UK Economic Crime Group: Enforcement Update
In this edition of the UK enforcement newsletter we provide an update on recent anti-corruption, fraud and bribery developments in the UK, US and Europe. We review the record global settlement secured by Airbus SE, provide updates in respect of enforcement actions by the Serious Fraud Office (SFO), Department of Justice (DoJ) and European Commission, as well as on the Court of Appeal's consideration of the UK's first unexplained wealth order (UWO), and the Administrative Court's subsequent discharge of further UWOs. We discuss the SFO's recent guidance on corporate compliance programmes, updates to the Joint Money Laundering Steering Group's (JMLSG) guidance to the financial industry and the Financial Conduct Authority's (FCA) Sector Views for 2020.
In terms of enforcement, we consider:
- The Deferred Prosecution Agreement (DPA) between the SFO and Airbus SE;
- The Court of Appeal's confirmation of the lawful imposition of the UK's first UWO;
- The sentencing of the final individuals convicted of manipulating EURIBOR;
- The post-trial acquittal of Lawrence Hoskins and his sentencing in the US investigation into Alstom;
- An update on the investigation into Swedbank by Swedish and Estonian regulators; and
- The High Court's decision to discharge UWOs in respect of multiple properties.
In terms of legislative reform and government matters we report on the following:
- The SFO's guidance on corporate compliance programmes and its approach to assessing these;
- The JMLSG's proposed amendments to its guidance for the finance industry on the prevention of money laundering and terrorist financing; and
- The publication by the FCA of its assessment of the financial sector's performance and its challenges for the coming year.
Airbus SE—Record Deferred Prosecution Agreement
On 31 January 2020, The SFO entered into a DPA with aerospace company Airbus SE following its approval by Dame Victoria Sharp, President of the Queen's Bench Division. Under the terms of the DPA, Airbus SE must pay a fine, disgorgement of profits and costs amounting to €991 million in the UK, and in total €3.6 billion as part of the world's biggest global resolution for bribery, involving authorities in France and the United States. This DPA is the seventh DPA agreed between the SFO and a company since they were introduced in 2013. It is the largest settlement the UK has seen, and exceeds the total value of all other DPAs concluded to date. The settlement was also a record for the French authorities at €2,083,137,455 for breaches of France's Sapin II anti-corruption laws and for in the US at €525,655,000 for breaches both of the Foreign Corrupt Practices Act (FCPA) and the International Trade in Arms Regulations (ITAR).
The UK DPA was agreed to just under four years after the SFO began its investigation into the company over allegations that it had used external consultants to bribe customers to buy its aircraft. The indictment, suspended for the duration of the DPA, covers five counts of failure to prevent bribery. The conduct covered by the UK DPA took place between 2011 and 2015 and orders for commercial airlines in Malaysia, Sri Lanka, Taiwan and Indonesia, and for military aircraft in Ghana.
In the judgment, Dame Victoria Sharp described the seriousness of the criminality as "grave", the Judge also described the company having displayed a slow start to cooperation, but that this built to full cooperation. The judgment also set out 24 actions which illustrated the company's cooperation, examples of which included the following: providing first accounts from all relevant individuals; a clear commitment from the company's Board to cooperate and communicate with the investigation team; providing extensive and detailed presentations directing the investigation team to relevant supporting evidence; providing millions of relevant documents to the investigation team (prioritised using predictive coding to aid in the identification of relevant material); coordinating with the investigation team to arrange investigative interviews; adopting what was described as "a cooperative position" regarding legal professional privilege—by providing key materials from its internal investigation (interview transcripts and memoranda) to the SFO under a limited waiver of privilege and listing other materials it had withheld from the SFO (including the reasons material was withheld); and implementing improvements to its anti-corruption and ethics programme.
The DPA requires Airbus SE to submit for the next three years (until 31 January 2023) to monitoring of its compliance programme, which will be conducted by the Agence Française Anticorruption—the French governmental anti-corruption agency. Throughout the same period, Airbus SE must retain all material gathered as part of its internal investigations and during the SFO's investigation, and must continue its cooperation with the SFO's ongoing investigation.
