Directors must ensure compliance (Part I)

WORKING IN A BANK, especially if you work in the loans department, you get to know several company directors. In the good old days, it seemed like directors led a very enviable existence. They seemed mostly men of integrity and known business acumen who, when they were retired, could look forward to positions on the board as directors.

It seemed like they didn’t have to know that much about the particular business on whose board they sat and that they largely were guided by the executive management teams. Their main function was to provide the public face of respectability and gravitas.

My first experience of the Bridgetown Club, at the invitation of my boss Michael Lashley, did not help to dispel this notion.

“Lash”, as we called him, introduced me to the gastronomic indulgence of a rum-flamed omelette; top-shelf drinks were flowing and it seemed like in retirement getting on a company board or two would be a great thing.

A case contested in the English courts – Group Seven vs Allied Investment Corporation Ltd – was a stark reminder that the board meeting of a corporation was no longer simply a place to rubber stamp some documents and have premium drinks (or a flaming omelette) with the boys.

The case involved a claim by Group Seven Limited for fraud in relation to a fantasy investment of €100 million (BDS$229 million). One of the defendants alleged that the company’s directors had breached their duties by falling for the scam and should be liable in part for the company’s loss.

To understand why one of the defendants (Mr Sultana) would even think that Group Seven was guilty of some degree of contributory negligence and that a countersuit could possibly succeed, the judge’s criticism of the directors of Group Seven is instructive.

The court found that the two directors, one of whom was also group legal counsel, bore heavy responsibility for the company’s involvement in the fraudulent scheme. Their conduct was heavily criticised and a selection of his comments give a flavour of the judge’s attitude.

“I do not think any person with a modicum of intelligence would believe that it were possible to make these vast amounts of money on such a short turn in the manner suggested. I do not believe that anybody, when told that the Fed [the US Federal Reserve Board] was going to issue its own bills at a 20 per cent discount to enable ‘favoured’ people to do a turn on it, would think that that would be possible. Nevertheless that is the deal which Mr Kooger and Visser accepted.

“It is impossible to overstate the level of incompetence demonstrated by Mr Kooger’s evidence at this trial . . . He fell under the spell of Rejniak, Nasir (and Mr Sultana) to such an extent that he became subject to autosuggestion, in effect.

“In my view Messrs Kooger and Visser were fools, not knaves. They may have exaggerated their stupidity because it suited them . . . Mr Sultana is the opposite. He is not a fool despite his attempts to put forward that appearance. He is a knave.”

It is clear that the English courts, from which we fashion much of our jurisprudence, take the role of directors very seriously and expect directors to exercise judgement that is aligned to the particular nature of the business they are directing. In short, directors must understand the businesses they are directing and exercise informed judgements.

Several recent anti-money laundering enforcement actions have required the targeted banks to establish board level compliance committees, including the recent consent orders involving JPMorgan Chase and Bank of America. Many large institutions are not waiting for enforcement actions and are appointing board level compliance committees.

The Barbados regulations stipulate that use of a group-wide policy does not absolve directors of their responsibility to ensure that the policy is appropriate for the licensee and compliant with Barbadian law, regulations and guidelines.

Failure to ensure compliance by the licensee with the requirements of the Money Laundering and Financing of Terrorism (Prevention And Control) Act may result in significant penalties for directors and the licensee. Directors could face up to $100 000 in fines. Board training has been mandated.

This year, we will be subject to two major influences; the anticipated mutual evaluation and the totally unexpected Panama Papers revelations. The interplay between these two events is that the Panama Papers revelations will make regulators look even harder at how directors oversee and direct anti-money laundering compliance and inevitably there will be tighter refinements to the guidelines.

Internationally, there are indications as to the evolving directions in directors’ responsibility and financial institution board members should re-examine what they need to know about anti-money laundering and sanctions compliance. In the next article, we will look at these emerging trends.

Louis Parris is a certified compliance professional, consultant and publisher of the Caribbean Banking Intelligence Anti-Money Laundering Compliance Newsletter. Email: louisp@caribsurf.com