UK Economic Crime Group: Enforcement Update

In this edition of the newsletter we outline recent developments in the field of white collar crime post the 7 May 2015 general election.

Executive Overview

News from the Financial Conduct Authority (FCA) – On 26 November 2015, the FCA announced that it had fined Barclays Bank £72 million for poor handling of financial crime risks. On 16 December 2015, the FCA and Prudential Regulation Authority published final rules confirming how they will apply the new accountability regime for individuals working in UK branches of overseas banks.

News from the Serious Fraud Office (SFO) – On 30 November 2015, Lord Justice Leveson definitively approved the first Deferred Prosecution Agreement (DPA). The DPA was between the Serious Fraud Office and Standard Bank Plc, who were the subject of an indictment alleging failure to prevent bribery contrary to section 7 of the Bribery Act 2010 (however, the first announcement of a company having accepted responsibility for a contravention of section 7 had already been made in Scotland on 25 September 2015). The DPA related to the payment of a fee to a "local partner" in Tanzania to induce the Government of Tanzania to grant Standard Bank Plc and a sister company a mandate to raise funds for them. As a result of the DPA, Standard Bank Plc has had to pay US$25.2 million in financial orders, US$7 million in compensation to the Government of Tanzania, and £330,000 in costs. It will also have to cooperate fully with the SFO and be subject to an independent review of its procedures.

On 13 November 2015, the SFO announced that it had issued the first criminal proceedings against ten individuals accused of manipulating the Euro Interbank Offered Rate (EURIBOR). This is the first time criminal charges have been brought in relation to EURIBOR. Shortly after, criminal proceedings were issued against an additional individual.

On 18 December 2015, Sweett Group Plc was the first company to plead guilty plea to an offence committed contrary to section 7 of the Bribery Act 2010. The offence related to a bribe used to secure and retain a contract with an insurance company for project management and cost consulting services in relation to the building of a hotel in Dubai.

On 21 December 2015, the Court of Appeal reduced Tom Hayes' sentence from 14 to 11 years' imprisonment. Mr. Hayes had been found guilty of eight counts of conspiracy to defraud relating to his role in the manipulation of London Interbank Offered Rate (LIBOR). The trial of six former brokers relating to the manipulation of LIBOR by Mr. Hayes has concluded and each individual was acquitted of all charges.

News from Government – The launch of the International Corruption Unit was announced on 9 August 2015. It will be the central point for investigating international corruption in the UK.

On 28 September 2015, it was announced that the Government had decided not to carry out further work relating to the Ministry of Justice examining the case for a new offence of corporate failure to prevent economic crime.

News from the Financial Conduct Authority

Banking

On 26 November 2015, the FCA announced¹ that it had fined Barclays Bank £72 million for failing to minimise the risk that it may be used to facilitate financial crime. The failings relate to a £1.88 billion pound transaction that Barclays Bank arranged and executed in 2011 and 2012 for a number of ultra-high net worth clients. The clients involved were politically exposed persons and should therefore have been subject to enhanced levels of due diligence and monitoring by Barclays Bank.

On 16 December 2015, the FCA² and Prudential Regulation Authority (PRA)³ published final rules confirming how they will apply the new accountability regime for individuals working in UK branches of overseas banks, having earlier in the year, on 7 July 2015, published⁴ the final rules confirming the approach to improving individual accountability in the banking sector. The final rules cover the Senior Managers Regime, the Certification Regime, and new Conduct Rules. The rules are said to be the latest changes aimed at embedding personal accountability in the culture of financial services and a crucial step in rebuilding public trust.

News from the Serious Fraud Office

First Deferred Prosecution Agreement

The Director of the SFO, David Green QC, had spoken about DPAs on a number of occasions in 2015, and in an interview with The Guardian on 6 August 2015,⁵ he said that the SFO "expected to have two completed" by the end of 2015.

