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. We consider recent enforcement actions by the Serious Fraud Office (SFO), the Metropolitan Police Service (MPS) and the National Crime Agency (NCA). We also consider some of the issues arising out of the COVID-19 pandemic, including the ability of the courts to conduct jury trials and guidance from the Financial Conduct Authority (FCA) for dealing with the pandemic. In pro bono matters, we consider the Windrush scandal and highlight Arnold & Porter's response to social injustice.
In relation to enforcement, we look at:
- Guidance issued by the FCA for firms on various aspects of their business that have been affected by the pandemic;
- The conclusion of the three-year Deferred Prosecution Agreement (DPA) between the SFO and Tesco Stores Ltd;
- The record €1.9 million seizure in a money laundering investigation by the MPS;
- The £37.8 million fine imposed by the FCA on the London branch of Commerzbank AG for failures of its anti-money laundering controls;
- Closure of three investigations by the SFO into ABB Ltd, Euribor and De La Rue Plc; and
- Two new editions of the NCA's "SARs in Action" magazine.
In relation to litigation, we consider:
- Conducting jury trials impacted by COVID-19;
- Rejection of the NCA's appeal against the High Court's discharge of Unexplained Wealth Orders (UWOs);
- Update on litigation between Eurasian Natural Resources Corporation (ENRC), Dechert and the SFO; and
- The High Court declining jurisdiction and ceding to Italian courts in a bribery claim.
In pro bono matters, we consider the Windrush scandal and highlight Arnold & Porter's response to social injustice.
Guidance from the FCA on issues arising from the COVID-19 pandemic
As an example of its collaborative approach to regulation, in the past few months, the FCA has provided a series of updates and guidance for firms looking to navigate the myriad of issues for the regulated sector arising from the COVID-19 pandemic. The stated goals of the FCA at this time are to work at both the national and international level to keep markets open and orderly, help firms to continue to operate, protect consumers and small businesses, and to maintain high standards of conduct.
On 3 April 2020, the FCA published a joint statement with the Prudential Regulatory Authority (PRA) on their expectations for dual-regulated firms in terms of the Senior Managers and Certification Regime. The FCA and PRA emphasised that firms should seek to complete any annual certifications for employees, to confirm that they remain fit and proper to conduct their business functions. They also considered how firms should manage if one or more of the individuals performing Senior Management Functions (SMFs) becomes ill with coronavirus and so are unable to continue their roles. FCA and PRA rules ordinarily allow individuals to perform SMFs without approval for up to 12 weeks if the SMF vacancy is (a) temporary and / or (b) reasonably unforeseen. On 30 June 2020, the FCA issued further guidance on extending the 12 week rule in relation to the Approved Persons Regime, noting that if temporary arrangements are needed for more than 12 weeks to cover illness, an extension will need to be notified to the FCA, which would allow for a 36 week period for those temporary arrangements.
On 22 April 2020, the FCA introduced temporary measures for firms submitting regulatory returns, allowing for submissions due up to 30 June 2020 to be delayed by either one or two months. The allowed delays vary depending on the return, but of most significance is the two month delay allowed for annual reports and accounts.
On 6 May 2020, the FCA published its expectations on maintaining financial crime systems and controls during the COVID-19 pandemic. In particular, the FCA emphasised the need for firms to remain vigilant in relation to money laundering and terrorist financing. However, it was acknowledged that there are operational challenges caused by the pandemic that may mean firms have to delay certain activities such as ongoing customer due diligence reviews or reviews of transaction monitoring alerts. Any amendment to controls should be clearly risk assessed, documented and go through appropriate governance. Additionally, the FCA recognised that firms may be unable to use traditional methods to verify a customer's identity, but emphasised the need to comply with obligations for client identity verification, even where this is being conducted remotely.
It is clear from the volume of guidance and updates that the FCA has released in recent months to assist firms with managing issues arising from the COVID-19 pandemic, that the regulator is focused on ensuring the ability of firms to continue to operate in these challenging circumstances, while emphasising that some obligations remain non-negotiable and will need to be met.
