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November 30, 2017

UK Economic Crime Group: Enforcement Update


Executive Summary


Serious Fraud Office (SFO) News

  • New investigations launched into allegations of bribery and corruption against Amec Foster Wheeler Plc and Rio Tinto Mining Group
  • Publication of 2016-2017 Annual Report announces positive financial and operational results

Anonymity: Supreme Court Judgment in Khuja v Times Newspapers Limited

  • Concerned an individual's right to anonymity where he was neither charged nor a party to proceedings
  • Judgment held that individual had no right to anonymity despite possibility that public would equate involvement with guilt

Use of Compelled Evidence: USA v Allen

  • United States Second Circuit Court of Appeal ruled that compelled evidence could not be used against the individual from whom it was extracted


Financial Reporting Council (FRC) and Financial Conduct Authority (FCA) Update

  • FRC launched a consultation to overhaul its guidance on non-financial reporting
  • FCA announced an investigation into RBS' and others' involvement into alleged laundering of Russian proceeds of crime
  • SFO continues summer of significant activity by commencing investigation into British American Tobacco


US Forex Trial

  • Following investigation by the Federal Bureau of Investigation (FBI) and Department of Justice (DOJ), a British HSBC trader has gone on trial for alleged Forex manipulation


  • Eurasian Natural Resources Corporation (ENRC) wins leave to appeal the decision of Mrs Justice Andrews to grant declaratory relief in favour of the SFO
  • Supreme Court overrules the Ghosh test


  • US Conviction in Rolls-Royce Investigation
  • First French Deferred Prosecution Agreement (DPA) concluded

UK Economic Crime Group: Enforcement Update

In this edition of the UK Enforcement Newsletter, we provide an update on the latest from the Serious Fraud Office, including new investigations into Amec Foster Wheeler Plc and Rio Tinto Mining Group, as well as the publication of the 2016-2017 SFO Annual Report. We also examine significant recent Supreme Court judgments, including the decision to overrule the Ghosh test, and Khuja v Times Newspapers Limited, which concerned whether an individual had a right to anonymity in circumstances where the public might equate involvement with guilt.

In addition to these topics, we address the Financial Reporting Council's launch of efforts to overhaul its guidance on non-financial reporting, and the Financial Conduct Authority's investigation into laundering of Russian proceeds of crime through British banks.


SFO Investigations Update

Amec Foster Wheeler Plc

On 11 July 2017, the SFO announced that it had opened an investigation into Amec Foster Wheeler Plc, the oil services company, and any predecessor companies owning or controlling the Foster Wheeler business. The company had already informed its shareholders that it had been asked to provide information in relation to the SFO's investigation into Unaoil in May. Amec acquired its US competitor Foster Wheeler for $3.3 billion USD in 2014.

Amec is itself currently subject to a £2.2 billion takeover bid from the Wood Group, (expected to complete in October) and the SFO's announcement came just weeks after the proposed acquisition was approved by shareholders of both companies.

The Wood Group had previously disclosed that it was carrying out its own internal investigation into its own past dealings with Unaoil.

The SFO's announcement is considered not likely to endanger the takeover; however, coming mid-transaction, it highlights the need to consider white collar crime issues for any company purchasing another entity which operates in higher risk jurisdictions or sectors. Both the seller's and purchaser's counsel will no doubt re-examine the disclosure that was made in due diligence (including historical M&A DD) and the term's (such as Material Adverse Change clauses and the price) in light of the news. It is of note that the share price of Amec fell 10 percent upon news of the announcement.

Another difficulty the buyer may have is how the investigation is being dealt with by Amec. Wood Group may not be entitled to all the information Amec has relating to the investigation and may not be entitled to engage with the SFO as it currently does not own Amec, meaning it is not party to substantial information relating to the asset it is about to purchase.

Rio Tinto Mining Group

Later in July 2017, the SFO announced that it had opened an investigation into the Rio Tinto Mining group.

The SFO's announcement comes after Rio Tinto disclosed the fact in November 2016 that it had commenced its own internal investigation into suspected bribery and corruption. Whilst not clear, it is believed that Rio Tinto submitted a formal self-report to the SFO.

The internal investigation was triggered by the discovery in August 2016 of emails dating from 2011 which refer to a $10.5 million USD fee paid to a consultant, Francois Polge de Combret, for advice on the Simandou iron ore mining project in the Republic of Guinea. It is alleged that Mr Combret may have links to Guinean Government officials. These emails were reportedly discovered by Rio Tinto's external counsel in the course of conducting work in respect of a commercial legal dispute related to the company's Simandou operations.

