Speech by SEC Staff:
IOSCO Annual Conference: Public Discussion Panel on Combating Financial Crime Globally
Director, Office of International Affairs
U.S. Securities and Exchange Commission
October 17, 2003
Thank you very much, Chairman Thomadakis.
Before I begin, I must provide you with the usual disclaimer: The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views that I express are mine and do not necessarily reflect those of the Commission or other members of the SEC's staff.
Overview of Enforcement Cooperation
With that finished, I would like to say that it is a pleasure to be here with so many distinguished individuals to discuss such an important topic. While perhaps in the news more today than ever before, the fight against global financial crime is not new. And it certainly is not new for securities regulators. Indeed, the SEC was founded in 1934 in the wake of the Great Depression - the same year that Turkey extradited to the United States the Chicago utilities magnate Samuel Insull on charges of securities fraud related to the stock market crash.
We have come a long way since then. Today, governments everywhere recognize the importance of maintaining the transparency and integrity of securities markets, if those markets are to prosper. Where markets are not transparent and where this integrity is violated - in other words, where fraud is rampant and investors can never be sure what they are getting - capital markets suffer. Compromised and poorly supervised markets also open themselves to other problems, such as money laundering and terrorist financing.
But market transparency and integrity require more than just good laws and regulations. The highest quality accounting and auditing standards, and the most comprehensive anti-fraud laws are meaningless if those standards and laws are not enforced.
These statements are almost axiomatic today, and securities regulators almost everywhere are on the lookout for market manipulation and other abusive practices. But this wasn't always the case. Until the 1980s, many jurisdictions did not ban insider trading on non-public information. Even where statutes regarding market fraud existed, many securities regulators lacked the legal authority to properly investigate and prosecute such fraud. And limitations on the use to which shared information could be put prevented regulators from further sharing the information with criminal investigators.
The result was that even where a regulator had the authority to investigate and prosecute securities fraud, when the investigative trail crossed its jurisdiction's borders, this trail very quickly became cold.
Today, all IOSCO jurisdictions recognize that their securities regulators should have comprehensive inspection, investigative, surveillance and enforcement powers. Every IOSCO member also recognizes that all securities regulators should have the authority to share public and non-public information with their foreign counterparts. And, finally, we all recognize that we should have the power to conduct investigations on behalf of one another.
Starting with the IOSCO Core Principles in 1998 through to the Principles on Disclosure, Auditor Oversight and Auditor Independence and the Technical Committee's recent Principles regarding Securities Analyst Conflicts of Interest, securities regulators throughout the world have come to broadly agree on what constitutes a robust framework for securities regulation.
Through the IOSCO Multilateral MOU, we have also reached broad consensus on what is required of regulators to be considered responsible members of the international regulatory community. The IOSCO Multilateral MOU on enforcement cooperation and information sharing now has 24 signatories, with more added every few months. Several of the most recent signatories only just received the legal authority required by the MOU. Their legislatures granted such legal authority precisely because the Multilateral MOU is such a powerful statement of what the international community believes is needed of securities regulators in today's global environment.
In short, this past decade has seen a tectonic shift in how securities regulators combat cross-border financial crime. In a sense, what we have now is a philosophy of collective security for securities regulators - we have the authority to view a threat to the integrity of foreign markets as a threat to our own. Those who commit financial crimes can run across borders, but they can't hide. Arrangements such as the IOSCO Multilateral MOU, if the underlying requirements are not compromised, can make cross-border investigations efficient, seamless and quick.
The Next Bold Step in Enforcement Cooperation: Asset Freezes and Repatriation
However, we do not yet have all of the tools we need to make our collective security against financial crime complete. What I would like to talk about today is what I believe is the next bold step for securities regulators in their fight against cross-border financial crime: that is increasing the abilities of securities regulators to freeze and repatriate assets on behalf of foreign counterparts. In other words, I want to focus on how we can take the profit out of financial crime by not just following the money, but getting it back.
As a general matter, all legal systems pretty much agree on two points: that (1) the perpetrators of fraud should not benefit from their crime, and (2) ideally, the victims of fraud should be made whole where possible. Securities regulators and law enforcement agencies everywhere recognize that the ability to freeze the assets of those suspected of committing financial crimes is crucial to these goals. Without this ability, funds taken from the victims of fraud may be spent, transferred to other countries, or hidden or dissipated in dozens of different ways.
