UK regulators get “tougher” on financial wrongdoers

BY Fraser Tennant

UK regulators are “getting tougher on financial crime” by issuing increasingly stringent penalties to wrongdoers, according to new analysis published this week by EY.

EY’s Investigations Index reveals that, over the past two years, the punishments handed out by the UK’s regulatory bodies – the Financial Conduct Authority (FCA), the Serious Fraud Office (SFO), the Competitions and Markets Authority (CMA) and the Office of Fair Trading (OFT) – saw fines soar by 271 percent (with £2.45bn issued in the past two years) and prison sentences increase 124 percent. Company directors also face an average prison sentence of four years or more.

Additional findings in the EY study include: (i) 58 percent of cases investigated by the SFO resulted in prison sentences; (ii) 56 percent of cases investigated  by the FCA resulted in fines; (iii) of the 82 cases investigated by the FCA over the course of two years, 25 were against individuals; (iv) of those 25 cases, 36 percent resulted in prison sentences; (v) 10 percent of all cases dealt with individuals or firms committing fraud; and (vi) of the 125 cases investigated by the CMA and OFT in the past two years, 119 were due to a proposed or completed merger or acquisition.

“UK regulators are getting tougher on financial crime," said John Smart, head of EY’s UK Fraud Investigation & Dispute Services team. “In the wake of recent corporate scandals and growing political pressure, there seems to be a greater focus by the regulators to pursue cases that may once have been considered ‘too difficult’, to ensure those responsible for wrongdoing are held to account.”

Despite the tougher stance, the Index did find that the average prison sentence has decreased by 40 percent over the past two years, from 87 months to 52 months.

Nevertheless, Mr Smart believes that the Index findings should also serve as a warning to companies, to review their processes on a regular basis, stating that the top reasons for fines, namely systems failings, business misconduct and misleading information, were all factors that could have been avoided by having stronger control processes to identify and resolve any corporate blind spots.

The EY Index examined 231 cases (which took place between 1 October 2013 and 30 September 2015) involving fines and criminal prosecutions against business and individuals.

News: U.K. Regulatory Fines Soar Amid Crackdown on Financial Crime

Beers still on ice as regulatory hearings loom

BY Richard Summerfield

The $106bn mega merger between beer rivals Anheuser-Busch InBev and SABMiller is approaching a key crossroads as regulatory concerns on both sides of the Atlantic are addressed.

In light of antitrust issues in Europe, it is believed that Anheuser-Busch InBev will sell the Peroni and Grolsch brands it will gain from its merger with SABMiller. Indeed, AB InBev will likely divest of several SABMiller brands as the majority of the company’s products are European-focused. The combined company’s dominance of the European market would undoubtedly be a red flag for European regulators.

The loss of two of SABMiller’s four global brands will have a significant impact on the company in terms of both volume and profitability. Yet reducing the lucrative European portfolio is a necessary evil if AB InBev is to win merger approval. Dutch group Heineken, US based Molson Coors and Irish firm C & C Group have all been mooted as potential acquirers of the Peroni and Grolsch brands, expected to sell for billions of dollars.

Away from Europe, the merger has already acted as the catalyst for a number of divestitures. To appease antitrust concerns in the North American market, SABMiller will sell its 50 percent voting interest and 58 percent economic interest in MillerCoors to Molson Coors, its partner in the joint venture, for around $12bn. The Miller brand is one of the most important, and highest selling beer franchises globally.

Next week the merger between the two firms will be subject to a US Senate hearing according to the Senate Judiciary Committee.

Outside of Europe and the US, regulatory concerns around the deal remain. Chinese regulators in particular are expected to create further difficulties down the road.

News: Anheuser-Busch InBev to sell Peroni, Grolsch to smooth merger - FT

Property price growth rate drops - report

BY Richard Summerfield

Property price growth rates have slowed in many of the world’s major city markets, according a new report from Knight Frank and EY.

In recent years, affordability has become a problem, limiting price growth. The report, entitled 'Global Tax Report 2015', examines holding and selling costs for overseas buyers of prime residential property between 2010 and 2015. According to the data, the slower rate of price growth in most major markets has made transaction costs and taxation increasingly important factors for investors.

“When purchasing property as an investment, tax is not necessarily the first concern but it is important because it is often the after-tax return that measures the success of the investment," said Carolyn Steppler, private client tax services partner at EY, UK & Ireland. "Our research shows that the tax burden across the cities in this report varies considerably both in amount and extent,” she added.

The joint report examines non-tax purchase, management and sale costs across 15 leading global cities, highlighting considerable variations. For example, international investors hoping to acquire property overseas can get the lowest costs in Shanghai. Monaco offers the lowest level of taxation when purchasing property valued between $1m and $10m.

