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June 21, 2017

UK Economic Crime Group: Enforcement Update

Newsletter

NEWS IN BRIEF

The long-awaited Criminal Finances Bill received Royal Assent in April, becoming the Criminal Finances Act 2017 in the process. The legislation creates new, wide-reaching offences of corporate failure to prevent the facilitation of tax evasion, in respect of which companies are highly likely to have to introduce new policies and procedures to ensure compliance. The Act also introduces significant changes to the Suspicious Activity Reporting Regime, which will give law enforcement agencies greater powers to investigate wrongdoing but, which may make it harder for firms in the regulated sector to avoid committing tipping off offences. Unexplained Wealth Orders (UWOs), which require individuals to explain the provenance of certain property in their possession, are another new tool that the Act has created to assist law enforcement in their fight against economic crime.

Given the outcome in the recent UK General Election, it is unclear whether Prime Minister Theresa May will continue with plans as set out in the Conservative Party Manifesto to abolish the SFO and subsume its functions into the National Crime Agency (NCA). What is clear is that the present budgetary restraints in multiple areas related to the Criminal Justice System will need to be addressed.

The Financial Conduct Authority (FCA) succeeded in the Supreme Court, obtaining a decision in FCA v Macris which limits the identification principle in respect of the statutory Notices it issues.

NEWS FROM THE SFO

Update on Investigation Into Unaoil

On 29 March 2017, the High Court dismissed the Judicial Review claim bought by Unaoil and a number of its executives against the SFO, in respect of the lawfulness of a Letter of Request issued to the Monegasque authorities to provide assistance with the ongoing investigation in the UK.

In its Judgment, the Court rejected the Claimant's submissions: that a request for Mutual Legal Assistance (MLA) needed to satisfy the same criteria as a domestic search warrant or be subject to a "heightened procedural obligation"; that the Crime (International Cooperation) Act 2003, governing the MLA regime, contained an implied duty of candour with which the Letter of Request did not comply; and that the Letter of Request was so broadly drafted, that it represented an unlawful "fishing expedition" with which to catch additional wrongdoing that was not, at the time, the subject of investigation.

The SFO has announced that it has formally opened related investigations into global technology and consulting services firm KBR Inc, and oil and gas giant Petrofac Plc, on 28 April 2017 and 12 May 2017 respectively. The investigation into Petrofac commenced after the SFO publicly rejected the results of the internal investigation report provided to it by Petrofac, adding that they did not consider that the company had cooperated with their investigations. Both the investigations of KBR and Petrofac relate to suspected bribery, corruption, and money-laundering.

Update on Investigations Into Eurasian Natural Resources Corporation (ENRC)

On 8 May 2017, Mrs Justice Andrews handed down Judgment in respect of the SFO's claim for a declaration that documents generated by forensic accountants and solicitors in the course of an internal investigation into ENRC were not subject to Legal Professional Privilege and must therefore be disclosed pursuant to notices issued under section 2 of the Criminal Justice Act 1987, to the authorities, in the course of their ongoing investigations into allegations of the commission of fraud, bribery, and corruption offences by ENRC, in various jurisdictions.

The Judgment makes clear that because investigation and prosecution are not part of the same amorphous process, documents generated in the 'investigation' phase would not, by default, benefit from the protection of Litigation Privilege. However, Mrs Justice Andrews did foresee that if a potential Defendant learned of during an investigation or knew of prior to an investigation, facts that made it likely (rather than merely possible) that prosecution would follow investigation, documents generated in the investigation phase may benefit from the protection afforded by Litigation Privilege. The Judgment also clarified that where documents are generated either: (i) to ascertain the accuracy of factual allegations (i.e. in this case those made by a whistle-blower); or (ii) to assist in securing a civil settlement to dispose of possible criminal wrongdoing; those documents were not created with the dominant purpose of preparing a defence against criminal prosecution, but rather with the dominant purpose of avoiding criminal prosecution, and therefore could not be subject to Litigation Privilege.

Charges Against FH Bertling

On 28 April and 3 May 2017, charges in respect of corruption offences under section 1 of the Prevention of Corruption Act 1906 and section 1 of the Criminal Law Act 1977 were brought against the UK subsidiary of German logistics company FH Bertling, three of its former directors, its former Chief Commercial Officer, and three other individuals associated with the company. The offences were alleged to have taken place between January 2010 and May 2013, and are said to have primarily enabled F.H. Bertling to retain or win contracts for the supply of freight forwarding services to a North Sea oil exploration project. These charges come in addition to those filed against the company and seven current and former directors in respect of allegations of corruption in Angola between January 2005 and December 2006.