Unexplained Wealth Orders—Court of Appeal Upholds UK's First Example
On 5 February 2020, the Court of Appeal dismissed an appeal by Mrs Zamira Hajiyeva, the wife of a former Azerbaijani banker, to discharge the UWO made against her by the National Crime Agency, (NCA). The UWO, granted in 2018, as initially reported by us in our October 2018 Enforcement Update, initially publicly identified her only as "Mrs A", and imposed on her an evidential burden of explaining financial sources used to purchase her Knightsbridge home and fund a £16 million Harrods shopping spree. This expenditure was alleged to have been out of keeping with her husband's officially declared salary—he has since been jailed in Azerbaijan for financial crimes.
Mrs Hajiyeva argued that the only person able to disclose those details would be her husband who was, as a condition of his imprisonment, being held incommunicado in Azerbaijan. The NCA at the time argued before the Hon. Mr Justice Supperstone that firstly there were reasonable grounds that Mr Hajiyev's salary and the lavish spending by his wife were from suspect sources. The second prong of the NCA's argument for a UWO was that they were both politically exposed persons (PEPs).
February's appeal dismissal doubly supported the issue of future UWO applications by reiterating a High Court decision in October 2018 that the Criminal Finances Act 2017 is correct in requiring a person (in this case a spouse) to provide evidence outside their knowledge; the admissibility during the UWO process of convictions said to have been secured unfairly (as it was argued Mr Hajiyev's conviction was); and the issue of wider importance - how PEPs should be defined. The ruling has added support to the NCA's continuing efforts in tracing the proceeds of crime.
The ruling also reinforces the NCA's freezing and forfeiture activities. This supplements the NCA's recently revised forfeiture powers through account freezing orders (AFOs). About the first of which we reported in our June 2019 Enforcement Update. Further AFOs and UWOs have followed, about which we reported in our September 2019 Enforcement Update.
Unexplained Wealth Orders—High Court Criticises National Crime Agency and Discharges Multiple Orders
On 8 April 2020 the High Court delivered a judgment finding that the NCA were wrong to issue three London properties owned by relatives of the former president of Kazakhstan 'Mr Aliyev' with unexplained wealth orders 'UWOs'.
The key points decided in the respondents' favour were as follows:
- In respect of two of the UWOs the individual identified by the NCA did not "hold" the property in question and so should not have been made subject to the UWOs.
- In respect of all of the properties, the court rejected as unreliable the NCA's contention that funds used to purchase them flowed from Mr Aliyev's criminal conduct.
- The removal of the link between Mr Aliyev and the properties removed the essential link between ownership of the properties and serious crime or a politically exposed person.
The judgment is important as it represents the fullest judicial analysis yet of the operation of the statutory framework within which UWOs are made (set out at Paragraphs 14-16 of the judgment, available here) and will help to guide existing and future such applications. In it the NCA were subject to significant criticism, the High Court describing its arguments at various points as "artificial" and "flawed" and expressing surprise that its presumption of the UBOs' financial dependence on Mr Aliyev was not more fully investigated.
The NCA has announced its intention to appeal the judgment.
On 5 March 2020, Colin Bermingham and Carlo Palombo were together ordered to pay costs of more than £1 million following their convictions in 2019 for their role in manipulating EURIBOR rates relating to trillions of dollars-worth of loans and derivatives. Palombo was also subjected to a confiscation order under which he must, within three months, pay a further £182,000 failing which he will be sentenced to an additional 30 months imprisonment in default. Their convictions (on which we reported in our June 2019 Enforcement Update) marked the last in the SFO's seven-year investigation into EURIBOR rate-rigging allegations.
The SFO's LIBOR and EURIBOR investigations are now closed. The LIBOR investigation resulted in five convictions and eight acquittals; the EURIBOR investigation resulted in four convictions and three acquittals with a further four individuals charged but their extraditions from France and Germany refused by the respective courts in those countries. The SFO reportedly spent £36 million on these investigations, investigations which, while securing a number of convictions, will likely leave some at HM Treasury questioning whether the SFO delivered good value from the significant additional funding which it obtained.
In a separate EURIBOR-related case, further to the European General Court's ruling in September 2019 that HSBC's EURIBOR fine lacked reasoning, about which we reported in our January 2020 Enforcement Update, the bank's British and French branches are continuing to challenge allegations made by the European Commission that they were complicit in a single and continuous infringement of competition rules by manipulating EURIBOR. In an appeal brought on 3 December 2019, but reported in the Official Journal of the EU on 10 February 2020, HSBC complained that "the General Court erred in law by finding that HSBC participated in a single and continuous infringement that included conduct that was not identified as infringing conduct by HSBC", and had also "distorted the evidence before the court." Although the European Commission's €33.6 million fine had been quashed, the allegations that HSBC had broken competition laws were maintained.