It was then on 30 November 2015 that the President of the Queen's Bench Division, the Right Honourable Sir Brian Leveson, definitively approved⁶ the first DPA in the Crown Court at Southwark sitting at the Royal Courts of Justice. The DPA was between the SFO and Standard Bank Plc (now known as ICBC Standard Bank Plc) (Standard Bank), who was the subject of an indictment alleging failure to prevent bribery contrary to section 7 of the Bribery Act 2010. This indictment, pursuant to DPA proceedings, was immediately suspended for three years, and subject to compliance with the terms of the DPA, the SFO will then discontinue the proceedings after three years. Lord Justice Leveson had first considered the DPA at a private preliminary hearing on 4 November 2015 when he had declared that the then-proposed DPA was "likely" to be in the interests of justice and its proposed terms were fair, reasonable, and proportionate.

The facts (as stated in the Statement of Facts and the judgments) are that Standard Bank Group Ltd is a publicly owned company registered in South Africa of which, at the relevant time, Standard Bank (a UK-regulated bank) was a subsidiary. The Group was also the ultimate parent of Stanbic Bank Tanzania Ltd, a Tanzanian company (Stanbic) which was not licensed to deal with non-local foreign investors in the debt capital markets.

In 2012, the Government of Tanzania needed to raise public funds. Standard Bank and Stanbic put forward a proposal by which they would be mandated to raise those funds for the Government of Tanzania by way of a sovereign note private placement. Negotiations began in February 2012 when Standard Bank and Stanbic quoted a combined fee of 1.4% of gross proceeds raised. Later, Stanbic increased the proposed fee to be paid by the Government of Tanzania to 2.4%. It transpired that 1% of that fee would be paid to a "local partner," a Tanzanian company called Enterprise Growth Market Advisors Limited (EGMA). EGMA's chairman and one of its three shareholders and directors, Mr. Harry Kitilya, was at all relevant times Commissioner of the Tanzania Revenue Authority and, as such, a serving member of the Government of Tanzania. EGMA's Managing Director, Dr. Fratern Mboya, had been CEO of the Tanzanian Capital Markets and Securities Authority between 1995 and 2011. There is no evidence that EGMA thereafter provided any services in relation to this transaction.

At the end of September 2012, EGMA opened a bank account with Stanbic which obliged Stanbic to undertake regulatory checks (Know Your Customer or KYC). These KYC checks do not appear to have been conducted in the same level of detail as would have been the case had Standard Bank conducted its own KYC and/or due diligence on EGMA.

After the addition of EGMA, the proposal proceeded quickly. In November 2012, the Government of Tanzania formally granted Stanbic and Standard Bank the mandate to raise the funds. By completion of the financing in March 2013, the amount to be raised stood at US$600 million. In March 2013, EGMA's 1% fee of US$6 million was paid by Stanbic into an account, and the vast majority was withdrawn in large cash amounts by Dr. Mboya shortly after.

Despite the fact that Standard Bank acted jointly with Stanbic on the transaction, the team at the Bank did not believe Standard Bank was required to conduct KYC and due diligence. Standard Bank relied entirely on Stanbic to conduct KYC checks and raise any concerns as regards EGMA.

Staff at Stanbic raised their concerns about the withdrawals from 26 March 2013 onwards, and on 2 April 2013, Standard Bank Group began an internal investigation. On 18 April 2013, before the internal investigation had been carried out, the matter was reported to the Serious and Organised Crime Agency; it was reported to the SFO on 24 April 2013.

After the internal investigation, the SFO reviewed the material obtained and conducted its own interviews. The SFO formed the view that Standard Bank had failed to prevent persons associated with it from committing bribery and concluded that Standard Bank did not have a realistic prospect of raising the "adequate procedures" defence to a section 7 offence. However, in the circumstances, SFO Director Green considered that the public interest would likely be met by a DPA, and negotiations were commenced accordingly.

In declaring at the preparatory hearing that the then-proposed DPA was "likely" to be in the interests of justice, Lord Justice Leveson first considered the seriousness of the conduct (the criminality which Standard Bank potentially faced was the failure to prevent the intended bribery). The second feature, to which Lord Justice Leveson attached considerable weight, was the fact that Standard Bank had immediately reported itself to the authorities (without self-reporting the conduct may not have come to the attention of the SFO) and adopted a proactive approach to the matter, including fully cooperating with the SFO from the earliest possible date. The third feature was that Standard Bank has no previous convictions for bribery and corruption, nor has it been the subject of any other criminal investigations by the SFO. Finally of relevance was that Standard Bank was effectively now a different entity from that which committed the offence, as it was now differently owned, a majority shareholding having been acquired by ICBC.

