UK Economic Crime Group: Enforcement Update
In this edition of our newsletter we outline recent developments in the field of economic crime since May 2016, including those that may be expected following the "Brexit" referendum.
DEVELOPMENTS AT THE SFO
Further Lessons to be Learned from DPAs
In our February newsletter we reported on the terms of the first Deferred Prosecution Agreement (DPA) secured by the Serious Fraud Office in the case of R v Standard Bank.
Since the first Deferred Prosecution Agreement was secured in the case of R v Standard Bank, on 11th July 2016 final judgment was delivered in the second DPA: R v XYZ. XYZ was purchased by ABC, an American company. After ABC purchased XYZ the fact that corrupt activity had taken place was revealed. Through its lawyers, XYZ self-reported in 2012 and there followed a prolonged investigation by the SFO in which the company cooperated. Of note is the fact that the company asserted proper claims to Legal Professional Privilege whilst providing the SFO with summaries of the accounts given by witnesses.
The key feature of the XYZ DPA is the level of the financial penalty imposed. ABC has entered into an agreement to loan XYZ the money required to satisfy the terms of the DPA. It has also returned to XYZ nearly £2,000,000 (apparently equivalent to the benefits innocently received by ABC, the criminal nature of which it was unaware). It is apparent that without the support of its parent company, XYZ would risk failing, but the court emphasised that ABC had no obligation to provide such support.
Conflicting Commentary on Incentives to Seek DPAs—A Reduction in Penalties?
The Standard Bank DPA levelled penalties which were perceived by many observers and professionals as unlikely to encourage other companies to press for similar treatment.
Speaking at a conference in June, Sir Brian Leveson PC QC confirmed that companies who are entitled to a DPA following an early self-report should be entitled to much more than a one-third discount in their penalty. Despite the fact that he couched his comments in terms that he was not expressing an opinion on behalf of the Judiciary, his comments carry significant weight. He was the judge who presided over the first two DPA proceedings and is therefore an authoritative voice in the country's, so far limited, jurisprudence on the development and application of DPAs.
A one-third discount to the penalty imposed is identical with the discount afforded to a defendant who enters a guilty plea at its first Crown Court hearing. However, significantly greater investigation and court resources are avoided by a DPA rather than by a company requiring prosecutors to build a case only to plead guilty at the first Crown Court hearing and it would be reasonable for the "credit" to be reflected in the terms of DPAs.
It remains to be seen whether subsequent DPAs and the judges reviewing them adopt the proposals made by Sir Brian Leveson, and how subsequent DPAs will manage the difficult balance of deterrence of corruption against incentivising self-reporting and the early detection of criminal conduct.
Funding and the SFO's Future
Despite some high profile successes this year the risk that the SFO will be subsumed into the NCA remains. Teresa May, now Prime Minister, had previously supported such a move.
The HMCPSI report concluded that the "blockbuster funding" model did not represent value for money and prevented the SFO from building future capability and capacity. Recent experience shows the SFO's core budget to be insufficient, with requests for an average of £26.6 million extra per year over the last three years. If the core budget of the organisation were increased, this could mean that applications to HM Treasury for extra funding would be reserved for exceptional cases.
CASES OF NOTE
High Court Approves SFO Investigation into Soma Oil
Soma Oil sought, unsuccessfully, to judicially review the SFO's approach to the investigation into its activities, specifically that the SFO were continuing to investigate despite representations being made as to the effect this would have.1 The Company argued that the investigation would lead to its ruin and was, in any event, bound not to reveal any criminal conduct. This case does nothing to diminish the long-held view of criminal practitioners that the Administrative Court will seldom intervene to prevent law enforcement bodies' suspicions of criminal conduct being exhaustively pursued. In Soma Oil's case, notwithstanding that the Company appeared to have cooperated fully with the investigation.
LIBOR, EURIBOR, and FOREX
In March 2016 the SFO announced that it was closing its investigation into the manipulation of FOREX, stating there was insufficient evidence to bring criminal charges. Tom Hayes, who was sentenced in August 2015 to 14 years in prison (reduced to 11 years on appeal) is continuing to try to challenge his conviction.
The SFO's EURIBOR investigation continues, despite the setback in May this year that key individuals charged with conspiracy to defraud and due to stand trial in September 2017 cannot be extradited from Germany, leaving the SFO with no current prospect of securing the men's return to the United Kingdom other than by voluntary surrender.
On 28th September 2016 the European Central Bank announced plans (to be implemented in 2017) to reform the calculation of the EURIBOR benchmark from a quote-based to a transaction-based index. In doing so the ECB aims to guarantee the integrity of reference rates which are of importance not only to direct market participants, but to the general public.
