Periodically, one of our legal consultants briefly discusses a relevant supervisory decision of the Dutch Authority for the Financial Markets (AFM), the Dutch Central Bank (DNB) or the Dutch Data Protection Authority (AP). This is always done by asking the same three questions and in plain language so that the issue is easily understood by the non-lawyers among us.
This time, Gerard Jong reflects on a ruling by the Trade and Industry Appeals Tribunal (abbreviated as CBb in Dutch) in response to a decision by the AFM to impose an order under penalty for an alleged violation of the obligation to cooperate. This ruling was published on 14 September 2021.
On 27 March 2018, AFM employees made an unannounced visit to the office of X. The purpose of the visit was stated in the letter presented: the AFM wanted to investigate X’s compliance with the provisions of the Financial Supervision Act and the Unfair Commercial Practices Act. More specifically, the AFM wanted to verify that X does not offer investment services in the Netherlands without possessing an AFM licence to do so. In the letter, the AFM also informed X of the investigative authority that AFM employees have under the General Administrative Law Act (Awb in Dutch) and X’s obligation to cooperate.
The letter also included a specific request for information. The AFM wanted to obtain recordings of the telephone conversations that X (its employees) had conducted with current and potential clients between 27 March 2017 and 27 March 2018.
X initially indicated, through different individuals, that it possessed the relevant telephone records and would share them with the AFM “in bulk”. Later that day, however, X adopted the position that only the telephone conversations of the last 30 days were automatically saved. But based on its on-site investigation, the AFM argued that the telephone records were indeed present, contrary to what X claimed. At the end of the afternoon, the AFM had concluded that X had not complied with its information request.
The AFM wanted to obtain recordings of the telephone conversations that X had conducted.
Then, in the early evening, the AFM issued X with an order under penalty by e-mail that stated X must still provide the requested information to the AFM by 5.00 pm on 28 March 2018. The order made clear that if X is not able to comply, it must provide a detailed reason, and if X does not do what the AFM asks, it must pay a penalty of €50,000. Moreover, the AFM would then make the penalty decision public. Before the expiration of the stipulated period, X made available only the telephone records that it said it possessed. The AFM was not satisfied, however, and concluded on 29 March 2018 that X had not complied with its order and must pay the penalty.
X objected to the order under penalty as well as the decision to disclose it. The AFM declared this objection to be unfounded and then decided to (i) publish its decision on the objection by modifying the previously published press release and (ii) proceed with collecting the penalty. X lodged an appeal with the District Court of Rotterdam.
The court considered two questions:
The court also considered whether the AFM had violated its duty to hear by not hearing X on the matter prior to issuing the order under penalty. According to the AFM, an obligation to hear did not apply here, as X had not met its legal obligation to provide records. In that case, the Awb provides an exception to the obligation to hear.
Concerning the first question, the court ruled that X had indeed violated its obligation to cooperate with the AFM based on the detailed report (“report of factual acts”) that the AFM had drawn up about its visit to X. In it, five different employees first indicated — separately — that X saves its telephone conversations for more than 30 days. The court found that the AFM did not have to attach any value to the later statement that this was not the case. Based on the report, the court concluded that the AFM was correct in taking the position that X had more recordings of phone calls than what it claimed it had at 2.30 pm and was prepared to provide (in bulk). According to the court, the AFM therefore correctly concluded that X had refused to provide the requested recordings of the phone calls made and, as a result, had violated its obligation to cooperate with the AFM.
As for the second question, the court determined that X must indeed pay the penalty. According to the court, X did not claim it was impossible to give the AFM access to all or part of the requested information. Instead, X restricted itself to the (implausible) statement that phone calls older than one month are automatically deleted by the system and only some (“flagged”) calls are saved for a longer period. The court therefore agreed with the AFM that X had not satisfied the order and therefore must pay the penalty.
With regard to not observing the obligation to hear, the court ruled in favour of X. Contrary to what the AFM had assumed, the telephone records not provided by X were immaterial to the order under penalty. So, the AFM should have given X the opportunity to present its opinion on the (proposed) penalty decision. But because X, in its appeal to the AFM, had the opportunity to make its objections to that decision (and its publication) known — and was also heard about this — the lack of such during the decision-making was remedied, according to the court. As a result, X was not disadvantaged.
Both the AFM and X disagreed with the court’s ruling and appealed to the CBb.
Like the district court, the CBb also ruled that the AFM was correct in taking the position that X had violated its obligation to cooperate. The CBb found that X was not successful in rebutting the legitimate suspicion of the AFM that it had more phone records than it ultimately indicated and then provided to the AFM. According to the CBb, the AFM had the right to legitimately and reasonably requisition the information requested of X in order to carry out its supervisory duties. Any misuse of authority was therefore dismissed.
The CBb also agreed with the district court that X did not satisfy the imposed order and therefore must pay the penalty. According to the CBb, the AFM had the right to assume that X possessed the requested information. This order was also clearly formulated. By only providing the AFM with a limited part of the requested information, X did not satisfy the order.
With respect to the obligation to hear, the CBb stated — as did the district court — that the AFM should have heard X prior to imposing the order under penalty. The statutory exception to the obligation to hear exclusively involves not satisfying a “legal obligation to provide information”, which was not the case here, said the CBb. It added, ‘This case concerns a refusal to satisfy a demand of the AFM to provide information, to which (…) the Awb attaches the obligation to cooperate.’
According to the CBb, the conclusion that the disclosure obligation had not been met was obviously important for taking the penalty decision. But in this process, other facts and interests could also have been significant. That’s why the AFM should have given X the opportunity to be heard on this matter. In this respect, the CBb considered that the AFM, in its capacity as an administrative body, had a duty under the Awb to gather the necessary knowledge of the pertinent facts and interests that must be taken into account (the requirement of “prudent decision-making”). For this reason, as well, the AFM should not have refrained from hearing. However, like the district court, the CBb concluded that X was not disadvantaged by this omission.
In its decision, the CBb allowed the earlier court ruling to stand.
This ruling shows that it is extremely important to be well prepared for these types of on-site investigations. This also applies to licensed financial undertakings, even though an unannounced investigation (also called a “dawn raid”), as carried out in this case, is less likely to occur.
The legislature has granted the regulators far-reaching powers to ensure effective supervision. Exercising these powers can have major ramifications for an undertaking, its directors and other stakeholders. Having a robust roadmap in place, which everyone in the organisation should be familiar with, makes it clear how to act in such a situation. This roadmap (also called a “dawn-raid policy”) provides answers to practical questions, such as: Who must be notified of the investigation? Who is the regulator’s main point of contact during the investigation? Which room can the regulator conduct the investigation in? The policy should also clarify which specific powers the regulators have and how that determines the on-site investigation. Such a roadmap allows for a more orderly investigation and can therefore prevent making contradictory announcements, statements and commitments under duress.