Lord Justice Leveson considered three years to be a sufficient amount of time for Standard Bank to implement the terms of the proposed DPA. The requirements of the DPA approved on 30 November 2015 are:

• payment of compensation of US$6 million (this sum represents the additional fee of 1% paid to EGMA that would otherwise have been paid to the Government of Tanzania) plus interest in US$1,046,196.58;
• disgorgement of profit on the transaction of US$8.4 million (the 1.4% fee Standard Bank and Stanbic received);
• payment of a financial penalty of US$16.8 million;
• past and future cooperation with the relevant authorities (as described in the DPA) in all matters relating to the conduct arising out of the circumstances of the draft indictment;
• at its own expense, commissioning and submitting to an independent review of its existing internal anti-bribery and corruption controls, policies, and procedures regarding compliance with the Bribery Act 2010 and other applicable anti-corruption laws (as described in the DPA); and
• payment of the costs incurred by the SFO, namely £330,000.

Commenting on the DPA, SFO Director Green said, "This landmark DPA will serve as a template for future agreements" and that the judgment provides very helpful guidance to those advising corporates.

The SFO has subsequently said that it is looking at other comparable cases, and when deciding whether to enter DPA negotiations it will give great weight to whether a company self-reports and proactively cooperates. Further, the SFO said DPAs will only be appropriate in specific situations. We will have to wait and see if the use of DPAs, rather than prosecution, does now become commonplace.

First Acceptance of Responsibility for a Contravention of Section 7 of the Bribery Act 2010

However, the approved DPA wasn't the first acceptance of responsibility for a contravention of section 7 of the Bribery Act 2010, as on 25 September 2015, the Scottish Crown Office and Procurator Fiscal Service had published⁷ a media release in which they made the first announcement of a company having accepted responsibility for a contravention of section 7. The company was not prosecuted as under the "self-reporting" initiative. Launched in Scotland when the Act came into force, the case was deemed suitable for civil recovery settlement (the Civil Recovery Unit recovered £212,800 under an agreed civil settlement with the company).

The cabling company accepted that it had benefited from unlawful conduct by a third party, but the company had carried out an extensive investigation after becoming aware of the issue through an internal review and had then self-reported in June 2015. The company had also taken steps to implement new policies and training to ensure that no unlawful conduct will take place in the future.

First Guilty Plea for an Offence Committed Contrary to Section 7 of the Bribery Act 2010

The first actual guilty plea to an offence committed contrary to section 7 of the Bribery Act 2010 came on 18 December 2015 when Sweett Group Plc pleaded guilty to a section 7 offence at the Crown Court at Southwark. The SFO having already announced⁸ on 2 December 2015, two days after the approval of the first DPA, that Sweett Group Plc had admitted a section 7 offence regarding conduct in the Middle East,⁹ and then having announced¹⁰ on 9 December 2015 that Sweett Group Plc had that day been charged with the offence. The offence had been committed between 1 December 2012 and 1 December 2015, and related to the company having failed to prevent the bribing of an individual by an associated person, namely Cyril Sweett International Limited, their servants and agents, and related to a bribe used to secure and retain a contract with an insurance company for project management and cost consulting services in relation to the building of a hotel in Dubai. Sweett Group Plc will be sentenced on 12 February 2016.

Compliance

In September 2015, the SFO gave a prosecutor's perspective to the question of compliance, in particular relating to section 7 of the Bribery Act 2010 and the defence where a company can show it had "adequate procedures" in place to prevent persons associated with it from committing bribery. The SFO welcomed the new compliance culture post the Bribery Act 2010, but said that it was not for it to offer advice or assistance on compliance policies. Further, that when the SFO comes to investigate a business, what matters to it is the substance and not the form of the compliance, and any attempts to justify a failure of compliance on the basis that bribery is simply the price of doing business in certain jurisdictions will fall on deaf ears.

