City and CAS – FFP not down and out yet


Our team: Alan Wetterhahn, Thomas Edwards


The Court of Arbitration for Sport (CAS) recently handed down its decision in the matter of Manchester City FC (MCFC) v UEFA. The decision had been much anticipated in sporting circles as it is the first real test of UEFA’s Club Licensing and Financial Fair Play (FFP) rules that were put in place to regulate the spending of football clubs. Below, Tom Edwards and Alan Wetterhahn review CAS’ decision and set out the key takeaways.

Facts

The proceedings before the CAS were an appeal by MCFC against a decision of UEFA’s Adjudicatory Chamber. The investigation against MCFC initially arose out of leaked emails that were obtained as a result of email hacking. UEFA handed down its decision in February 2020, in which it concluded that MCFC had disguised equity funding as sponsorship income. This was a problem because the FFP rules specifically set limits on the amount of equity funding a club can receive. The effect of the alleged breach was that, in the eyes of UEFA, MCFC had artificially inflated its commercial income by over £200m, and therefore intentionally breached the FFP break-even rules which set the allowable losses of each club over a three year period. As a result of UEFA’s sanctions, MCFC were handed a large fine and banned from European competition for two seasons.

The proceedings centred on alleged equity funding from the owners of MCFC, acting through two investment vehicles, jointly referred to in the proceedings as ADUG. UEFA alleged that equity funds from ADUG had been channelled through two sponsors, Etihad and Etisalat, which UEFA alleged were connected to both MCFC and ADUG, and which did not comprise legitimate sponsorship funds, but were a deliberate attempt to circumvent the limits on allowable equity contributions.

Below are the key takeaways and rulings from the full CAS decision.

The independency of the CAS panel

Whilst there is no suggestion of impropriety or bias by the CAS panel, the make-up of the panel on this case was interesting. Each party, as allowed by CAS rules, had nominated an arbitrator. The chairman of the panel is then independently selected by the CAS appeal tribunal division.

In the present case, the chair of the panel was in fact nominated by MCFC (although it should be noted that UEFA raised no objection to the nomination or appointment).

The leaked emails were admissible

One of the key issues in the case was whether the leaked emails would be admissible. The investigation against MCFC arose out of illegally obtained, hacked emails. These emails were subsequently published in a German newspaper, Der Spiegel, before being published more widely in the international press. The decision before CAS was whether the overriding interest in establishing the truth outweighed the use of illegally obtained evidence.

The CAS panel ruled that there was an overriding public interest in this case (in other words, in seeing the FFP rules upheld). Further, the panel stated that, as the emails were already widely available in the public domain, and as UEFA was not involved in obtaining the emails, there was no reason to preclude the submission of the emails.

Did CFCB breach its obligations of due process?

MCFC had alleged that UEFA’s investigatory arm, the Club Financial Control Body (CFCB) had, by referring its referral decision to the Adjudicatory Chamber prematurely, denied MCFC the opportunity to present its case relating to the issue as to whether the parties involved in the alleged activities were related parties. MCFC maintained that the referral decision was formed incorrectly on the basis of an assumption into the relations between MCFC and its sponsors.

CAS found that this allegation was not relevant. CAS stated that, even if the parties were not related, it would not preclude them of conspiring to disguise equity payments as sponsorship.

MCFC also maintained that leaks which had taken place during the UEFA proceedings showed that the Investigatory Chamber and the Adjudicatory Chamber proceedings lacked impartiality. The CAS panel was not convinced by this argument, and found that the leak had no impact on UEFA’s impartiality in the earlier proceedings.

CAS therefore found that the CFCB did not breach its obligations of due process.

Did the conclusion of a settlement agreement in 2014 and the subsequent release in 2017 bar UEFA from charging MCFC with the issues at stake in these proceedings?

In 2014 MCFC entered into a settlement agreement with UEFA arising out of earlier alleged breaches of the FFP. In 2014 MCFC were alleged to have committed offences relating to the reporting of its financial information. The parties entered into a settlement agreement which imposed financial constraints and certain stricter reporting requirements on MCFC. In 2017, UEFA confirmed that MCFC had complied with the settlement agreement and could exit the settlement regime.