SFO concludes three-year DPA with Tesco Stores Ltd
On 10 April 2020, the SFO announced that Tesco Stores Ltd had complied with its obligations under the three-year DPA with the SFO, bringing the case to a close. The DPA arose from the SFO's investigation into accounting irregularities surrounding the overstatement of expected profits by Tesco Stores Ltd. As we reported in our June 2019 Enforcement Update, the DPA was entered into in April 2017, although it was not published in full until January 2019, following the completion of related proceedings and the lifting of reporting restrictions. Under the DPA, Tesco Stores Ltd agreed to pay a financial penalty of £129 million and £3 million towards the SFO's costs, as well as implementing remedial actions including commissioning a review of its systems and controls. The SFO's recent announcement brings the DPA to an end, with Tesco Stores Ltd joining Standard Bank and Sarclad as the companies who have fulfilled the terms of their DPAs with the SFO.
Separately, on 8 June 2020, the Financial Reporting Council (FRC) announced that it was closing its investigation into a number of accountants working for Tesco at the time of the overstatement of expected profits by Tesco Stores Ltd. This followed the earlier closures of related investigations into Tesco's former Chief Financial Officer (in August 2016) and into Tesco's former external auditors (in June 2017).
MPS make record €1.9 million seizure in money laundering investigation
The MPS successfully seized €1.9 million (£1.6 million) from numerous UK bank accounts in a money laundering probe, investigating members of an organised crime network based in Italy. The forfeiture was granted by Westminster Magistrates' Court on 15 April 2020, providing an example of the way the MPS are continuing with significant and substantial cases, despite the restrictions imposed as a result of the COVID-19 pandemic.
The seizure was made using an Account Freezing Order (AFO) and forfeiture application. The MPS had been investigating matters with their Italian counterparts for the past two years. The investigation found that dozens of front companies had been opened in the UK, with false identities including those of a deceased man and a victim of identity theft being used to obtain banking facilities with a major bank. The accounts were used to launder millions of euros from Europe to the UK and then paid back to Italian accounts, thus concealing the source of the cash, using a method known as "layering" to launder the money.
AFOs were created by amendments to the Proceeds of Crime Act 2002, which were introduced by the Criminal Finances Act 2017. Although a relatively new tool for law enforcement, AFOs were used more than 650 times in 2018/19 to freeze over £110 million of suspected illicit funds, according to government statistics. Given their success, the increasing use of AFOs appears to be a trend that is set to continue.
FCA imposes fine on the London branch of Commerzbank AG for anti-money laundering control failures
On 17 June 2020, the FCA issued a fine of £37.8 million to the London branch of Commerzbank AG (Commerzbank London) for its lack of adequate anti-money laundering (AML) systems and controls between October 2012 and September 2017. This investigation demonstrates the FCA's approach to ensuring that participants in the UK banking system are vigilant and taking action against money laundering risks.
The fine is the second largest levied by the FCA for AML failings. This is despite Commerzbank London receiving a 30% discount for agreeing to resolve the matter at an early stage. Without the discount, the financial penalty would have been £54 million.
Commerzbank London was found to have breached Principle 3 of the FCA's Principles for Businesses, which requires firms to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. This breach arose from a failure to conduct timely due diligence on clients, a failure to have adequate policies and procedures in place when undertaking customer due diligence and a failure to address previously identified issues associated with automated monitoring of money laundering risks in transactions.
The failings were exacerbated by the fact that Commerzbank London was aware of the weaknesses in its AML systems and controls following the FCA raising specific concerns in 2012, 2015 and 2017, as well as a market-wide shift over the period to increased emphasis on ensuring compliance with AML regulations.
Commerzbank London has undertaken substantial remediation of its AML controls, including the appointment of a Skilled Person to test the enhanced systems and controls. Additionally, the bank conducted an extensive review of transactions to identify suspicious transactions between October 2012 and September 2017. Commerzbank London also voluntarily implemented a number of business restrictions, including temporarily stopping taking on new high-risk customers and suspending all new trade finance business activities.
SFO closes three investigations
On 19 May 2020, the SFO announced the closure of its three-year investigation into ABB Ltd. On 16 June 2020, the SFO announced the closure of its investigation into De La Rue Plc, almost a year after initially announcing the investigation. In relation to both of these investigations, the SFO announced that based on a thorough and detailed review of the available evidence, they had concluded that neither case met the test for prosecution as defined by the Code for Crown Prosecutors.