New Charges

On 9 November 2015, the SFO announced¹¹ that an individual had appeared before the Crown Court at Southwark. The individual was charged with two offences of concealing, destroying or otherwise disposing of documents, knowing or suspecting they are relevant to a SFO investigation, contrary to section 2(16) of the Criminal Justice Act 1987. The charges arise out of an investigation into alleged corruption relating to construction projects in Iraq. The individual is next due in court on 1 February 2016, and any trial is scheduled to begin on 12 December 2016.

On 13 November 2015, the SFO announced¹² that it had that day issued the first criminal proceedings against ten individuals accused of manipulating EURIBOR, and that criminal proceedings will be issued against other individuals in due course. It is the first time criminal charges have been brought in relation to EURIBOR. On 21 December 2015, the SFO said that criminal proceedings had been issued against an additional individual. The bankers (six former Deutsche Bank staff, four former Barclays traders, and an ex-Societe Generale trader) are all to be charged with conspiracy to defraud, and six were charged at their first appearance at Westminster Magistrates' Court on 11 January 2016. The other five did not appear for the hearing.

Verdict After Trial

In what was seen as a big victory for the SFO, Tom Hayes was found guilty on 3 August 2015, after a trial at the Crown Court at Southwark, of eight counts of conspiracy to defraud relating to his role in the manipulation of LIBOR. He was a former derivatives trader at UBS and Citigroup and is the first individual to be charged and stand trial in the UK as a result of the SFO's ongoing investigation.

The offences took place between August 2006 and December 2009, when Mr. Hayes was an employee of UBS, and December 2009 and September 2010, when he was an employee of Citigroup. He had conspired with numerous other individuals to procure or make submissions of rates into the Yen LIBOR setting process that were false or misleading, thereby intending to prejudice the economic interests of others. He had sought to change the published rate from what it would otherwise be in order to gain an advantage for his bank's trading profit, whilst also getting benefits for himself, including bonuses.

The trial judge, The Honourable Mr. Justice Cooke, sentenced¹³ Mr. Hayes, 35, to a total of 14 years' imprisonment and said, "The conduct involved here must be marked out as dishonest and wrong and a message sent to the world of banking accordingly." Mr. Justice Cooke had regard to the Sentencing Guidelines, and although the maximum sentence for conspiracy to defraud is 10 years' imprisonment, he made the sentences passed for the four offences committed whilst at UBS (9 years and 6 months) and the four offences committed at Citigroup (4 years and 6 months) consecutive to each other, thereby passing the total sentence of 14 years' imprisonment.

However, on 21 December 2015 the Criminal Division of the Court of Appeal (R v Hayes [2015] EWCA Crim 1944¹⁴) reduced this to 11 years' imprisonment (8 years for the UBS offences and 3 years for the Citigroup offences). It is of note that the Court of Appeal stated in the final paragraph of the judgment: "However, this court must make it clear to all in financial and other markets in the City of London that conduct of this type, involving fraudulent manipulation of the markets, will result in severe sentences of considerable length which, depending on the circumstances, may be significantly greater than the present total sentences."

On 6 October 2015, the trial of six former brokers for conspiracy to defraud started at the Crown Court at Southwark relating to the manipulation of LIBOR by Mr. Hayes. The prosecutor described the six as "middlemen willing and enthusiastic to lend themselves to Mr. Hayes' dishonest scheme." The trial concluded on 28 January 2016 and each individual was acquitted of all charges.

It is of note that prior to the aquittals of these individuals, SFO Director Green already had agreed in The Guardian interview on 6 August 2015 that there was uncertainty about the future of the SFO. Referring to proposals made in October 2014 by the Home Secretary, Theresa May MP, to subsume the SFO within the National Crime Agency (NCA), he had explained that, while it would be a matter for ministers to determine the organisation's future, he would continue to make a case for the SFO to remain independent. Of course, since this interview the SFO has had the first DPA approved and there has also been the first guilty plea for a section 7 offence. In addition, on 9 February 2016 it was announced that Mr. Green's contract, due to end in April 2016, was extended for a period of two years. Whilst not removing the challenges the SFO faces, this may offer the organisation some stability.