In May, a US District Court judge rejected Barclays' argument it should not hand over certain documents to three of its former traders on trial which could help them prove that senior employees of the bank were complicit in misconduct. Barclays argued that the documents were irrelevant to the lawsuit. The Court rejected Barclays' arguments, stating that it was up to the Court, not the bank, to decide which documents were relevant.
Also of note is the manner in which the former Barclays traders have pursued their defences and the evidence given by them. Jay Merchant, one of the former traders on trial for conspiracy to manipulate LIBOR, told the court that he found it "difficult to believe" that senior bank staff were unaware of what the swaps desk was doing. Mr Merchant stated, "Everybody knew the banks set LIBOR to their own commercial interest", adding that requests to fix LIBOR were part and parcel of his job.
On 29th June 2016, all three traders were convicted of their parts in LIBOR manipulation. The jury reached a unanimous verdict for Mr Merchant and majority verdicts of 10-2 and 11-1 for Alex Pabon and Jonathan Mathew respectively, but was unable to reach verdicts for two other former Barclays traders, Stylianos Contogoulas and Ryan Reich.
Apparently buoyed by the success of the convictions, the SFO announced in early July 2016, that it would seek a retrial of Stylianos Contogoulas and Ryan Michael Reich.
"Flash Crash" Extradition Case
In our May 2015 newsletter we reported on the bid to extradite Navinder Singh Sarao, the ironically named "Hound of Hounslow" to face 22 charges of market manipulation. On 14th October 2016, Mr Sarao lost his High Court appeal and is due to be extradited to the US in the next 28 days.
New Criminal Offence of Failure to Prevent Facilitation of Tax Evasion
Following a consultation by HM Revenue and Customs (HMRC) on the creation of a corporate offence of failure to prevent the facilitation of tax evasion, the offence has been incorporated in Part 3 of the Criminal Finances Bill, presented to Parliament on 13th October 2016.
The proposed legislation contains parallels with Section 7 of the Bribery Act 2010, the corporate offence of failing to prevent bribery. As will be apparent, it is easier to prosecute companies for these types of offences, where there is no mens rea element and it is sufficient that bribery had been committed by an individual acting on behalf of the company.
The proposed offence of failure by a company to prevent facilitation of tax evasion offences by associated persons, has three stages:
Stage 1: criminal tax evasion by a taxpayer (under the existing criminal law).
Stage 2: criminal facilitation of this offence by a person acting on behalf of the corporate.
Stage 3: the failure by the corporate to take reasonable steps to prevent those who acted on its behalf from committing the criminal act set out in Stage 2.
As currently drafted, the offence would have extra-territorial jurisdiction and includes both United Kingdom tax offences and overseas tax fraud offences where the overseas offence would amount to an offence in the United Kingdom. This latter element is included because the government has stated that it believes that companies with a presence in the United Kingdom should be obliged to take reasonable steps to prevent their agents being complicit in tax evasion, wherever that tax is owed.
As noted above, the proposed legislation incorporates a statutory defence of having in place "such prevention procedures as it was reasonable in all the circumstances to expect [the company] to have in place", "or it was not reasonable in all the circumstances to expect [the company] to have any prevention procedures in place". Whilst this has similarities to the defence of "adequate procedures" under the Bribery Act 2010, the language proposed is deliberately different.
It remains to be seen how HMRC will finally seek to interpret and apply the "prevention procedures" deemed to be "reasonable". Whilst the current draft guidance provides some detailed information on the principles required for reasonable prevention procedures, these will continue to be debated in Parliament.
Consultation on Expanding Corporate Criminal Liability
Looking forward, the development of corporate offences of failing to prevent the commission of economic crimes appears more likely to occur. In May the government announced that it would publish a consultation "this summer" in respect of its goal of expanding these types of offences into other economic crimes, such as money laundering, false accounting, and fraud.
Then Justice Minister Dominic Raab MP said that the Government wants carefully to consider whether the evidence justifies any further extension of the section 7 Bribery Act model to other areas of economic crime, "so that large corporations are properly held to account".
As yet, the Government's promised publication has not been forthcoming. However, an extension of the law in this area was referred to by the Attorney General (Jeremy Wright QC) speaking at the Cambridge Symposium on Economic Crime on 5th September. Mr Wright QC referred to the Prime Minister's intention to "get tough on irresponsible behaviour in big business", and to tackle "vested interests" through the development of a cross-government anti-corruption strategy to complement the existing Serious and Organised Crime Strategy.
The Attorney General referred to the benefits that the Bribery Act and Deferred Prosecution Agreements have brought in strengthening the United Kingdom's response to corruption but noted that the Government hopes to do more and to improve the United Kingdom's reputation by creating corporate offences of failing to prevent economic crime. Until such a change is implemented, Mr Wright QC noted that there was little chance of those occupying boardrooms doing anything other than distancing themselves from companies' operations.