The cost of UK tax equates to around 9.7 percent and 20.7 percent for $1m and $10m properties respectively. Taxation governing residential property in the UK and London specifically has changed considerably over the last two years. In December 2014, progressive stamp duty land tax rates were introduced, and in April 2015 the taxation of capital gains on the disposal of property by non-resident owners was also introduced. Potential alterations to inheritance tax in the UK could also impact activity as certain property investment structures will become much less attractive to investors. However, London’s position as an economic and cultural powerhouse will help maintain the city's lustre for international investors.

Cities where property costs are highest include Paris, Berlin and Geneva, with costs for a $10m property can exceed 10 percent.

Report: Global Tax Report 2015

Record-breaking $160bn deal sees Pfizer buy Allergan

BY Fraser Tennant

In a deal believed to be the largest in healthcare history, biopharmaceutical giant Pfizer Inc. has announced that it is to acquire speciality pharmaceutical company Allergan plc – a transaction that will create a new global leader in biopharma business and innovation.

Under the terms of the definitive merger agreement, Pfizer will combine with Allergan in a stock transaction currently valued at $363.63 per Allergan share, for a total enterprise value of approximately $160bn (based on the closing price of Pfizer common stock of $32.18).

Allergan shareholders will receive 11.3 shares of the combined company for each of their Allergan shares, and Pfizer stockholders will receive one share of the combined company for each of their Pfizer shares.

“The proposed combination of Pfizer and Allergan will create a leading global pharmaceutical company with the strength to research, discover and deliver more medicines and therapies to more people around the world,” said Ian Read, chairman and chief executive of Pfizer. “Allergan’s businesses align with and enhance Pfizer’s businesses, creating best-in-class, sustainable, innovative and established businesses that are poised for growth. Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders, and continued investment in the United States.”

Under the terms of the transaction, unanimously approved by their boards of directors, the businesses of Pfizer and Allergan will be renamed ‘Pfizer plc'. The new entity’s board is expected to consist of 15 directors and will be led by Mr Read (continuing his previous role) and Brent Saunders (currently Allergan’s chief executive) as president and chief operating officer.

“The combination of Allergan and Pfizer is a highly strategic, value-enhancing transaction that brings together two biopharma powerhouses to change lives for the better,” said Mr Saunders. “This bold action is the next chapter in the successful transformation of Allergan allowing us to operate with greater resources at a much bigger scale.”

Upon closing, the combined company is expected to maintain Allergan’s Irish legal domicile – a move which has seen the US-based Pfizer accused of corporate tax avoidance (i.e., tax inversion) by president Obama, among others. 

Nevertheless, subject to certain conditions, including receipt of regulatory approval in certain jurisdictions such as the US and EU, and the receipt of necessary approvals from Pfizer and Allergan shareholders, the transaction is expected to complete in the second half of 2016.

News: Pfizer to buy Allergan in $160 billion deal

Hausfeld agrees $120m Libor settlement with Barclays

BY Fraser Tennant

Following four years of complex private litigation, global claimants’ law firm Hausfeld has announced a $120m settlement with Barclays Bank plc regarding Libor (London Interbank Offered Rate) fraud claims made by Over-The-Counter (OTC) investors.

Barclays, along with 15 other global financial institutions, had been accused of manipulating Libor – the mechanism used to set the cost of borrowing on mortgages, credit cards, loans and derivatives worth more than $450 trillion (£288 trillion) globally – so that its traders could make big profits on derivatives pegged to the base rate.

It is believed that Barclays first manipulated Libor during the global economic upswing of 2005–2007 before coming under suspicion from a number of regulatory authorities (based in the US, Canada, Japan, Switzerland, and the UK, among others). This particular litigation stretches back to 2011 when the City of Baltimore and other purchasers filed lawsuits against Barclays and other international banks alleging that they conspired to artificially suppress the US dollar LIBOR rate during the financial crisis.

Barclays previously admitted to manipulating LIBOR (in the run up to the financial crisis and in its aftermath) during settlements with US and UK regulators - the US Commodity Futures and Trading Commission and the FSA, respectively - in June 2012. In this instance, the bank was fined £290m and chief executive Bob Diamond resigned amid the fallout.

In addition to the monetary compensation agreed this week, Barclays, which only last month agreed to pay $94m in a separate litigation involving manipulation of Libor's euro-denominated equivalent, Euribor, has also committed to assisting the OTC plaintiffs in their continuing litigation against the other bank defendants .

The settlement with the OTC plaintiffs was achieved shortly before the Second Circuit Court of Appeals heard arguments on whether the plaintiffs’ antitrust claims should be reinstated after they were dismissed by the trial court.

“The settlement with Barclays, which comes over four years after the case was first filed, not only represents an important breakthrough in resolving this long-running litigation, it also provides significant monetary recovery and cooperation that will benefit the victims of the banks’ conduct," said Michael D. Hausfeld, chairman of Hausfeld.

Hilary Scherrer, a partner at Hausfeld LLP, called the settlement with Barclays an “icebreaker that could open up this litigation to future settlements".

News: Barclays to pay $120 million in U.S. Libor litigation - lawyers