In our January 2020 enforcement update we reported on Lawrence Hoskins' conviction for FCPA violations and money laundering. Hoskins has since appealed to the Connecticut District Court which, on 26 February 2020, took the uncommon action of overturning the jury's decision to convict, granting Hoskins' appeal in respect of his FCPA charges, but leaving four money laundering convictions for which, on 6 March 2020, he was sentenced to 15 months imprisonment.
Hoskins was employed by a British subsidiary of Alstom. He worked primarily for one of Alstom's French subsidiaries. The FCPA charges were linked to an Indonesian project involving the engagement of third-party consultants. Alstom's US subsidiary, Alstom Power Inc (API) was involved in the bidding process for this work. Hoskins was convicted of FCPA offences as API's agent (an earlier ruling having determined that was the only basis on which the FCPA could have jurisdiction over the facts of his case).
Although the government introduced evidence which could permit a reasonable jury to conclude that API controlled the hiring of consultants and gave Hoskins instructions (which he followed), the key question in determining whether the FCPA convictions should stand was whether Hoskins agreed to act, and did act, under API's control. Judge Arterton held that no element of Hoskin's role could be categorised as making him API's agent - no one within API had the right to control or direct his actions. Within the corporate structure, if there had been a genuine disagreement as to whether Hoskins' business unit were to hire a consultant, then the business unit would have won that argument, not API.
Judge Arterton pointed to the absence of the necessary facet of an agency relationship that the principal should have authority to terminate the agency relationship. The government had introduced no evidence to suggest that API were in a position to affect Hoskins' compensation, or to decide whether to withdraw his authority to hire consultants. There was therefore no evidence to suggest that Hoskins agreed or understood that API were controlling his actions, nor that API in fact were doing so.
This is a further dent to the jurisdictional range of the FCPA, already subject to recent challenge by Hoskin's previous appeal which caused him to be prosecuted as an agent rather than a conspirator. However, the government has filed an appeal in respect of Judge Arterton's acquittal ruling, through which it will no doubt seek to reinforce its ability to use the law to prosecute overseas agents of US companies.
This judgment is likely to be viewed by US prosecutors as highly fact-specific and it does not remove from them the ability to charge non-US persons with money laundering offences. Whilst the parts of Judge Arterton's ruling analysing the basis on which a foreigner may be linked as an agent to a US entity (whether the principal could affect the agent's remuneration, whether the principal could terminate the agent's authority to act, whether the agent acceded to the relationship) will be cited favourably by other defendants, the practical effect will likely be a tightening-up by US prosecutors of future cases brought on the agency basis.
On 19 March 2020, The Swedish financial regulator, the Finansinspektionen (FI) imposed a record fine of 4 billion Swedish Kronor (around £334 million) on Swedbank for deficiencies in its measures to combat anti-money-laundering (AML) and for withholding information from authorities. The Swedish bank has acknowledged the systematic shortcomings.
Swedbank came under scrutiny in February 2019 following reports that billions of dollars of illicit funds may have been laundered through its Estonian branch. According to the FI, Swedbank had not taken sufficient action to prevent the money laundering even though it had been aware of suspicious activity through internal and external reports warning it of the same.
This particular fine stems from a joint investigation conducted by both Swedish and Estonian authorities into parent company Swedbank AB and its subsidiary bank Swedbank AS in Estonia, with regard to both banks' AML practices.
Finantsinspektsioon, Estonia's Financial Supervision and Resolution Authority has required the bank to take measures to improve its AML systems to bring them into line with Estonian requirements. The Chairman of Finantsinspektsioon, Kilvar Kessler, criticized Swedbank for making "choices that allowed it to service higher risk clients without proper anti-money laundering systems and controls and without knowing to the fullest extent the money laundering risks posed from servicing these clients." The Estonian Prosecutor's Office is now conducting an investigation to determine whether money laundering took place.
The bank also remains under investigation in the United States.
