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DIFC financial penalties

Several recent enforcement actions undertaken by the Dubai Financial Services Authority (DFSA) demonstrate that the regulator will not hesitate to impose financial penalties. Set against the current global backdrop, the DFSA's recent interventions may appear relatively low-key. They do however mark an important development in the DFSA's maturity as a financial services regulator in the Middle East.

In late September 2008 the DFSA sanctioned a publicly traded, Dubai-based investment bank with an authorised subsidiary in the DIFC for market abuse. The bank agreed to pay the DFSA a penalty of $850,000 in relation to alleged market manipulation and also to pay the DFSA a penalty of $100,000 in relation to the alleged obstruction of the DFSA's investigation. The alleged market abuse related to a series of unusual trades of DP World shares on the Dubai International Financial Exchange (now known as Nasdaq Dubai). The DFSA decided that the bank had breached the DIFC Markets Law by manipulating the price of DP World shares.

Earlier in September 2008, a foreign-exchange brokerage business with an authorised presence in the DIFC gave an enforceable undertaking in which it acknowledged that the conditions of its licence had been breached. This occurred when certain employees undertook trades on behalf of various customers (albeit with the full consent of those customers). At the relevant time the brokerage was authorised to arrange deals but was not licensed to trade as agent for its customers. They agreed to pay a fine of $25,000 and also to compensate those customers who had suffered trading losses during the time trades were being made by the employees of the brokerage.

In February 2009 a former compliance officer of the brokerage business was fined $70,000. The size of this fine surprised many, especially as the former compliance officer had left the business many months before the regulatory breaches (for which the company was fined) took place. The other surprising aspect was that the compliance officer in place at the time of these regulatory breaches was only fined $5,000. Despite (or because of) receiving a significantly higher fine, the former compliance officer was not prohibited from holding other authorised roles in the DIFC, and he remains employed by another company as their compliance officer.

The actions taken by the DFSA in respect of the institutions and individuals mentioned above represent the first time the DFSA has imposed financial penalties. Previous enforcement actions have been limited to banning certain individuals and organisations from operating in the DIFC.

The legal basis for the DFSA's powers are set out in the DIFC Regulatory Law. Article 8 of the Regulatory Law gives the DFSA the power to do whatever it deems necessary in connection with or reasonably incidental to performing its functions in exercising its powers. It is therefore interesting to see that the DFSA's favoured means of taking enforcement action appear, to date, to rest almost entirely upon obtaining enforceable undertakings from organisations or individuals who have breached either the DFSA Rulebook and/or laws applicable in the DIFC.

The Regulatory Law spells out in some detail the wide range of specific powers that the DFSA has at its disposal during the course of an investigation. The DFSA can enter business premises for the purpose of inspecting and copying information or documents. The DFSA can require people to produce or procure the production of documents and/or information and also has the power to compel attendance at compulsory interviews. Compulsory interviews are tape-recorded and generally attended by multiple representatives of the DFSA. Although the interviewee is entitled to legal representation, the DFSA has in some instances prevented the authorised firm's regular counsel from representing employees during the compulsory interview process.

The DFSA will typically require the interviewee to swear an oath or make an affirmation at the beginning of the interview to the effect that the answers of the interviewee will be true. The DFSA requires oaths to be sworn on the Quran or Bible or other appropriate holy book.

Once the DFSA has concluded its investigations it may issue a preliminary findings letter, a notice offering an opportunity to make representations or some other form of process that outlines the concerns of the DFSA and the form of proposed action. It is then open to the recipient of the letter to commence settlement discussions with the DFSA. This generally takes the form of a discussion as to the exact wording of any enforceable undertaking that may be issued. Such discussions would also include negotiations regarding fines or compensation that may be payable. The financial resources of the recipient, the desire to remain within the DIFC and the nature of the allegations being made will all be factors to be considered when entering into the settlement negotiations.

Stuart Walker

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