Rio Tinto dismissed its Chief Executive of Energy and Minerals, Alan Davies, and terminated the contract of Head of Legal and Regulatory Affairs, Debra Valentine, in the wake of the revelations.

The SFO's "Guidance on Corporate Prosecutions" states that self-reporting can be taken into account as a factor tending against prosecution, so long as it is part of a genuinely proactive approach adopted by the corporate management team. As the investigation develops, it will be interesting to see whether the SFO will consider Rio Tinto's remedial actions sufficient to take into account when deciding whether to prosecute. This is especially the case where some media outlets have speculated that there was a significant delay in Rio Tinto referring the suspected wrongdoing to the SFO. Publicly, the company has said it will fully co-operate with the SFO.

British American Tobacco Plc

One month after opening the investigation into Rio Tinto, in August 2017, the SFO announced it would investigate corruption allegations made against British American Tobacco Plc (BAT). Although it did not give any further details, the tobacco giant announced in February it was investigating claims that it bribed officials in east Africa to undermine anti-smoking laws. This followed statements made in late 2015 by a former BAT employee, Paul Hopkins, who claimed he paid bribes on behalf of the company to hinder the implementation of anti-smoking legislation in Kenya. BAT has committed to co-operating with the investigation, which is still very much in its infancy.

Despite this, it is clear to see the often central role that whistleblowers play in the publicising of wrongdoing and the resulting commencement of investigations. Businesses need to have effective whistleblowing policies in place in order that allegations of wrongdoing can be reported to the authorities and investigated in a thorough and efficient manner.

SFO Annual Report 2017

The SFO Annual Report for the year 2016-2017, published in July, will be the last report overseen by David Green CB QC who is due to step down as Director in April 2018. This year saw twelve new criminal investigations opened adding corporate names such as Airbus and Unaoil to their existing list of high profile investigations concerning, inter alia, Barclays, Tesco and Rolls-Royce.

The report provides an overview of the SFO's performance covering matters such as stakeholder engagement; digital and technological capabilities; and statistical analysis of casework.

Charges were brought against fifteen defendants (corporates and individuals) in eight cases, achieving a conviction rate by defendant of 87 percent and by case of 100 percent, an increase from 32% percent in 2016. It also entered into two DPAs, most notably with Rolls-Royce. It made financial recoveries of £544.7m, meaning that it has achieved a net financial contribution of £460m to the Treasury over the previous four years, which equates to approximately £1m per member of staff. The casework success and the significant level of financial recovery will certainly bolster the SFO at a time when there are still some question marks over its future, particularly under the present Government.

Of note in the report are the steps the SFO has taken to raise its global profile. The Office played an active role in the UK Anti-Corruption Summit in May 2016; met with European counterparts in October 2016 to discuss best practice; and in March 2017 they co-hosted the 5th annual meeting of the Economic Crime Agencies Network bringing together economic crime agencies from around the world.

On the basis of this report and the cases which have been taken on by the SFO during David Green's tenure as Director, he will have secured a legacy characterised by relative success and value for money.

Anonymity: Khuja v Times Newspapers Limited and Others

In July, the Supreme Court published its judgment in Khuja (Appellant) v Times Newspapers Limited and others. The case concerned the reporting of an individual's name which had been referred to during trial proceedings to which they were not a party. The individual had been arrested in respect of similar offences for which others were on trial but a charging decision over him had not been made before the commencement of the trial. Reporting restrictions preventing the reporting of the identity of the individual were in place during the trial but once a decision was made not to charge the individual, the press applied to lift the reporting restrictions. The Court considered the principle of open justice and the need to balance this against an individual's right to privacy and a family life, ultimately deciding that the press should be permitted to report the individual's identity, despite determining that some members of the public might equate suspicion (because of the arrest) with guilt.

Whilst this judgment concerns a CPS prosecution, it is important in light of the SFO's (and other UK enforcement agencies) increasingly common practice of naming unindicted co-conspirators in prosecutions. The issue for the unindicted co-conspirator is that they are not a party to the proceedings and have no right defend themselves. This prevents them from being able to clear their name in public, the consequence of which is likely to be serious personal and professional reputational damage. An example of this is the original indictment against Tom Hayes, the trader convicted of manipulating LIBOR, which reportedly listed twenty-two unindicted co-conspirators. Six were subsequently indicted and acquitted during a later trial, but, it was reported that only one of the remaining sixteen was ever interviewed by the SFO.