LEGISLATIVE REFORM AND GOVERNMENT MATTERS
Serious Fraud Office Guidance on Corporate Compliance Programmes
On 17 January 2020, the SFO published the part of its Operational Handbook entitled Evaluating a Compliance Programme (the compliance guidance). Although it is not statutory guidance, it illustrates the central role that a business's compliance procedures can play in identifying the strategic and operational focus of an SFO investigation.
The compliance guidance notes that it has been published "in the interests of transparency", something which should be welcomed by those in business responsible for developing and enhancing anti-corruption compliance programmes. It reiterates the importance of a genuine, whole-business approach to compliance. The compliance guidance builds on and reinforces the statutory guidance on adequate procedures published in March 2011, which detailed, at pages 20-31, the six principles that should guide all businesses wishing to prevent bribery.
The compliance guidance defines a compliance programme as the internal systems and procedures for helping a business and its workers ensure they comply with legal requirements, and thereby reduce the risk of regulatory breaches. The key features are that a compliance programme must be effective, relevant, proportionate and risk-based—it cannot simply exist as a "paper exercise."
The document reminds those subject to SFO investigation that there are key points in time which prosecutors will review:
- historic programmes in place during the period of offending;
- current programmes and any remedial steps taken after the offence; and
- future programmes to prevent further offending.
The existence and nature of the compliance programme at point (1) will be of key importance in determining whether to prosecute at all including whether it is in the public interest to do so. It will also impact on whether the business may assert that it had adequate procedures in place to prevent bribery and if successfully argued that will be a complete defence to a charge of failing to prevent bribery.
The existence of the compliance programme at point (2) may also mitigate against prosecution if, for example, a business had already taken steps to remedy past compliance failings. An improved approach and attitude to compliance is also likely to encourage prosecutors to measure a business's proactivity and suitability to enter into a DPA. As with point (1), a judge may take a business's current compliance approach into account to mitigate any penalty imposed.
If a DPA is being considered by the SFO, close attention will be given to all the points: a DPA may yet be appropriate even where a compliance programme has failed in the past or has yet to be appropriately enhanced. This is because a significant part of a DPA can be the requirement to improve and permit monitoring of a compliance programme.
The SFO naturally encourages early assessment of compliance programmes, using whatever available tools are appropriate in the particular case. This is likely to have an impact on streamlining and focusing investigations.
Joint Money Laundering Steering Group Proposes Amendments to Guidance
On 10 January 2020 the EU's Fifth Money Laundering Directive (the Directive) came into effect in the UK (as reported in our January 2020 Enforcement Update), implementing strengthened measures to counter money laundering and terrorist financing. To assist the UK financial industry's compliance with the Directive's requirements, on 3 February and 17 March 2020 the JMLSG published proposed changes to its Prevention of money laundering/combatting terrorist financing guidance (the Guidance).
Key changes made by the Directive
Some of the key changes which the Directive required Member States to implement are as follows:
- Expanding money laundering and terrorist financing diligence requirements to additional groups including letting agents, crypto-asset exchanges and custodian wallet providers;
- Enhancing requirements to maintain registers of corporate beneficial ownership, permitting improved access to these records for due diligence purposes;
- Requiring improved registers of prominent public functions to be kept in order to help identify PEPs;
- Requiring details to be kept of the holders of safe-deposit boxes;
- Improving law enforcement agencies' access to information held by regulated businesses (whether or not a suspicious activity report has been filed);
- Widening the requirement to carry out Enhanced Due Diligence (EDD) on all parties to a transaction touching on high-risk countries, not just to customers;
- Requiring electronic money providers to carry out Customer Due Diligence (CDD) on lower-value transactions, not merely Simplified Due Diligence (SDD), due to a concern about terrorists and money launderers' use of electronic money;
- Permitting identification of customers to be carried out using independent electronic means;
- Requiring that existing customer relationships are subject to ongoing CDD (chosen based on their risk profile) not merely at the point of initiating the relationship; and
- Requiring regulated businesses to ensure that their agents (as well as their employees) are aware of and receive training on money laundering and terrorist financing requirements.
Key changes proposed to the Guidance
The sections of the Guidance in which proposals for change have been made concern: customer risk factors; the different levels and methods of due diligence appropriate in varied circumstances (particularly with respect to electronic money); the training responsibility of Money Laundering Reporting Officers (MLRO); clarification of how equivalent market exemptions may permit reduced due diligence to be carried out; and introduction of guidance for the newly included sectors (letting agents, art market participants, cryptoasset exchange providers and custodian wallet providers).