In considering the question of whether to prosecute, the Code for Crown Prosecutors sets out the Full Code Test, consisting of the evidential stage and the public interest stage. Under the evidential stage, the prosecutor must be satisfied that there is sufficient evidence to provide a realistic prospect of conviction. If there is sufficient evidence to justify a prosecution, the prosecutor must then consider the public interest stage, namely whether a prosecution is required in the public interest.
Separately, the SFO has also closed its long-running investigation into the manipulation of global Euribor (Euro Interbank Offer Rate) interest rates. As part of that closure, the SFO withdrew European Arrest Warrants against Joerg Vogt, Ardalan Gharagozlou, Kai-Uwe Kappauf, all formerly of Deutsche Bank and Stephane Esper, formerly of Société Générale. This followed the refusal of Germany and France to extradite the men. The Euribor investigation yielded four convictions for the SFO, with three other individuals being acquitted.
Two new editions of the NCA's "SARs in Action" magazine
In the past few months the NCA has published two issues of its magazine "SARs in Action". The magazine provides useful guidance for companies who may need to make suspicious activity reports (SARs), as well as insights into some of the key areas on which the NCA is currently focusing. It is also a useful resource for those who want to develop their understanding of how the SARs regime operates.
The fourth issue, published in March 2020, focuses on the use of fintech and virtual assets and the complexities involved in trying to regulate these areas. They note that exchanges are "a point of attack" for law enforcement and that the Fifth Money Laundering Directive (5MLD) will bring exchange platforms and custodian wallet providers within its scope as reporting entities. 5MLD has increased the corporate due diligence required to be performed by exchanges and consequently the NCA expects to see an increase in the number of SARs being submitted by these companies. This will aid the NCA in its efforts to intercept criminals who are currently taking advantage of the lack of transparency that has historically been afforded by virtual asset service providers. They also look at the work being done by the FCA's Office for Professional Body Anti-Money Laundering Supervision to improve consistency of the supervision of Professional Body Supervisors (PBSs), whose supervision includes accountants, lawyers, bookkeepers and insolvency practitioners, and aid collaboration and intelligence sharing between PBSs, statutory anti-money laundering supervisors (such as the FCA and HMRC) and other law enforcement agencies.
The fifth issue, published in May 2020, is a special edition looking at the work being carried out by the NCA in conjunction with the banking sector to combat human trafficking. This includes an educational session run by the NCA's Modern Slavery and Human Trafficking unit and the UK Financial Intelligence Unit (UKFIU) to educate firms on the red flags to look for in relation to trafficking and laundering operations. This referred to case studies and discussions designed to demonstrate how legitimate businesses can be unwittingly infiltrated by human trafficking organisations and how to prevent this from happening. It was also noted that the UKFIU has begun to see SARs submitted in relation to COVID-19. Examples of suspicious COVID-19 activity include: individuals impersonating high street banks and using COVID-19 as a reason for the change in operating procedures; businesses taking payments for but not supplying PPE; and victims being told they are investing in companies that are developing a vaccine, where the company and/or vaccine in question is not legitimate. This has prompted the NCA to create a new cell to tackle COVID-19 related fraud. The new cell is a "fusion" cell led by the National Economic Crime Centre and sponsored by the private sector, consisting of experts from a range of sectors including finance, insurance, trade and the public sector.
The impact of COVID-19 on court activity and conducting jury trials
After a seven-week hiatus, certain jury trials resumed on 18 May 2020 under stringent physical distancing restrictions, including the use of separate court rooms linked by television, with one for the judge, jury, witnesses, counsel and defendant, another for members of the public, and a third for jury deliberation. These restrictions place a burden on court space resulting in significantly fewer live jury trials, and contributing to an unmanageable backlog, with the Justice Select Committee being told last week that 41,000 cases are awaiting trial in the Crown Court.
Appearing before the Justice Select Committee on 24 June 2020, Lord Chancellor Robert Buckland QC explained that the growing backlog of cases is forcing radical changes to the criminal justice system. In order to boost the capacity of the courts and reduce the backlog, the government is considering whether to allow less serious "either way" offences to be heard with just a judge and two magistrates instead of a jury. This is to be a last resort option with the preferred measure being a reduction in the number of jurors from the usual twelve to seven. Also under consideration are measures to allow courts to open for longer and at weekends, and by August there are plans to open ten emergency courts around the country.