"BREXIT" AND ITS POTENTIAL EFFECTS ON ECONOMIC CRIME
The decision on 23rd June 2016 by British voters to cease membership of the European Union had a profound and immediate effect on the financial markets. "Brexit" is still in its early stages, with much uncertainty surrounding it. The process attracted further uncertainty on 3rd November 2016 when the Divisional Court2 ruled that the Government could not use its prerogative powers unilaterally to trigger Article 50 of the Treaty on European Union and cause the separation from the European Union. The Court ruled that only Parliament has authority to decide the issue of when (if at all, it now seems) the United Kingdom could divorce itself from the European Union. The Government has indicated that it intends to appeal the Court's decision.
Although we know that the Government intends (if the Supreme Court allows its appeal) to trigger the formal process of leaving the European Union by the end of March 2017, the pace and the extent to which this will have an effect on United Kingdom legislation remains unclear. Despite repeated calls from opposition politicians there has been little direction or policy proposal so far expounded by the Government.
Below we consider three areas in which the United Kingdom's exit from the European Union could affect the regulatory and enforcement environment in respect of economic crime. In particular change may be expected in:
- the effect of economic uncertainty on the prevalence of economic crime; and
- the United Kingdom's relationship with European Union law enforcement bodies and its ability to remain a strong actor against economic crime.
It is unlikely, in the short term, that the United Kingdom's withdrawal from the European Union will have any effect on United Kingdom legislation. However, once the United Kingdom has formally withdrawn from the European Union (by the engagement of Article 50) the United Kingdom will no longer be bound to implement or enact European legislation. One area in which this is likely to have a particular impact is in relation to trade and economic sanctions, an area in which a large number of European Union regulations are in force. Currently the United Kingdom is bound by international obligations to implement United Nations and European Union measures concerning trade and economic sanctions.
Although European Union regulations currently have direct effect in the United Kingdom, legislation is required in order to create criminal liability from them (such as in respect of economic and trade sanctions). Following withdrawal from the European Union the United Kingdom could elect to mirror developments in European regulations, but would no longer be bound to them. The United Kingdom could opt to repeal existing legislation that arises from European Union regulations, but it is by no means a foregone conclusion that this would occur and it would be more likely that the immediate response would be for existing European legislation enacted in the United Kingdom to remain in force with a timetable set to review the continuation of individual enactments. Obligations arising from membership of the United Nations will be unaffected.
In addition to European Union regulations, there remains uncertainty over whether the United Kingdom would continue to implement European Union directives. This could affect the United Kingdom's approach to implementing the Fourth Money Laundering Directive. However, it is unlikely that the United Kingdom would directly benefit from being seen as weakening its approach to economic crime.
Given the promises from the current Government to crack down on corruption and bribery, evidenced in the Attorney General's address to the Cambridge Symposium on Economic Crime (referred to above) in which he explained that dealing with economic crime is a "Government priority", any relaxation of regulation and enforcement would run contrary to the Government's aspirations.
A unilateral relaxation of financial regulation would also make the United Kingdom's trading relationship with the European Union difficult. Access to the single market as an EEA member would undoubtedly require the United Kingdom's compliance (or at least near-parity) with European Union law. Likewise, any other bilateral or multilateral trade agreements are likely to require the United Kingdom to adopt regulatory standards equivalent to the other contracting States. In order to ensure that London retains its place in the global financial markets it would make sense for the United Kingdom to maintain a close connection to the European financial markets. Therefore, it is likely to remain in the United Kingdom's best interests to maintain a strong regulatory environment.
Relationship with European Union Law Enforcement Bodies
During pre-election arguments, those campaigning to remain in the European Union cited a lack of intelligence-sharing as a reason why the United Kingdom should remain in the Union. There remain concerns over how Brexit will affect the SFO and NCA's roles as effective intelligence gathering bodies in the fight against corruption.
Whilst Mutual Administrative Assistance between different nations would likely continue unaffected, securing admissible evidence through formal Mutual Legal Assistance may be delayed. The ease with which United Kingdom law enforcement and intelligence agencies are able to conduct joint investigations with other European agencies is also likely to be impacted by Brexit. It is likely that notifications of individuals of interest crossing borders from Europe into the United Kingdom will be less efficient, and the restraint, confiscation and recovery of assets across EU/UK borders may be effected less simply than under current agreements.
Whilst these issues are less likely to grab headlines than issues concerning migration they should, nonetheless be at the forefront of the Government's considerations when ensuring the best possible deal for the United Kingdom's exit from the European Union.