Although the Guidance is issued by a private body (and therefore is not legally binding) significantly JMLSG guidance has previously received HM Treasury endorsement, therefore it is sensible to take note of the revisions, not least as they provide a helpful indication of how the revised money laundering regulations apply in practice and will be of particular use to operators in the newly-included sectors.
The key changes made to Parts I (risk-based approach, customer due diligence, staff awareness training and alertness, record keeping and glossary), II (electronic money) and III (equivalent markets) of the Guidance include:
- Narrowing the instances in which SDD can be applied and requiring businesses to document decisions to apply SDD;
- Clarification around when EDD should be applied;
- Clarifying requirements around electronic identification processes;
- Updated guidance on CDD regarding the "e-money specific exemption" permitting CDD to be relaxed in respect of purses of limited value, turnover and restricted geographical range;
- Expanding the examples of transactional risk factors to include transactions relating to oil, arms, precious metals, tobacco, cultural artefacts, ivory and protected species, and items of archaeological, historical or religious significance, or of rare scientific value;
- Additional requirements regarding proof of company registration and additional guidance relating to beneficial ownership;
- Adding anonymous safe-deposit boxes to the list of items which firms are prohibited from setting up and requiring CDD to be carried out on any existing anonymous safe-deposit boxes;
- Adding letting agents, art market participants, cryptoasset exchange providers and custodian wallet providers to the list of financial sector firms to whom the money laundering regulations apply;
- Clarifying that an MLRO must be appointed to oversee training in relation to money laundering and terrorist financing;
- Reminding those operating in the cryptoasset sector that the risk profile for this sector is currently low but likely to increase, requiring businesses to make proactive risk-assessments. The risks in this area are in part due to: the increased likelihood of privacy and anonymity of users, the cross-border and decentralised nature of transactions, cryptocurrencies themselves being digital and convertible, and the processes and products involved being subject to constant innovation; and
- Identifying factors to be taken into account when assessing whether markets meet the disclosure requirements in the Directive and whether equivalence can therefore be deemed - leading to SDD being acceptable.
These are proposed changes to the Guidance and a final version will follow once the public consultation period has concluded. The public consultation on the amendments to Parts I, II and III was open until 3 April 2020, with consultation on the new section in Part II concerning cryptoasset exchange providers and custodian wallet providers open until 18 May 2020.
Financial Conduct Authority Sector Views for 2020
On 18 February 2020 the FCA published its annual "Sector Views" document, available here, giving its outlook on how the financial sector is performing and the challenges to be faced in the coming year. The FCA initially considers the drivers of change impacting the wider market and then focuses on the individual markets it regulates.
The 2020 Sector Views were obviously published prior to the current global emergency caused by the developed COVID-19 "lockdowns", and it should be noted that the issues it flags will likely be considered as secondary to the problems caused by the pandemic. Nonetheless, the issues flagged will require resolution in addition.
In terms of drivers for change, the FCA flags Brexit and the EU withdrawal negotiations as a key feature of the financial landscape. The FCA identifies that under the Withdrawal Agreement (currently in force until 31 December 2020), firms and consumers have some certainty, with the continued application of EU law in the finance sector during the "transition period". However, it acknowledges that businesses will need to consider how they will continue to operate from 2021, after the transition period. Other drivers for change that the FCA have highlighted are global issues such as COVID-19 and the US-China trade tensions, as well as national issues like high levels of student debt and levels of pension savings for those approaching retirement age. In addition the FCA flags technological changes impacting on the financial sector, providing greater access but also bringing new risks such as the potential for data misuse, cybercrime and mis-selling.
Looking at the individual markets it regulates, the FCA focuses on seven sectors: (i) retail banking and payments; (ii) retail lending; (iii) general insurance and protection; (iv) pensions savings and retirement income; (v) retail investments; (vi) investment management; and (vii) wholesale financial markets. In each of these sectors, the FCA considers issues that might have a negative impact on consumers or the integrity of the financial system in the future, as well as identifying trends and developments within each market. In the investment management sector in particular, the FCA highlights the potential harm that could be caused by a disorderly transition from LIBOR to alternative lower-risk rates.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory 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.