Trials by jury are the bedrock of the UK's criminal justice system and proposals to either reduce their number or remove them entirely from certain trials are controversial. Although currently proposed as a temporary measure, defendants would be denied their fundamental right to a trial by jury. Although it is right that the wheels of justice continue to turn, it will be interesting to see whether such a radical departure from the norm is deemed necessary.
Court of Appeal denies permission to appeal discharge of UWOs
As we reported in our April 2020 Enforcement Update, on 8 April 2020, the High Court delivered a judgment finding that the NCA were wrong to issue UWOs in respect of three London properties owned by relatives of the former president of Kazakhstan, Mr Aliyev.
The NCA was initially denied permission to appeal by the High Court, and so applied to the Court of Appeal for permission to appeal. On 19 June 2020, the Court of Appeal also denied the application. The Court of Appeal concluded that the NCA had no real prospect of overturning the finding that they had failed to establish reasonable grounds to suggest that the three properties had been bought with the proceeds of crime.
This brings the case to a close and reinforces the importance of the High Court judgment as the fullest analysis of the operation of the statutory framework within which UWOs are made and which will be considered in relation to current and future applications for UWOs.
Update on litigation between ENRC, Dechert and the SFO
In our June 2019 Enforcement Update we reported that ENRC has sued the SFO in the High Court, claiming damages against the agency over its conduct in investigating ENRC's activities in Kazakhstan and Africa. In related litigation, ENRC has separately sued its previous legal advisers, Dechert LLP. In our January 2020 Enforcement Update we reported that the High Court had given Dechert permission to forensically examine documents belonging to ENRC, despite ENRC claiming that these were protected by legal professional privilege. The past few months have seen further developments in this litigation.
Consideration of privilege where lawyers cease to act for a client
The matter was before the High Court again in April 2020 where Dechert made further disclosure applications, this time to be able to access a database of documents showing the extent of its work for ENRC during its representation in the SFO's criminal investigation. On 22 April 2020, the Hon. Mr Justice Butcher denied all but two of Dechert's 11 disclosure requests. The judge agreed with ENRC's contention that a number of documents to which Dechert sought access may be privileged.
Butcher J agreed with the rationale that being privy to a client's material depended on whether a lawyer had knowledge of a document's existence while working for a client, rather than having theoretical access to it. Unless a party can refer to a specific document to which they had access while representing a client, then once the lawyer-client relationship ends no general right to view the previous client's material exists. The substantive trial in this matter will not be heard until June 2021. However, this interim application is of note given the court's clear choice in applying a logically restrictive approach to the protection of a client's documents where they have ceased to instruct lawyers.
SFO may not use documents disclosed in civil proceedings to pursue its criminal investigation
On 7 May 2020, at a case management hearing concerning ENRC's linked claim against the SFO, the Hon. Mr Justice Waksman ruled that the SFO may not use documents disclosed by ENRC in the civil proceedings to continue the criminal investigation into the Company. The SFO sought a ruling on the extent to which ENRC had waived privilege by disclosing the documents. Waksman J dismissed the request stating that although there had been a limited waiver in respect of privilege of some documents for the purpose of the just determination of the claim, there appeared to be no supporting civil rules to extend such a waiver for the remainder.
At the same case management hearing Waksman J ruled that the SFO must consider the extent to which its criminal investigation had been influenced by documentation allegedly disclosed at meetings which ENRC now contends it did not instruct Dechert to hold. ENRC argued at the hearing that it would be unrealistic to accept that the SFO did not act on the information it had improperly received from Dechert. The SFO maintains that it received the information innocently.
As noted above, this dispute will not wholly be resolved for more than a year, the interim hearings to date have raised key issues concerning privilege and disclosure, and we will continue to monitor and provide updates on the progress of the linked cases.
High Court declines jurisdiction ceding to Italian courts in bribery claim
Royal Dutch Shell plc (Shell) and Eni SpA have secured the dismissal of claims brought in the English Commercial Court against them by the Federal Republic of Nigeria (FRN). This case is a clear demonstration of the application of the Brussels Recast Regulation in assessing jurisdiction in multi-jurisdictional matters.