In Mr. Green's report¹⁵ to the 33rd Cambridge International Symposium on Economic Crime on 7 September 2015, he set out that the need for the SFO is stronger than ever before and that it had to stick "unflinchingly" to the sort of work for which it was designed, and if it "dumbs down, then it will lose its raison d'etre and justification." In his view, the SFO has to embrace the most difficult and risky work, and whistleblowers and insiders are playing an increasingly important role. He also said "the Libor investigation continues and we will go wherever the evidence takes us," and accordingly, further Libor charges are apparently likely.

As far as Mr. Green is concerned, the SFO is "well equipped, and clear as to its role and mission." It will have to be seen if those making the decisions as to the future of the SFO agree with him.

However, it is clear that the SFO is short of funds, as in a written statement¹⁶ by the Solicitor General, Robert Buckland QC, on 7 January 2016. Solicitor General Buckland stated that a cash advance from the Contingencies Fund had been sought by the SFO. In line with the current "blockbuster funding" agreement with HM Treasury, the SFO will be submitting a reserve claim as part of the supplementary estimate process for 2015-16 to cover the cost of significant investigations and the settlement of material liabilities. Pending the Parliamentary approval for the additional resources sought of £21 million, urgent expenditure estimated at £15.5 million will be met by a repayable cash advance. The advance is required "to meet an urgent cash requirement on existing services."

News from Government

No New Offence of Corporate Failure to Prevent Economic Crime

As reported in our May 2015 newsletter, the UK Government published its Anti-Corruption Plan (the Plan) on 18 December 2014. The Plan recognises that bribery and corruption are live issues across the public and private sectors and seeks to make the UK a leader in the global effort to combat them.

Of particular interest is Action 36 of the Plan relating to the Ministry of Justice examining the case for a new offence of corporate failure to prevent economic crime and the rules on establishing corporate criminal liability more widely. Although the timescale for this action was stated as June 2015, and as of 9 July 2015 the work relating to this was "progressing and any announcements and decisions will be made in due course" (as stated in a UK Parliamentary response¹⁷ to a question relating to the proposed offence), there will now apparently be no further work carried out. This was stated on 28 September 2015, but only in a written response¹⁸ from Andrew Selous, Parliamentary Under Secretary of State, Minister for Prisons, Probation and Rehabilitation, to a question from Conservative MP Byron Davies. Ministers had apparently decided not to carry out further work at this stage as "there have been no prosecutions under the model Bribery Act offence and there is little evidence of corporate economic wrongdoing going unpunished."

Of course, this response was made before the first DPA was approved relating to section 7 of the Bribery Act 2010, and the first guilty plea for such an offence was entered shortly after. It is also of note that SFO Director Green had hoped that there would be an extension of the law on corporate liability to assist in the use of DPAs. In his report to the 33rd Cambridge International Symposium on 7 September 2015, he had said there was a step that was necessary to make DPAs mainstream, and it involved moving away from the identification principle of corporate criminal liability in English law and embracing something closer to vicarious liability, as in the United States. He explained that until that was done, a corporate might conclude that if the prosecution of a company was so difficult under our law, why should they agree to a DPA?

However, it appears that contrary to Mr. Green's hopes there won't, at this stage, be an extension of the law on corporate criminal liability, although it will have to be seen as to whether or not the recent DPA and guilty plea means further work will now actually be carried out. Mr. Green's views clearly haven't changed as he took the opportunity to repeat the need for a new law in an interview¹⁹ with a newspaper on 5 January 2016.

Launch of the International Corruption Unit

The International Development Secretary, Justine Greening MP, has launched a specialist unit to investigate cases of international corruption affecting developing countries. The new crime unit, the International Corruption Unit (ICU), was announced in a press release²⁰ from the Department for International Development (DFID) on 9 August 2015. The DFID said the ICU will be the central point for investigating international corruption in the UK. In line with the Plan, it will bring together existing investigation and intelligence units funded by the DFID from the Metropolitan Police Service (MPS), City of London Police (COLP) and NCA. The multi-agency team will be operated by the NCA²¹ (it replaces the MPS Proceeds of Corruption Unit and the COLP Overseas Anti-Corruption Unit). The DFID will be providing £21 million to the ICU for five years to 2020.