MCFC argued that all of the issues presently before CAS were also the subject of the 2014 agreement. The CAS panel found that the alleged new facts would potentially result in new charges which were not the subject of the 2014 agreement, on the basis that the 2014 agreement related to compliance with monitoring requirements, while the present proceedings related to disguised equity funding. The panel further found that the 2104 settlement agreement did not impose sanctions on MCFC but, instead, was a contract formed by the parties under which MCFC agreed to take certain steps. Therefore the 2104 agreement did not preclude sanctions for those offences now.

Were the charges against MCFC time-barred?

This was a major issue in the present proceedings (certainly in the press), as the sponsorship provided by Etisalat would potentially fall outside of the limitation period applied to the charges from UEFA.

Article 37 of the CFCB rules states that a prosecution is barred after five years for all breaches of the [FFP]. Therefore if any charges related to the period more than five years before the prosecution took place, those charges would be inadmissible in these proceedings.

From when the limitation period was deemed to apply depended upon the interpretation of when the prosecution was deemed to take place. MCFC contended that the prosecution took place when the sanctions were made against MCFC (i.e. 14 February 2020). UEFA contended that it was when the investigation was opened (i.e. 7 March 2019).

The CAS panel disagreed with both parties’ interpretations and, instead, determined that the prosecution took place when the charges were formally filed against MCFC. In the present case, this was the issuance of the referral decision to the Adjudicatory Chamber on 15 May 2019. Therefore the panel had found that it could only look to charges against MCFC arising from breaches taking place on or after 15 May 2014.

Alleged breaches arising out of financial statements filed with The FA for the years ending May 2012 and May 2013 were therefore time-barred. Actions arsing out of break-even calculations over the same period were also time-barred.

The panel also found that financial information submitted to UEFA before the limitation period could not be used as the basis for charges for actions taking place within limitation period. The panel deemed that this would otherwise have the effect of artificially extending the limitation period. This was highly relevant to the alleged equity funding of MCFC via sponsorship payments made by Etisalat. The amounts in issue were transferred to MCFC by Etisalat in June 2012 and January 2013, so could not be prosecuted as they were time-barred.

UEFA were therefore time-barred from charging MCFC for any breach arising from the provision of funding by Etisalat as the breach fell outside of the limitation period.

As for the funding by Etihad, the panel found that the payments received in 2012/13 were time-barred, but the payments made to MCFC in 2013/14 and 2015/16 were made within the limitation period, and these charges could therefore proceed.

Did MCFC disguise equity funding as sponsorship income?

The key questioned remained whether the club had disguised payments from ADUG as sponsorship payments from Etihad. UEFA contended that the leaked emails proved that this is exactly what had happened, whether by ADUG directly providing money to Etihad which was then paid to MCFC, or by ADUG directing other third parties to provide the funds to Etihad, which would then be passed on to MCFC. In either case, UEFA contended that they should have been properly recorded as equity contributions.

The CAS panel noted that the standard of proof for proving the charges of UEFA was that the panel must be comfortably satisfied that the charges had been proven, but also noted that given the severity of the allegations, any evidence must be particularly cogent.

The leaked emails, which had been deemed admissible, were submitted by UEFA as proof of their charge. UEFA contended that the leaked emails (which were written by key senior officials of MCFC) proved that the club had arranged for equity funds to be paid to MCFC via its sponsors to disguise the true source of such funds.

Here, a majority of the panel disagreed with the approach taken by UEFA’s Adjudicatory Chamber. The Adjudicatory Chamber had reasoned that the leaked emails were direct evidence that the arrangements as set out in the emails (which suggested that equity be disguised as sponsorship payments) had taken place, and that, in the absence of any evidence to the contrary from MCFC, this was direct evidence that these arrangements had actually taken place. The panel instead found that the leaked emails by themselves were not sufficient evidence to support the finding that MCFC had provided incorrect information by UEFA by disguising equity contributions as sponsorship. The panel stated it was for UEFA to prove that the arrangements in the leaked emails had been acted executed, but UEFA had not proved this. The emails only showed that the arrangements had been discussed, not acted upon. Indeed, the panel was fairly critical of UEFA when addressing this point, noting that for UEFA’s interpretation of the facts to be true, it would have involved a vast conspiracy involving multi-national companies, large accountancy firms, and possibly the government of Abu Dhabi.