In Khuja, the Supreme Court stated that the Courts should use their case management powers to avoid identifying those with an appropriate claim to anonymity during trial proceedings. The Court recognised that s. 11 of the Contempt of Court Act 1981 allows a name to be withheld from the public in proceedings before the court and this could be achieved by, for example, using the initials of an individual's name. In circumstances where an individual is named as a co-conspirator or where they have been arrested and not prosecuted, it is therefore advisable to make an early application to the Court for their identity to be anonymised to avoid any adverse reporting.

Use of Compelled Evidence: United States v Allen

On 17 July 2017 the US Court of Appeals for the Second Circuit handed down its judgment in United States v Allen, ruling that compelled testimony (or any evidence derived from it) cannot be used in a prosecution against the person who gave it. This was the first US criminal appeal arising out of the long-running LIBOR fixing scandal and the appellants were among the first individuals to be convicted of LIBOR offences in the US.

Anthony Allen and Anthony Conti, both British former Rabobank traders, were compelled to give evidence to the FCA as part of its investigation into LIBOR manipulation. The FCA also investigated Paul Robson, another Rabobank trader, who requested and received all of the evidence against him, which included Allen and Conti's testimonies. Robson read these closely and annotated his copies. The FCA eventually dropped its investigation into Robson, but proceedings against him were promptly issued by the DOJ. Robson pleaded guilty, entered into a co-operation agreement with the DOJ and assisted it in developing its case against Allen and Conti, including by giving evidence against them throughout the proceedings. The pair pleaded not guilty and were convicted for their alleged role in manipulating the Japanese Yen and US Dollar rates.

Allen and Conti both had their convictions overturned on appeal on the basis that the use in a US trial of compelled inculpatory statements obtained by foreign governments (i.e., the FCA evidence, violated the Fifth Amendment) which provides defendants with an absolute right not to testify against themselves at trial. The court also followed Kastigar v United States, which requires the government bringing a prosecution to show that, where a witness has had substantial exposure to a defendant's compelled testimony, that exposure has not influenced the evidence used by the government. The Court found that the DOJ had failed to prove that Robson's testimony had been obtained independent of his earlier review of Allen and Conti's compelled testimony.

This judgment will provide some comfort to individuals who are compelled to give evidence, such as in FCA s.171 and SFO s.2 interviews, as it means that any information disclosed in such interrogations cannot be used against them in a prosecution in the US (and possibly other jurisdictions). It also means that evidence obtained as a result of the information disclosed at interview will be considered “tainted” and inadmissible as evidence at trial. The court highlighted the increasing importance of these principles in an environment where cross-border white collar prosecutions and parallel investigations by law enforcement agencies in multiple jurisdictions are becoming increasingly common.

In future investigations, the DOJ will have to act quickly to identify valuable witnesses and co-operate with foreign law enforcement bodies to ensure that those witnesses are not subjected to compelled interviews. Two key challenges will be the acute difficulty of identifying key witnesses at the early stages of an investigation, and the perception that US law enforcement agencies are over-zealous in their interrogation of foreign companies and individuals, which has contributed to a sense of competitiveness between them and their foreign counterparts. The DOJ is clearly looking to tackle these problems however, for instance in its recent move to place prosecutors at Eurojust, Interpol and the FCA.


FCA Investigation of RBS

In July 2017 the FCA notified RBS plc that it had commenced an investigation into RBS' compliance with the Money Laundering Regulations 2007. The investigation concerned a number of UK and US companies and the passing of huge sums of Russian money through British banks. In addition to RBS, 16 other UK-based financial institutions and certain US banks were allegedly involved in the scheme. Initially reported in the Guardian, the scheme dubbed the "Global Laundromat", is said to have involved thousands of individual banking transactions with a total value of at least $22 billion USD.

This highlights how even banks in jurisdictions with some of the most sophisticated regulations still need to consider whether their Anti-Money Laundering (AML) procedures are robust enough given the attraction of British banks to money launderers, as they attempt to make their enterprises appear legitimate. Earlier this year the FCA announced its intention to launch the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) by the start of 2018. OPBAS will be responsible for monitoring the activities of 22 legal and accounting bodies, such as the Law Society and the Association of Chartered Certified Accountants, ensuring that their enforcement of AML regulations are consistent and effective.