The case arises from an ongoing dispute in relation to the settlement of disputes over Oil Prospecting License (OPL) 245 for the Gulf of Guinea. In 2011, Shell and Eni paid $1.3 billion to the FRN to settle a dispute over drilling rights to the offshore tract, OPL 245. It is alleged that a large proportion of the settlement funds were used to pay bribes to Nigerian government officials and kickbacks to executives at Eni and Shell.
There are ongoing criminal proceedings in Italy, where Eni is headquartered. In March 2018, the FRN joined those proceedings as a civil claimant, seeking damages from Eni and Shell in respect of the alleged bribery. In December 2018, the FRN issued proceedings in the English Commercial Court, with the jurisdictional challenge being heard at the end of April 2020 and judgment handed down on 22 May 2020.
The jurisdictional challenge was brought on the basis that the proceedings before both the English and Italian courts related to the same causes of action and were between the same parties. Under Article 29 of the Brussels Recast Regulation, where there are proceedings involving the same cause of action and between the same parties before the courts of two Member States, any court other than the one where proceedings were first commenced shall halt its proceedings. Where the court in which proceedings were first commenced establishes that it has jurisdiction, any other court shall decline jurisdiction in favour of that court. With the ongoing Italian proceedings, the Hon. Mr Justice Butcher concluded that the cause of action and the parties to the proceedings were the same, and as a result the English court declined jurisdiction.
While this case demonstrates the application of the Brussels Recast Regulation, it should be noted that at the end of the Brexit transition period on 31 December 2020, as matters stand, the Brussels Recast Regulation will cease to have effect in the UK. Subject to any deal that may be agreed with the EU before then, following the end of the transition period, the Courts of England and Wales will revert to merely considering the common law and the Hague Convention on Choice of Court Agreements when determining questions of jurisdiction.
"Windrush Day" was marked across the UK on 22 June 2020. Although the day gives pause for celebration of the contribution made by the Windrush generation and their descendants, justice for many of those affected has still not been delivered and some families continue to feel the effects of this appalling episode in British history.
Windrush campaigners have called for the government to speed up compensation payments promised to those who suffered losses because they could not prove they had a right to live in the UK. Additionally, there were calls for a full deployment of the "Windrush Lessons Learned Review," commissioned by the Home Office and written by Wendy Williams to assess the events leading up to the Windrush scandal and make recommendations for change. Key recommendations include commissioning a full review and evaluation of immigration policy and law from the 1960s onwards that created a hostile environment, and ensuring that ministers and Home Office staff are educated on the history of Britain and its colonial past. The review stated that although there was no definitive finding of institutional racism, there were concerns that the Home Office's failings "demonstrated an institutional ignorance and thoughtlessness towards the issue of race and the history of the Windrush generation".
Following the delivery of the petition and Windrush Day, the Home Secretary, Priti Patel, confirmed that she will be implementing the recommendations in full. While this news is welcome and shows steps in the right direction, she disappointingly declined to set targets for dealing with compensation claims, as each case should be "treated with care". Despite the myriad of economic, social and political challenges the UK is currently facing, righting the wrongs of the Windrush scandal must remain a priority for the government.
Social injustice and Arnold & Porter's response
The excessive use of force against members of the public by state agents is an affront to the principles of justice. That is true in any circumstance. Where circumstances reveal prejudices based on institutional racism or bigotry that is not only an affront to justice, but is offensive to anyone of rational mind and is an issue of wider public concern. The recent, tragic, events in the US and the cause initially for shock and then for reflection has brought into focus more than ever that systemic inequality pervades society, affecting under-represented individuals across daily interactions which so many are privileged to take for granted.
Lawyers are in a unique and powerful position to be able to effect change, through: representation, robust advocacy, education, correspondence with state agencies, recruitment and advancement of a diverse workforce, and mentoring those entering the profession from under-represented backgrounds.
Arnold & Porter and its attorneys have a long and proud history of working with under-represented and under-invested individuals and groups on pro-bono matters in order to redress, wherever possible, the inequality of representation so often experienced. We will continue this work. Our Chairman, Richard M. Alexander, has reaffirmed our firm's commitment to meaningful change through which we aspire, as a firm, and as individuals, to fulfil our responsibilities within society.
We restate Mr Alexander's words that "Our hope is that out of tragedy and injustice, meaningful and sustainable change will take place. We are committed to being a leader in a more inclusive profession and continuing our role as defenders of the rule of law".
© 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.