The panel did not find it credible that a large company such as Etihad would have been able to hide large amounts of money (allegedly from ADUG) being passed through its accounts to MCFC without it being noticed. Witness evidence from senior Etihad figures supported this assertion.

UEFA also relied on the fact that accounting evidence showed that Etihad had paid MCFC two amounts of £8m and £59.5m, in one year of the Etihad sponsorship agreement which was as discussed in the leaked emails. UEFA contended that only the £8m was legitimate sponsorship money from Etihad whilst the £59.5m was provided by AUDG. UEFA contended that this fee would not have been paid in these two particular instalments if Etihad had funded all of the sponsorship itself. MCFC argued the payments were made in these instalments as the monies came from different Etihad budgets/monetary sources. The majority of the panel believed that witness evidence supported the interpretation advanced by MCFC.

The panel found that, at times, MCFC had been very reluctant and, at times, uncooperative in providing UEFA with the information requested (copies of the leaked emails and their email chains in full, along with certain witness testimony).

However, the panel reasoned that while MCFC had only partially complied with UEFA’s four evidentiary requests, as UEFA did not pursue these requests further, the panel found that no adverse inference could be drawn from MCFC’s failure to provide such information in full.

On the key issue as to whether MCFC had disguised equity payment as sponsorship, the CAS panel therefore found that:

  • Etihad had fully complied with its sponsorship payment obligations;
  • The sponsorship agreement was presumed to have been concluded at fair value and MCFC, AGUD and Etihad were not considered related parties;
  • There was no evidence that the sponsorship agreements had been backdated or otherwise used to disguise the nature of the arrangements;
  • The leaked emails suggested that an arrangement was discussed whereby ADUG would fund the Etihad sponsorship as a requisite to the agreement being entered into by Etihad, but there was no evidence that this had actually taken place;
  • Based on the evidence, the majority of the panel was not comfortably satisfied that equity payments had been disguised as sponsorship; and
  • The panel was not comfortably satisfied that the Etihad sponsorship payments were procured to be funded by ADUG or unidentified third parties.

Did MCFC fail to comply with CFCB investigation?

The CAS panel found that MCFC should have complied with UEFA’s request to make certain witnesses available during the Adjudicatory Chamber proceedings (notably the authors of the leaked emails). In addition, MCFC withheld the identity of an individual that UEFA was seeking to identify until long after the issue could have been clarified by MCFC. Further, MCFC only partially complied with UEFA’s request to provide the full leaked emails and their email chains over a year after the initial request by UEFA in the present proceedings.

The panel considered that the above were reasonable requests by UEFA and MCFC had no reasons for their failure to produce the documents and witnesses. MCFC had therefore breached their obligation to cooperate with UEFA, which was a key pillar of the FFP regulations.

Conclusions

The summary of the CAS panel’s decision is as follows:

  • CFCB did not breach its obligations of due process;
  • The alleged breaches relating to financial statements submitted by MCFC for the years ending May 2012 and May 2013 were time-barred. The alleged breaches for the break-even information submitted by MCFC for 2013/14 was time-barred;
  • The charges relating to equity funding being disguised as sponsorship from Etisalat were therefore time-barred;
  • The panel was not comfortably satisfied that MCFC disguised equity funding from ADUG as sponsorship from Etihad;
  • MCFC had failed to cooperate with CFCB’s investigation; and
  • The ban on MCFC’s participation in European competition for two years was set aside, and the fine imposed on MCFC was reduced to £10m.

Fladgate Comment

The landmark case involving the FFP regulations was undoubtedly resolved in the favour of Manchester City, but it was not perhaps the overwhelming victory MCFC were looking for. It is clear that at least some of the claims against MCFC were thrown-out as they were time-barred. The charges relating to the Etihad payments simply hadn’t been sufficiently evidenced by UEFA, as a result of what appears to be a failure by UEFA to continue investigating the issue. UEFA clearly thought the leaked emails were all the proof that they required, but CAS drew a clear distinction between showing that matters had been discussed, and those matters actually taking place. This isn’t therefore necessarily a knock-out blow for the FFP regulations, and we expect UEFA to beef up its investigatory powers in the near future.

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