The investigation took on a new dimension in September 2017, when Treasury Select Committee chair Nicky Morgan wrote to the FCA and demanded that it release its full report on RBS. This followed the leak of a document that suggested that 92 percent of RBS' Global Restructuring Group's customers experienced "inappropriate action", such as being charged unnecessary fees. The head of the FCA, Andrew Bailey, responded that it was not in the public interest to publish the entire report, but that it will publish a detailed summary in due course.

Financial Reporting Council Consultation on Non-Financial Reporting Guidance

On 15 August 2017, the FRC launched a consultation on amendments to its Guidance on the Strategic Report, which encourages businesses to consider a number of issues, including non-financial reporting (NFR).

The obligation to provide NFR comes from the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016, which implement into UK law the EU Non-Financial Reporting Directive. NFR reporting is compulsory for companies that are: a traded company; a banking company; an authorised insurance company; or a company carrying out insurance market activity. A company may be exempt if it qualifies as: "small", "medium", or has fewer than 500 employees.

Comments and feedback on the FRC's draft were invited by 24 October 2017. The new FRC guidance will remain non-mandatory, but will be intended to encourage best practice.

The Guidance was first published in 2014, but is being revised in light of new regulations that came into effect for reporting periods commencing 1 January 2017.

The EU Non-Financial Reporting Directive states, among other things, that organisations must provide enough information to allow for an understanding of the group's development, performance, position and impact of its activity, relating to environmental, social and employee matters, respect for human rights and anti-corruption and bribery matters.

Guidance on this requirement will be valuable in assisting companies in meeting a range of diverse and somewhat exacting obligations. Qualifying companies seeking to comply will have to provide a description of the group's policies on the relevant matters, including due diligence, the outcome of the implementation of policies and the assessment of risks in these areas, relevant to the business. Any deficiencies or deviations will require a clear and reasoned explanation.

The FRC stated that the regulations reflect its plans to improve the effectiveness of s.172 of the Companies Act of 2006. This section requires a director to have regard to factors including the long term impact of their decisions, the interests of stakeholders, and non-financial matters in pursuing their duty to promote the long term success of the company.

The FRC's proposed amendments demonstrate how the language of long-term value creation is becoming embedded in UK corporate reporting practice. In an environment where investors increasingly assess the quality of corporate reporting as a proxy for the quality of management, the Strategic Report is likely to become a valuable investment tool.

It also means that certain companies' anti-corruption procedures may come under public scrutiny for the first time and if they wish to maintain the confidence of their stakeholders they will need to be able to point to an adequate compliance programme. Guidance on how the FRC expects this to be done in practice would therefore be helpful and need to be closely scrutinised by the affected organisations.


British Forex Trader on Trial in New York

The trial of the head of global foreign exchange cash trading at HSBC, Mark Johnson, began on 26 September in New York. Mr Johnson is accused of misuse of confidential information, misrepresentations to his client, and breach of trust relating to forex manipulation. Mr Johnson was arrested at JFK airport in July this year by the FBI. The US is also seeking to extradite Stuart Scott, the former global head of HSBC's foreign exchange cash trading desk for Europe, the Middle East and Africa who was arrested in June this year in the UK at the behest of the DOJ.

The DOJ accused the two of "front running" on one of their client's trades. Allegedly they used their knowledge that HSBC was about to execute a $3.5 billion USD to GB Sterling trade on behalf of a client to a make proprietary trade that made a $3 million USD profit for the bank, on top of the $5 million USD in fees it earned for executing the client's trade. Telephone conversations are said to record Mr Scott describing the trade as being like "Christmas".

Mr Johnson is the first person to go on trial for charges stemming from the US investigation into forex manipulation. The banking industry has already paid billions of pounds in fines for rigging and misusing information in the foreign currency markets.

The trial emphasises the extraterritoriality of US criminal legislation for transactions involving USD for UK banks and bankers and the will of the DOJ to pursue cases which on the surface may not appear to affect US citizens or corporates directly.


ENRC Given Leave to Appeal

Following the handing down of the judgment of Mrs Justice Andrews in the SFO's declaratory relief application against ENRC, it appeared that the mining company would have to disclose documents it claimed were subject to legal professional privilege. The judgment was widely scrutinised because of the impact many thought it may have on the conduct of internal investigations and dealing with the SFO, because it appeared to dramatically narrow the circumstances in which documents could attract the protection of privilege. The judgment attracted substantial criticism from lawyers in the area, who felt that corporations who were attempting to co-operate with the SFO to report and resolve wrongdoing risked being unfairly penalised. Whilst some commentators have opined that in any event, the case may be distinguished on its unique facts, it has now been confirmed, as many suspected they would, that ENRC has been given leave to appeal. On 11 October 2017, Lord Justice Floyd stated that "the grounds of appeal have a real prospect of success". The appeal will be heard at an as yet unspecified time before 31 October 2018.