Libor Acquittals

On 6 April 2017, following a six week retrial, Stylianos Contogoulas and Ryan Reich, both formerly traders at Barclays, were acquitted by a jury at Southwark Crown Court of charges of conspiracy to defraud in relation to their involvement in Libor manipulation.

They had first been tried alongside four others in April 2016. Whilst their Co-Defendants were convicted (although the sentence of one was recently reduced on appeal), the jury had been unable to reach verdicts in relation to Mr Contogoulas and Mr Reich.

Of the 19 individuals charged in respect of Libor and Euribor manipulation, there has been one guilty plea, four convictions and eight acquittals. The remaining six Defendants will be tried in April 2018.

LEGISLATIVE AND REGULATORY NEWS

Criminal Finances Bill receives Royal Assent

On 27 April 2017, the much-debated Criminal Finances Bill received Royal Assent, becoming the Criminal Finances Act 2017 (the Act). When it comes into force (at a date to be appointed, likely in the autumn), the Act will introduce significant amendments to the Proceeds of Crime Act 2002. From a corporate crime perspective, the most noteworthy of these changes are: (i) the introduction of new corporate offences of failure to prevent facilitation of tax evasion; (ii) revisions to the Suspicious Activity Reporting (SAR) regime; and (iii) the creation of Unexplained Wealth Orders (UWOs).

(i) Failure to prevent facilitation of tax evasion

The Act creates broad, strict-liability type offences of corporate failure to prevent facilitation of evasion of UK and foreign tax. To commit the offence, a corporate needs to fail to prevent one of its "associated persons" from facilitating criminal tax evasion (in the case of the foreign offence, the tax evasion must be both criminal in the foreign jurisdiction and in the UK). A statutory defence of adopting and implementing preventative procedures that are reasonable in all the circumstances are available (as is, what is expected to be a lesser-used defence, that it was not reasonable to have any such procedures in place).

Whilst the maximum penalty for both offences is an unlimited fine, such wrongdoing may also be disposed of by way of Deferred Prosecution Agreement (DPA). Whilst the Government's Draft Guidance on the new offences accepts that there will have to be a transitional period in which companies become compliant, it also states that it expects "rapid implementation" of such measures. Given that the Act defines "associated persons" as an employee, an agent other than an employee, or "any other person who performs services for or on behalf of [the company] who is acting in the capacity of a person performing such services", corporates' exposure to liability in respect of the new offences is very wide.

Whilst there have long been calls for the introduction of offences of this type, given the current political and economic climate, it will be interesting to see how quickly they are brought into force, and what attitude HMRC adopts to enforcement. On the one hand, securing significant convictions or DPAs with large fines will appeal greatly to members of the general public. Conversely, introducing and using the legislation will send a hostile message to the large multinational corporations and financial institutions with a UK presence, who would seem to be its primary target, at a time when their support for the economy is vital. As such, it would be unsurprising if initial enforcement focused on mid-sized UK-based corporates who are suspected to have systemically committed the offences, and large, multinational, UK-based corporates who will continue to support the UK economy regardless of criminal sanction.

(ii) Revisions to the Suspicious Activity Reporting (SAR) regime

Under the current SAR regime, one may request consent to proceed with a transaction about which suspicions have been raised. Prior to the introduction of the Act, the NCA had seven working days to respond to such a request. In that seven day period, they had the option for the NCA to either grant or refuse consent for an additional 31 day Moratorium Period. The Act allows courts to grant further extensions to the Moratorium Period, in tranches of no more than 31 days, if satisfied that further time is reasonably needed for an investigation into a SAR to be carried out. Such extensions are available up to a maximum of 186 days. Furthermore, the Act grants the NCA the power to request (or make an application to order the disclosure of) further information from a person in the regulated sector, following submission of a SAR. As a company cannot reveal the submission of a SAR to the individual or entity that is the subject of a SAR, firms will be faced with the difficult prospect of potentially having to manage their clients for up to 217 days without informing them of why a project cannot move forward, whilst possibly having to comply with requests for disclosure of information from the NCA.

In addition to the expansion of the Moratorium Period, the Act also enables regulated entities to share information with one another regarding suspected money laundering offences. This approach is intended to allow multiple entities to compile detailed intelligence about suspected criminality before providing this information to the NCA, in a single, jointly-submitted report that has colloquially become known as a "Super-SAR". In creating this new reporting mechanism (especially when viewed in the context of the wider changes to the SAR regime outlined above), it seems that the NCA will expect firms to submit more SARs, containing more detail in the coming years, regardless of the significant time and cost burden this may place on reporting entities.