As an indication of its importance, since 2000, the SEC has sought more than 200 asset freezes in all types of market manipulation, insider trading and other securities fraud cases.
In the aftermath of the recent corporate scandals in the United States, the U.S. Congress granted the SEC additional powers reflecting this philosophy of restoring the proceeds of fraud to victims and preventing wrongdoers from benefiting from their crimes.
For example, the Sarbanes-Oxley Act authorizes the SEC to seek temporary asset freezes where an issuer makes extraordinary payments to officers, directors or employees as wrongdoing starts to be uncovered. The intent of this provision is to stop a company from being looted, even before wrongdoing has been firmly established.
The Sarbanes-Oxley Act also authorizes the SEC to add civil penalties resulting from an enforcement action into a victims' disgorgement fund. This "Fair Funds" provision enhances the ability of the SEC to assist defrauded investors, particularly where a disgorgement alone is insufficient because investor assets have been dissipated. The goal is not just to catch the bad guys, but to help defrauded investors get their money back.
Other recent laws in the United States regarding financial crime and terrorist financing also reflect this philosophy. The USA Patriot Act, for example, authorizes the US Department of Justice and other criminal authorities to freeze and seize assets held in correspondent accounts in the US where the corresponding assets located abroad are the proceeds of crime.
New legislation has also improved our ability to track the proceeds of financial crime so that asset freezes and disgorgements can be made more timely. The Patriot Act clarified portions of the Electronic Communications Privacy Act to specifically allow the SEC to gain access to Internet subscriber and traffic information - information that the SEC can seek on its own behalf or on behalf of a foreign regulator. The Patriot Act also required banks, broker-dealers, mutual funds and other financial intermediaries to collect additional beneficial owner information, enact know-your-customer procedures, and file suspicious activity reports under a wider range of circumstances. Each provision is designed to make it easier for firms and financial authorities to detect financial crime and trace the proceeds of these crimes.
The Need for an International Mechanism
Today, investor capital flows across borders. Our enforcement abilities must do so as well. Over the years, as a consequence of the work of IOSCO and other multinational groups, the need for securities regulators to cooperate with each other and share enforcement-related information has become well understood. We have successfully shared bank and brokerage account records, telephone records, Internet subscriber information and testimony with each other. We are also beginning to receive enforcement cooperation from jurisdictions once thought of as havens for those seeking a see-no-evil-speak-no-evil regulatory environment.
But one remaining hole in our international cooperative efforts is assistance to one another in freezing and repatriating the proceeds of a financial crime.
When the fraudsters and assets remain at home, we have a pretty good track record of being able to use civil freezes and other mechanisms to get money out of the hands of those who commit fraud and back into the hands of the fraud victims. However, when the money leaves the country, this becomes considerably more difficult.
Consequently, providing each other with information may no longer be enough. We need to look over the horizon and consider how we can assist one another further in taking the profit out of financial crime.
Current Approaches and Problems to Asset Freezes
This isn't to say there are no options currently available to us to freezing and repatriating assets. Today, the SEC, for example, relies on a number of options to restrain and repatriate the proceeds of securities fraud that are located abroad.
One approach is to file civil litigation in the other jurisdiction. So-called "Mareva injunctions" are temporary asset freezes issued by a foreign court while litigation is pending or contemplated in another jurisdiction. While effective, this approach increases a regulator's litigation risk, and regulators with limited resources may have difficulty providing the financial undertakings that may be required by foreign courts when filing such injunctions.
In a few jurisdictions, such as Canada, regulators have the authority to issue temporary administrative freezes on behalf of their foreign counterparts. Such authority can really take a bite out of the profits of financial crime. It allows securities regulators to fully cooperate in a cross-border investigation - simultaneously sharing the information required to build an investigative record while shutting down an ongoing fraud and freezing the ill-gotten proceeds.
Unfortunately, such administrative authority is the exception rather than the rule.
Problems Involving Enforcement of Judgments
However, Mareva-type proceedings and other approaches may be fruitless if the foreign jurisdictions do not recognize final monetary judgments. Indeed, repatriation is the flip side of an asset freeze. The freeze is ineffective if proceeds of crime cannot be returned to the victim or be used to satisfy a penalty.