Ghosh Test Overturned

In October, the Supreme Court handed down a highly significant judgment in a civil case, Ivey (Appellant) v Genting Casinos (UK) Ltd t/a Crockfords (Respondent). Although this case was decided on principles of civil law, arguably it has more far-reaching implications on the criminal law of dishonesty.

Phil Ivey is a well-known professional gambler and won £7.7m playing Punto Banco (Baccarat) at the Crockfords Club in Mayfair in 2012. The club refused to pay out on the basis that Ivey had used an unfair technique called "edge-sorting". Ivey challenged the club all the way to the Supreme Court, losing at every turn. From a criminal law perspective, the significant part of the judgment relates to the test for dishonesty, with the Supreme Court stating that the test for dishonesty in fraud and other acquisitive offences, known as the "Ghosh test", which has been used in criminal cases since 1982, does not correctly represent the law. The "Ghosh test" is based on an objective test—would ordinary honest people regard the behaviour as dishonest—and a subjective test—did the defendant realise that ordinary honest people would regard the behaviour as dishonest. It is the second limb of the test which the Supreme Court stated does not represent the law. The key passages of the judgment are set out below:

"In civil actions the law has settled on an objective test of dishonesty. There can be no logical or principled basis for the meaning of dishonesty to differ according to whether it arises in a civil action or a criminal prosecution. The second leg of the test propounded in Ghosh does not correctly represent the law and directions based upon it ought no longer to be given. The test of dishonesty is that used in civil actions. The fact-finding tribunal must ascertain (subjectively) the actual state of the individual's knowledge or belief as to the facts and then determine whether his conduct was honest or dishonest by the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest."

This judgment represents a fundamental change to a basic tenet of criminal law and will mean that judges in criminal trials going forward will be required to give a different jury direction when summing up cases involving dishonesty.


Rolls-Royce: Conviction of Individuals in the USA

In January 2017, Rolls-Royce settled investigations into criminal conduct to avoid prosecution in the UK, US and Brazil. Investigations into individuals involved continued however.

On 7 November 2017 the US DOJ unsealed an indictment revealing that five individuals have now been charged in relation to FCPA offences relating to Rolls-Royce Plc and its US subsidiary. Three were former employees of the engineering company's energy division (which it sold in 2014), one a former intermediary in Kazakhstan, and one an executive of an international engineering consulting firm.

The three former employees have all pleaded guilty to bribery and corruption offences in America. James Finley, a UK citizen, along with the two other former employees admitted that between 1999 and 2013 they participated in a conspiracy to engage commercial advisors who would use their commission payments from Rolls-Royce to bribe foreign officials in a number of countries to help the company secure an improper advantage and obtain and retain business in a number of jurisdictions across the globe. The DOJ stated that the convictions were only possible due to co-operation between the DOJ, SFO and Brazilian law enforcement.

The indictment and guilty pleas reinforce the DOJ's and SFO's consistent message that DPAs are not simply 'cosy deals' that allow a company to pay their way out of a bribery investigation. They allow those truly responsible for the wrongdoing to be appropriately punished whilst minimising the harm to those other innocent bystanders who depend on, or are otherwise invested in the company's fortunes.

First French Deferred Prosecution Agreement Concluded with HSBC Private Bank Switzerland

In December 2016, France strengthened its anti-corruption legislation by introducing legislation that borrows heavily from the UK Bribery Act and US Foreign Corrupt Practices Act. The "Sapin II Law" has extended corruption offences to include conduct beyond the borders of France and significantly, it has introduced a French deferred prosecution agreement (the "convention judiciaire d'intérêt public").

Additionally under the Sapin II Law, large companies are required to adopt anti-corruption compliance procedures. The first sign of this legislation's effectiveness is the recent case of HSBC Private Bank Switzerland, which, on 14 November 2017, become the first company to agree such a DPA in France, after a Paris court approved the landmark settlement. The High Court in Paris approved the €300 million agreement under which HSBC Private Bank Switzerland, and its holding company HSBC, have resolved allegations of unlawful banking, financial soliciting, and aggravated money laundering with the France's Public Prosecutors' Office. The size of the settlement figure is significant and lawyers will be watching closely to see if this agreement prompts other corporates under investigation in France to pursue a DPA.

© 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.