(iii) Creation of Unexplained Wealth Orders

The final major change is the Act's introduction of the UWO. In obtaining a UWO, law enforcement bodies (the SFO, NCA, HMRC, the FCA and the DPP) can require an individual to explain and provide evidence to support the provenance and nature of ownership of any property they hold, with a value of £50,000 or more. Before granting a UWO, the High Court must be satisfied that: (1) there are reasonable grounds for suspecting that the respondent's lawful income could not have allowed them to acquire the property in question; (2) the respondent to the proposed UWO is a Politically Exposed Person; and (3) there are reasonable grounds for suspecting that the respondent to the proposed UWO or an associated person is or has been involved in serious crime. Non-compliance with a UWO may make the property which is the subject of the UWO liable to recovery in civil proceedings. Furthermore, making false statements in response to a UWO is a separate criminal offence, which carries a maximum penalty of two years' imprisonment. It seems that UWOs will be powerful tools to law enforcement agencies, as they may be accompanied by Interim Freezing Injunctions that will allow the relevant property to be preserved. Whilst UWOs may only be obtained in respect of an individual rather than a company, there will likely be a significant indirect impact on financial institutions, as it is they who will have to enforce any injunctions over a client's assets.

Fraudsters sought to con HMRC out of £10 million

A group of alleged fraudsters are being prosecuted at the Old Bailey for attempting to claim tax credits using the identities of MPs, judges, soldiers and police officers. Personal details were stolen from the membership list of the Civil Service Sports Council and used to fraudulently claim tax credits covering a four year period. The gang were successful in claiming tax credits of nearly £2.5 million before HMRC identified the issue and the total fraudulent claims for tax credits would have been around £10 million.

Separately, research by fraud prevention group Cifas and LexisNexis Risk Solutions has found that one in five victims of identity fraud between 2012 and 2015 were company directors. In particular, criminals are using publically available data from Companies House to target these individuals.

Judgment on the identification principle in FCA notices

On 22 March 2017, the Supreme Court issued its judgment in Financial Conduct Authority v Macris, providing an interpretation of the identification principle under section 393 of the Financial Services and Markets Act 2000 (FSMA). In doing so, the Supreme Court has raised the threshold for identification in FCA notices, reversing the wider approach taken by the Upper Tribunal and the Court of Appeal.

In 2012, Mr Macris was the International Chief Investment Officer of JP Morgan Chase Bank NA (JP Morgan) and was responsible for the bank's Chief Investment Office (CIO International). CIO International managed, amongst other things, a portfolio of traded credit instruments known as the Synthetic Credit Portfolio (the SCP). In April and May 2012, large trading losses occurred within the SCP, with total losses eventually amounting to $6.2 billion, with the responsible trader being nicknamed the "London Whale".

After investigating the matter, the FCA issued a Final Notice on 18 September 2013, imposing a penalty of more than £137 million on JP Morgan. Mr Macris claimed that adverse references to "CIO London management" within the Final Notice identified him personally. He argued that a copy of the Final Notice should have been provided to him to allow him to make representations to the FCA before publication, as required under section 393 of FSMA. Section 393 is intended to protect the rights of third parties identified in an FCA Notice and to whom the Notice may be prejudicial. As a result of this failure, Mr Macris referred the matter to the Upper Tribunal.

The Upper Tribunal upheld his complaint noting that the "reference to CIO London management, being the most senior level of management, [was] significant. A reader with experience of how large corporations operate would take such a reference as being to the most senior individual concerned". Therefore they accepted that Mr Macris had been identified by the Final Notice, concluding that persons who operated in the field would reasonably have been able to identify Mr Macris from statements made in the Final Notice in conjunction with publically available material. As a result he should have been provided with a copy of the Final Notice and the opportunity to make representations to the FCA before its publication. The Court of Appeal affirmed the decision, although this was partially based on an analogy to the law of defamation.

The FCA subsequently appealed to the Supreme Court. The Supreme Court granted the FCA's appeal, concluding that the person concerned by the Notice must be "identified" and not merely "identifiable" to qualify for protection. Indeed, for section 393 FSMA to apply, the relevant Notice must identify the individual by name or by a synonym for him, such as a job title, in a way that the reference could only apply to one person. In addition, the Supreme Court stated that the person has to be identified by the general public and not just a select group of banking peers.

As a result of the Supreme Court's ruling, the FCA will avoid having to overhaul its approach to referring to individuals when drafting Final Notices. Further, FCA v Macris was effectively a test case for the FCA, which will now seek to apply the reasoning of this judgment across similar cases. These will include those brought against the FCA by other traders who are claiming third party rights by virtue of having been identified by Final Notices issued against their employers in the Libor and Forex benchmark-rigging probes.

© 2017 Arnold & Porter Kaye Scholer LLP. This newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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