Periodically, one of our legal consultants briefly discusses a relevant ruling from the supervisory field of the Dutch Authority for the Financial Markets (AFM), De Nederlandsche Bank (DNB) or the Dutch Personal Data Authority (AP). Always based on three identical questions. In ‘plain language’, easy to understand even for the non-lawyers among us. This month, Gerard Jong reflects on two rulings of the Trade and Industry Appeals Tribunal (CBb or Tribunal) of 17 October 2023, ruling 1 and ruling 2.
These rulings answer the questions:
Financial services provider X held an AFM license until 31 December 2017. The AFM’s investigation revealed that from February 2015 until December 2017, X did not have a sound remuneration policy and did not handle customer complaints in a diligent and objective manner. According to the AFM, this resulted in a breach of Section 4:11(2) of the Financial Supervision Act (Wft). According to this section, a financial service provider must have an adequate policy to ensure integrity in the conduct of its business. For this breach, the AFM finally (after objection) imposes a fine of €10,000 on the company and €5,000 each on the de facto directors A and B. With this fine, the AFM considers the information provided by them on their ability to pay. A, B and X then unsuccessfully appealed to the District court of Rotterdam. A, B and X all appealed to the CBb against the decisions of the court.
Z is a trust office licensed by DNB. DNB’s investigation revealed that Z failed to report an unusual transaction of $10 million by its client to the Dutch Financial Intelligence Unit (FIU-NL) in a timely manner. According to DNB, this resulted in a breach of Section 16(1) of the Anti-Money Laundering and Anti-Terrorist Financing Act (Wwft). According to this section, a trust office must (among other things) report such an unusual transaction to the FIU-NL “without delay”, i.e. as soon as possible after the unusual nature of the transaction becomes known.
For this offence, DNB imposed a fine of €50,445 on trust office Z and €25,000 on the de facto director Y. Due to the entry into force of its new Fines Policy on 12 December 2020, DNB (only) reduced the fine for Z to €29,790 on 30 December. Y and Z then unsuccessfully appealed these fine decisions to the District court of Rotterdam. Both appealed these decisions to the CBb.
Based on the documents in the file, the CBb concludes that X did not have a sound remuneration policy at the time. According to the CBb, it was established that (i) X’s variable remuneration was (much) higher than (the legally permitted) 20% of the fixed remuneration and (ii) it was not based on non-financial criteria for at least 50% of the time, as required by law. According to the CBb, there was also an “inadequate handling of complaints” by X. The Tribunal does not agree with the argument that the five complaints selected by the AFM as a sample would give a false picture of how X normally handles complaints. Therefore, the CBb does not accept the offer made by X in the appeal process to grant access to other complaint files.
Furthermore, the CBb ruled that the AFM could impose fines pursuant to Section 4:11(2) of the Wft. Contrary to what A, B and X argue, this section provides an independent legal basis for enforcement by the AFM. In addition, the remuneration policy and the handling of complaints also form part of the integrity aspects of the business. Finally, their appeal to the principle of equality is in vain: why were we fined and other financial service providers not?
However, according to the CBb, there was no arbitrariness. Although other financial services providers investigated by the AFM had also failed to comply with the rules on sound remuneration, no further breaches were found. In addition, they adjusted their remuneration policy after the AFM pointed this out to them, whereas X had to be reminded of this on several occasions. Therefore, there was no breach of the prohibition on arbitrariness. The fines of €10,000 for the company and 2 x €5,000 for the de facto directors have therefore become final with this judgement.
Y and Z are also unsuccessful before the CBb. According to the Tribunal, the alleged and punishable offence was established. The CBb agreed with the District court of Rotterdam that the $10 million loan qualified as an unusual transaction within the meaning of Section 1 of the Wwft. The facts and circumstances (as outlined by the CBb) surrounding this loan meant that it could potentially be related to money laundering. In any event, since the report was not made within 14 days of the unusual nature of this transaction becoming known to Z, the CBb considers that Z has breached Section 16(1) of the Wwft.
In the Tribunal’s view, the court correctly identified Y as the de facto director of this violation. He was aware of these facts and circumstances, should have realised as early as 1 August 2016 that the transaction was unusual and, as a director of Z, was authorised to make a report to the FIU-NL. “By failing to report himself, he knowingly accepted the substantial likelihood that the conduct of failing to report an unusual transaction would occur,” the CBb concludes. The decision shows that Y did eventually make an FIU-NL report, but only on 3 March 2017.
Y and Z also argue in vain that DNB’s fine report was not drawn up negligently and that DNB was biased. Their complaint that the fine was disproportionate also fails. According to the court, the imposition of an administrative fine on both company Z and (co-)director Y was ‘appropriate’. The CBb agrees with that. According to the CBb, the fact that there was only one ‘incorrect’ transaction, does not preclude the imposition of a fine. The CBb is of the opinion that, given the seriousness of the offence, DNB should not have dealt with it by means of informal measures, such as a warning or a norm-transmitting conversation.
However, the CBb considers that the reasonable period within which this fine should have been settled, i.e. four years, has been exceeded. This results in a 10% reduction of the fine for both, bringing the fine for trust office Z to €26,811 and for de facto director Y to €22,500.
These rulings teach us that the role of de facto director or day-to-day policymaker of a supervised financial organisation can have far-reaching (financial) consequences. Even some time after the financial institution itself is no longer supervised. The duties and responsibilities associated with this role must always be demonstrably properly discharged. If the opposite is the case, (former) directors policy makers can be blamed for a lack of control and/or integrity in their business operations. This results in the imposition (and publication) of high administrative fines. However, in order to fine a de facto director, there must (also) be a breach by the financial institution itself.
While it may be ‘worthwhile’ to file an appeal against a fine imposed by the AFM or DNB, the bar is high. Appeals based on the principle of equality or the prohibition of arbitrariness, the principle of due care, the prohibition of bias and the principle of proportionality have not been successful. Taking everything into account, the court may conclude that a lower fine is “appropriate and necessary”. But that obviously requires – in addition to a thorough justification – an investment, for example in legal fees.
Be that as it may, we wish all de facto directors or day-to-day policymakers from 2024 onwards good luck and wisdom in demonstrably meeting the high expectations of legislators and regulators!
Have you yourself been confronted with signals from the regulator showing that your organisation’s compliance with laws and regulations is failing? Or have you been called to account for this as a (former) director or policymaker? Our consultants will be happy to help you settle your dispute with the regulator or, better still, prevent it. Please contact us without any obligation.