The Australian Prudential Regulation Authority (APRA) and the UK Financial Services Authority (FSA) have accepted enforceable undertakings from former Cologne Re Dublin (CRD) executive Mr John Byrne over his involvement in a number of sham reinsurance transactions.
Under the terms of the undertakings, Mr Byrne is prohibited for a period of five years from:
- in Australia, being or acting as a director or senior manager of a general insurer, non-operating holding company or agent of a foreign general insurer; and
- in the UK, performing any controlled function in relation to any regulated activity carried on by any authorised, exempt person or exempt professional firm.
Mr Byrne has also agreed to assist APRA with its continuing investigations into the role of other personnel involved in the sham transactions. In return, APRA has agreed to take no further action against Mr Byrne in respect of its investigations.
Mr Byrne acknowledged that he was involved in arranging and structuring financial reinsurance contracts on behalf of various subsidiaries of the Gen Re Group that he knew lacked sufficient risk transfer to be accounted for as reinsurance. The transactions were undertaken during the period 1998 to 2001 when Mr Byrne was a senior employee of CRD, a subsidiary of the Gen Re Group.
Mr Byrne knew that certain of these opaque - and in some instances highly complex - transactions were deliberately designed to allow Gen Re Group's various counterparties to pass them off to third parties (including auditors and regulators) as contracts of reinsurance, when in fact they were not, and to account for the transactions inappropriately.
Mr Byrne participated in transactions where the devices used to disguise their true and improper purpose included undisclosed side letters that, at least in one instance, altered the substance of the relevant contracts, and backdating of documentation to allocate a current year reinsurance contract to a prior accounting period. He knew the counterparties would likely improperly account for the transactions.
APRA Deputy Chairman Ross Jones said "APRA's ongoing investigation into financial reinsurance products developed and marketed by parts of the Gen Re Group has identified three transactions where Mr Byrne knowingly contributed to the development of products whose design made them capable of being misused by a counterparty for an improper purpose".
Mr Jones said APRA and the FSA have been liaising closely and this was the first instance of an enforcement matter being jointly settled between the two agencies. Both APRA and the FSA also acknowledge the assistance provided by the Irish Financial Services Regulatory Authority in this matter.
The transactions are outlined in Mr Byrne's Enforceable Undertaking to APRA and in the FSA Final Notice, which can be seen on their respective websites at www.fsa.gov.uk and www.apra.gov.au, click here for APRA information.
Financial, or finite, reinsurance is a form of limited risk transfer arrangement. Whilst there are legitimate reasons for using financial reinsurance, its use should properly be disclosed, including the entirety of any arrangements, to regulators, auditors, tax authorities and the market as appropriate. If used improperly, and not fully disclosed, financial reinsurance can be used to conceal the true financial position of a company.
This media release coincides with the issuing of a media release by the UK's Financial Services Authority.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding approximately $2.2 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.