There is no avoiding the current media attention in relation to the conduct of certain bank officials. However, the question that arises is whether any legal implications arise from that conduct and, if so, what? Shelley Koran closes her accounts.
This article looks at the potential offences that may arise, and the civil and criminal sanctions that may be imposed, for any breach by a bank official. Further considered are the powers of the Office of the Director of Corporate Enforcement and the Irish Financial Services Authority to inspect and sanction bankers in default.
There is no doubt that directors’ loans have been the source of great controversy and attention in recent times. Generally, loans to directors are a breach of s31 of the Companies Act 1990. However, two exceptions to that section may apply. First, s32 (1) provides an exception where the loan does not exceed 10% of a company’s relevant assets. Undoubtedly, given that banks have vast assets, it would be unlikely that a loan to a director would exceed 10% of a bank’s assets. Secondly, s37 allows loans to directors where those loans are provided in the ordinary course of business and are given on terms no more favourable than they would be to a customer of similar standing. Undoubtedly, banks lend money as part of their business and so s37 would almost certainly apply. However, in order to come within s37, the bank would have to show that it provided the loan to the director on the same terms or using the same collateral as would have been provided to another customer of comparable standing.
The next matter that has attracted media attention is the provision of loans to bank’s customers for the purchase of its own shares. Section 60 of Companies Act 1963 contains the basic prohibition against such conduct. However, exceptions do exist and s60 (13) permits the lending of money where it is the ordinary course of business. This exception would therefore encompass the business of a bank.
Insider dealing/market manipulation
Far-reaching EU legislation has been transposed into Irish law by virtue of the Investment Funds, Companies and Miscellaneous Provisions Act 2008 and the Market Abuse (Directive 2003/6/EC) Regulations 2005. The offence of insider dealing prohibits the provision of undisclosed information relating to financial instruments that is used to purchase or dispose of shares. It is conceivable that, where a banker invites certain bank customers to purchase its shares on an off—market basis, based on information not available in the public domain, that both parties may be guilty of insider dealing. The new offence of market manipulation is broadly defined and would capture situations where a person fails to disclose key information on its balance sheets or where that person has provided false or misleading signals to the market (such as transferring large deposits from one financial institution to another at financial year-end in order to artificially enhance the perceived financial health of the receiving institution). The penalties for breaches are extremely stringent. A person found guilty of an offence could be liable to ten years’ imprisonment and/or a fine of €10,000,000. Further, persons guilty of either offence could be made civilly liable and be required to compensate affected persons or to account to them for any profits. It is worth further noting that the provision by a bank of undisclosed information in relation to a bank’s shares to certain bank customers could give rise to a breach of the Prospectus (Directive 2003/71/EC) Regulations 2005.
Proper books of account
Companies are required, under s202 of the Companies Act 1990, to maintain proper books of account, and failures to disclose required information or the publication of false information would give rise to an offence. A breach could he punishable by unlimited liability on a director in default, and the commission of two or more offences could give rise to disqualification. However, a defence may arise where a competent person, such as an auditor, was charged with looking after the bank’s books. It is worth also noting that offences also arise where a director provides false information or where a vital document is destroyed or mutilated under ss242 and 243 of the Companies Act 1990.
Deception and conspiracy
There are a number of express criminal offences that could also apply to a banking official in default. The Criminal Justice (Theft and Fraud) Offences Act 200l expressly includes offences by bodies corporate and their officers. The first offence is that of deception under s6 of the act, which involves providing false information with the intention of making a profit or causing a loss to another by inducing that person to do or refrain from doing an act. For example, a banking official who manipulates a bank’s affairs and balance sheets, so that individuals are induced to purchase shares in the bank believing it to be in a healthier financial state than it is, could be guilty of an offence. A person guilty of deception could be liable to five years in prison and/or a fine.
The second relevant offence is that of false accounting under s10, which prohibits a person from acting dishonestly and with the intention of making a profit by providing false, misleading or deceptive accounting documentation. Undoubtedly, manipulation of a balance sheet could give rise to false accounting, and a person found guilty of an offence could be liable to a maximum of ten years in prison and/or to a fine.
