Parallel Proceedings: Autumn 2021 update

As foreshadowed in our Spring 2021 update, we are beginning to see some of the consequences of an increase in fraud and other scams fuelled by the COVID pandemic. These consequences are being felt by financial institutions in particular, who may often be used to facilitate the commission of financial crime. An increased exposure to the risk of claims from victims and regulatory action for systems and controls failures, alongside criminal investigations into the underlying conduct, creates new opportunities for tension between these different regimes. Recent communications from the Government, as well as consideration given to these issues by the Courts, provide some guidance for affected parties, but there is much that remains to be determined as the numbers of such cases grow.

In this issue we consider a number of recent decisions which serve as a useful reminder of the need for caution when advancing private prosecutions in the context of a civil dispute. We also share an update on the latest trends in investor actions brought under s.90A FSMA against UK listed companies, and look at a number of other recent developments, including in relation to the disclosure of SARs in civil litigation, the stay of regulatory proceedings to make way for civil litigation, and the English courts’ approach to declarations that may interfere with foreign proceedings. See our parallel proceedings microsite for further insight into the issues that arise when an incident leads to multiple legal proceedings and/or enforcement actions.

Disclosure of Suspicious Activity Reports (SARs) in civil litigation

On 7 July 2021, the UK Government published a Circular on the use of SARs in civil litigation, intended to help ‘protect’ those obliged to report suspicions of money laundering under the Proceeds of Crime Act 2002 (POCA), including financial institutions. The Circular provides some helpful guidance as to how steps taken in decision-making regarding customers may reduce the likelihood of a SAR being required to be disclosed in a subsequent dispute. However, it does not address how disclosable internal communications which make reference to a SAR should be treated; a point which is likely to arise in practice. For further consideration of the issues which may arise in this scenario and how they may be mitigated, see our full analysis of the Circular.

Challenges for retail banks where customers are victims of Authorised Push Payment (APP) and other frauds

A key theme which has emerged over the last year, fuelled by a rise in cases during the COVID pandemic, is the response of retail banks to instances of fraud against their customers. These cases are often particularly challenging as they can provide a basis for civil, criminal and regulatory proceedings to run concurrently.

Important aspects for banks to consider include whether they have met their regulatory obligations to prevent financial crime and address the consequences of it, whether they have treated their customers fairly, and whether they have taken appropriate steps to mitigate their own risks of civil, regulatory or even criminal liability. We explore some of these issues and more in our article on Financial crime and customer redress, and webinars on The risk agenda for banks when their customers fall victim to fraud and Authorised push payment fraud: defending claims and managing risks.

Banks must also be alive to the need for consistency and coherence in their approach to enquiries from customers, regulators and criminal investigation authorities concerning instances of fraud, and appreciate the challenges which may arise in the event that proceedings initiated by any of these parties run concurrently. Read more about those particular challenges on our parallel proceedings microsite.

Private Prosecutions and civil proceedings

There have been a number of recent decisions in which the courts have considered the relationship between private prosecutions and civil proceedings. A key question raised in these cases was whether the private prosecutions were properly motivated, or whether the litigation was more appropriate for the civil courts. They serve as a useful reminder that any private prosecution must be properly motivated, and meet the public interest test in the Code for Crown Prosecutors – although that does not necessarily mean that private prosecutions cannot be brought where there is a related or underlying civil dispute. See here for further information.

Staying regulatory proceedings to make way for civil litigation

In this case the First Claimant successfully challenged by judicial review in the Administrative Court the decision of the FCA’s Regulatory Decisions Committee (RDC) to refuse to stay disciplinary proceedings pending resolution of a related Commercial Court claim. In coming to its view, the Court found in particular that “where issues that are critical to regulatory charges are both outside the general experience of RDC panel members and due for early consideration by a specialist court, regulatory conclusions based on those findings will carry particular weight and will for that reason particularly serve the public interest in regulation that is robust, fair and maintains the integrity of the financial system”. See here for further information on the circumstances of this finding.

Section 90A FSMA claims

As we observed in our Spring Update, investor actions brought under s.90A FSMA against UK listed companies are increasingly a feature of UK litigation, and are often brought alongside ongoing criminal or regulatory proceedings. We have been monitoring developments in this area, including cases brought in the wake of criminal investigations. See our overview of three important judgments relevant to the conduct of claims under s.90A FSMA here, and our podcast on particular issues which arise where company directors are implicated in criminal wrongdoing.

Court refuses declaration where sole purpose to assist in foreign proceedings

The case of Radia v Jhaveri demonstrates the court’s reluctance to grant – without special reason – a declaration which may interfere with foreign proceedings.

The Claimant requested a declaration that he did not have any beneficial interest in some shares. In analysing whether or not the court should exercise its discretion to grant the declaration, it was relevant that:

1. the shares were essentially worthless and so the lack of participation of the Defendant in the proceedings was understandable;

2. evidence from non-participating parties (including the Defendant and the company in which the shares were held) could have assisted the court in resolving disputed issues of fact; and

3. though there was a dispute between the parties as to the ownership of the shares, the Claimant’s real dispute was with the Indian authorities in that he wanted the declaration to assist in his responses to their enquiries and any future proceedings brought by them.

The court did not consider it appropriate to make a declaration that could impact the Indian authorities’ investigation where all parties to be impacted by such declaration were not engaged. Read our fuller analysis of the case here.