For example, even with a Mareva injunction in place, some jurisdictions refuse to enforce foreign default judgments - meaning a wrongdoer can get to keep the money simply by refusing to litigate.
Current Approaches and Difficulties for Private Sector
The end result is that international securities regulators have done an excellent job over the years increasing their abilities to cooperate to detect and prosecute cross-border securities fraud. However, crime still pays, and until we can quickly and efficiently work together to freeze and repatriate the proceeds of financial crime, there will be a hole in our enforcement network.
Of course, we securities regulators are resourceful, and we have done a very good job enhancing cooperation among civil and criminal authorities all over the world. In many cases, this patchwork of cooperation yields results - assets are sometimes frozen and funds on occasion repatriated. However, the process is not pretty. The multiple channels we rely on can be a defense counsel's dream, and a nightmare for the banks and brokerage firms holding the assets. The shotgun approach we must take under the current system can yield numerous lawsuits and counter-suits, often with firms and other regulators caught in the middle.
Solution: An International Approach to Asset Restraints and Repatriation
What we need today is a multilateral approach to enforcement cooperation that allows for asset freezes and asset repatriation. This approach need not be formal.
Instead, I suggest that a multilateral solution to this problem may exist through an informal, albeit widespread, expanded understanding of what powers securities regulators should have and should be able to exercise on behalf of their foreign counterparts.
In this regard, I suggest that certain Canadian provinces are leading the way for the rest of us. By granting Canadian securities regulators with the authority to freeze assets on behalf of their foreign counterparts, the provincial legislatures explicitly recognized (1) how important it is to deprive those who commit securities fraud of the benefits of their fraud, and (2) that securities fraud today is borderless and helping stop fraud abroad is a vital component in our battle against fraud in our own jurisdictions.
If other IOSCO members begin to consider acquiring this same authority to act on behalf of their foreign counterparts, a multilateral approach to asset restraint and repatriation begins to become a possibility. Such an informal approach would not be binding - rather, it would represent a statement of regulators that can help each other through asset freezes and asset repatriation that they are willing to do so.
Of course, there will doubtless be constitutional or other legal issues to consider. However, jurisdictions generally, with effort, find legal or legislative fixes to overcome such hurdles. As with the Multilateral MOU, assistance with asset restraint and repatriation would necessarily take account of due process and other legal and constitutional protections. In this manner, we will be able to protect the legal rights of our citizens, but we will also be able to offer them greater protection against financial crime.
Furthermore, other jurisdictions, in addition to the Canadians, may not be far away from drawing this same conclusion. Article 12 of the European Union's recent Market Abuse Directive states that competent securities authorities should be given all supervisory and investigatory powers necessary to exercise their functions, including the power to request the freezing and/or sequestration of assets.
Article 12's focus is on domestic enforcement. But in the spirit of cross-border cooperation, EU countries, in implementing the provision, may want to consider allowing their securities regulators to exercise this authority in the case of cross-border enforcement cooperation.
Lastly, improving our abilities to restrain and repatriate assets on behalf of our foreign counterparts will benefit not just investors and law enforcement agencies. Our current approaches to solving this problem can present banks and other intermediaries with competing claims and contradictory obligations. For example, a foreign court order against an account may not be enforceable in another jurisdiction. Consequently, a bank or intermediary may be liable if it prevents an account holder from withdrawing funds from that account. At the same time, defrauded investors may argue that the foreign judgment makes the bank or intermediary a constructive trustee of those funds and liable if they are withdrawn. Banks and intermediaries may want to do the right thing, but may be uncertain as to which claim to honor.
An enhanced multilateral understanding of international enforcement cooperation would offer banks and intermediaries clarity in this regard. The obligations of banks and intermediaries would be clear, as the domestic securities regulator could order an asset freeze at the request of a foreign counterpart, simultaneously assisting a cross-border investigation and insulating domestic banks and intermediaries from lawsuits by the account holder.
A new approach to asset freezes and repatriation will require bold action, but it is the next logical step in our fight against transnational financial crime. If we can take the profit out of international financial crime, we can preserve the integrity of our financial systems, to everyone's benefit. I look forward to working with you to meet this challenge.