Moreover the common law offence of criminal conspiracy could arise where two or more financial institutions conspired together to commit an unlawful act, such as false accounting. For example, where two banks agree to temporarily transfer money from one bank to another in order to misrepresent the health of the receiving bank, criminal conspiracy to manipulate the market could arise. Further, where a person agrees with an officer of a bank to receive undisclosed information and purchase that bank’s shares on the basis of this information, an offence of conspiracy to commit insider dealing could he made out. Ordinarily, a person guilty of conspiracy is liable to the maximum penalty for the commission of the unlawful act itself.
Criminal fraudulent trading
If a director is carrying on a business activity with the deliberate intent to defraud its creditors, he may be found guilty of criminal fraudulent trading under s297 of the companies Act 1963, as amended. For example, a director guilty of the criminal offences of false accounting and/or deception could be liable to prosecution. A maximum prison sentence of seven years and/or a fine could be imposed for fraudulent trading.
It is worth noting that the proofs required for criminal offences at common law and pursuant to criminal statutes are significantly stricter than those provided for under the Companies Acts. In criminal proceedings, it would fall on the DPP to prove that the bank official in question committed the breach with the requisite intention to commit the unlawful act. By contrast, a presumption exists in the Companies Acts
whereby a director is presumed to be in default unless he can prove otherwise, rendering offences under these acts much easier to prosecute.
The Office of the Director of Corporate Enforcement (ODCE) was set up under the Company Law Enforcement Act 2001 and the Director of Corporate Enforcement (DCE) has been given extensive powers to investigate and sanction any breaches of the Companies Acts. ODCE is independent in its functions, and members of the gardai have been seconded to it, many of whom worked in the Garda Bureau of Fraud Investigation. The DCE is empowered to:
• Apply for a court-appointed inspector to investigate the affairs of a bank,
• Apply for a search warrant in the District Court to inspect premises, including a dwelling,
• Appoint an inspector without court involvement where it seeks the identity of persons who are financially interested in a bank, such as shareholders (it is noteworthy that s14 could be invoked to uncover the identities of individuals who were provided with bank loans to purchase a bank’s own shares),
• Apply to disqualify a director where the director is guilty of fraud or dishonesty
• Prosecute summary offences under the Companies Acts (it is noteworthy that the only body that can prosecute indictable offences under the Companies Acts is the DPP),
• Seek an injunction freezing the assets of bank, its directors or others, and
• Refer its findings to the DPP and the Garda Bureau of Fraud Investigations.
It is worth observing that the appointment of an inspector can have severe consequences for a bank official. An inspector can examine persons on oath. In Re National Irish Bank Ltd (No 1), it was held that even the constitutional rights to silence and privilege against self-incrimination do not affect this right. Further, in Countyglen plc v Carway, an inspector’s report was held to have presumptive evidentiary effect in civil proceedings.
The powers of the Irish Financial Services Regulatory Authority (IFSRA) are extensive and can be found in the Central Bank Act 1942, as amended. IFSRA can:
• Do anything necessary to perform its functions, such as bringing and defending legal proceedings,
• Hold inquiries where it believes that a financial
service provider is guilty of a contravention,
• Summon witnesses and take evidence,
• Abide by the rules of procedural fairness, but it is not bound by the rules of evidence,
• Impose sanctions on bankers, such as monetary penalties.
Crucially, IFSRA has statutory immunity from liability unless bad faith is found to exist. However, an employee of IFSRA may be exposed to the tort of misfeasance in public office, which is not excluded.
Arising from the above, it is clear that there is a myriad of offences that could capture the activities of bankers. Further, it is clear that the regulatory bodies are endowed with extensive and far-reaching powers to investigate and sanction those perceived breaches of the legislation. However, as most of the legislation has yet to be invoked to date, this is, for the most part, territory not yet charted. It remains to be seen how these powers are put into practice and whether they will withstand judicial scrutiny.
"This article originally appeared in the April 2009 issue of the ‘Law Society Gazette’. Reproduced by permission of the editor."