onwards, it will be paying more attention to anti-money-laundering compliance and the application of international sanctions. It will also begin to consider the personal liability of the directors and officers of regulated entities for their organisations' serious failures to comply with its rules.

The Barrington fine

Since announcing its new publication policy, the BMA has published at least one press release with the aim of ‘naming and shaming’ a firm that it regulates. On 29 August, the regulator proclaimed that it had fined a local investment company, Barrington Investments Limited, the sum of $50,000 for breaking a number of rules in a way that it described as ‘serious,’ saying also that it had restricted Barrington’s investment business licence.

The BMA reported that it had found Barrington to be in breach of the Minimum Criteria for Licensing specified in the Investment Business Act 2003 with respect to corporate governance, the conduct of business in a prudent manner and risk management. The question of whether the facts and circumstances of any particular case such as Barrington’s may justify a more confidential or anonymous approach by the BMA, despite its new policy, will be a matter for submission and persuasion or, if that does not work, for an appeal to an independent appellate tribunal or to the Supreme Court of Bermuda.

Preparations for the future

In future, therefore, regulated entities doing business in Bermuda should expect the BMA to announce its enforcement actions and adverse enforcement decisions in public and in a manner similar to that of the Securities and Exchange Commission in the United States and the Financial Conduct Authority in the United Kingdom.

In view of the BMA’s powers and apparent intentions to impose ever-larger civil penalties, regulated firms in Bermuda ought to devote more resources to regulatory compliance while also preparing themselves for increasingly complicated and expensive investigations and contentious enforcement actions. They might also want to review their liability insurance policies to see whether they have adequate cover for the costs and expenses of regulatory investigations and any other costs they might incur when contesting regulatory enforcement proceedings.

The liability insurers of Bermudian entities will also, no doubt, want to keep the BMA’s new policy in mind, both when underwriting and when assessing claims.

It is of interest to note that the BMA announced its new publication policy only a few months after Offshore Alert published a highly critical article in November last year about its reluctance to inform the public in detail about its decisions. Another significant motivating factor behind the BMA’s new publication policy appears to have been the looming AML/TF assessment of Bermuda, as a jurisdiction, that the Caribbean Financial Action Task Force will conduct in 2018.

Enforcement in the Cayman Islands

In a similar vein, the Government of the Cayman Islands has recently announced its intention to revise its legislation so as to give the Cayman Islands Monetary Authority more enforcement powers involving the use of civil penalties ranging from $5,000 to $1 million, as well as criminal sanctions for certain regulatory offences.

* Both partners can be reached on 441.296.9276 or at mark.chudleigh@sedgwicklaw.com and alex.potts@sedgwicklaw.com

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