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 National Crime Agency (NCA) and the Financial Reporting Council (FRC). We comment on the most recent Deferred Prosecution Agreement (DPA) between the SFO and G4S, the ongoing investigations into Rio Tinto and 1MDB, and how documents leaked from the Financial Crimes Enforcement Network (the FinCEN files) show suspicious funds flowing through global banks. We set out the FCA's newly announced approach to medicinal cannabis companies and introduce the new Global Human Rights Sanctions Regulations.
We also consider some of the issues arising out of the COVID-19 pandemic, including the impact of court shortages and potential fraud against the UK's furlough scheme. As part of our wider commentary, we continue to discuss themes of diversity and inclusion in the workplace, and in particular, efforts made by Her Majesty's Courts and Tribunals Service (HMCTS) and the Financial Conduct Authority (FCA) and to promote these areas.
In terms of enforcement, we consider:
- The DPA agreed between the SFO and G4S;
- Discussions between Rio Tinto and the SFO over bribery probe deal;
- Europol's warning that banks are used to launder match-fixing cash;
- The 1MDB bribery scandal; and
- The FinCEN files.
In terms of legislative reform and government matters, we consider:
- The FCA's approach to medicinal cannabis companies;
- UK Human Rights sanctions;
- The NCA's Annual Report 2019-20;
- The FRC's Annual Enforcement Review;
- The ongoing impact of COVID-19 on the criminal justice system;
- The Coronavirus Job Retention Scheme and the Finance Act 2020;
- Tackling racial bias in UK courtrooms; and
- Diversity and the FCA.
DPA Agreed Between SFO and G4S
On 17 July 2020, a DPA between the SFO and G4S Care and Justice Services (UK) Limited (G4S C&J) was approved in court. This is the eighth DPA that the SFO has successfully negotiated with companies and is related to the DPA that was agreed with Serco in July 2019. The draft indictment in this matter included three counts of fraud by false representation by G4S C&J, in relation to financial models reporting costs to the Home Office and Ministry of Justice. Under the DPA, G4S C&J will pay a penalty of £38.5 million, as well as the SFO's costs of £5.9 million, and maintain a corporate renewal programme. KPMG has been appointed as a third-party reviewer to monitor G4S C&J's progress going forward. In order to avoid prejudicing any subsequent criminal proceedings reporting restrictions remain in place and the Statement of Facts associated with the DPA has not been published.
Although this DPA resolves the matter in respect of the company (barring any breach of the DPA), the result of criminal proceedings against individuals remains outstanding. On 8 September 2020, three former executives of G4S C&J were charged with seven offences of fraud relating to false representations made to the Ministry of Justice between 2009 and 2012.
The DPA and judgment provide further insight into the considerations by the court in determining whether a DPA should be approved on the basis that it is in the interests of justice not to prosecute the relevant company. As has been the case with previous DPAs, cooperation is emphasised. Although the company cooperated from the outset of the investigation in January 2014, it was noted that the level of cooperation intensified significantly after October 2019, when the company granted a limited waiver of privilege, providing access to all interviews conducted by its solicitors and accountants in its own internal investigation. Other examples of the assistance provided include: responding voluntarily to investigative requests from the SFO; providing digital and hardcopy material to the SFO; providing notification of when and how other data had been destroyed; and assisting the SFO with tracing relevant third parties. Mr Justice William Davis emphasised that the overall level of cooperation is what matters and that any initial reluctance to cooperate fully can be dealt with when considering the discount on any financial penalty.
The court also considered the remedial steps taken by G4S C&J's parent company and the fact that the relevant conduct was not recent (having been undertaken between 2005 and 2013). Mr Justice William Davis was also keen to emphasise that resolution by a DPA did not allow the company to avoid the consequences of its criminality as it had been required to compensate the Ministry of Justice in full and had undertaken remedial actions. Moreover the basis of the financial penalty ordered was the same as would follow a conviction.
In respect of the financial penalty, the six steps of the Sentencing Council Definitive Guideline on Fraud, Bribery and Money Laundering are clearly set out in the judgment. Of particular interest is that the culpability in this matter was determined to be high, such that a multiplier of 300% was applied to the gross gain by the company. In determining the discount to be applied for assistance to the prosecution and reduction of sentence for a guilty plea, earlier DPAs were considered where in all but one instance, the financial penalty had been discounted by 50%. Mr Justice William Davis considered that as it was not until October 2019 that G4S C&J's showed an exemplary level of cooperation, the company should not receive a 50% discount. Instead, a discount of 40% was applied.
Rio Tinto in Discussion With SFO Over Bribery Probe Deal
In November 2017, we wrote about the SFO's investigation into Rio Tinto for suspected corruption in the conduct of business in Guinea after the company self-reported in 2016. The investigation was triggered by the discovery of emails from 2011 which referred to a payment of $10.5 million made to a consultant, François Polge de Combret, for work carried out on the Simandou iron ore mining project in the Republic of Guinea. The emails revealed Combret's links to Guinean government officials, and in particular, Combret's facilitation of a $700 million payment in 2011 to the then new government of Guinea's President Alpha Condé in exchange for mining rights.
Rio Tinto is now seeking a DPA from the SFO in relation to fees paid to Combret. Although no details have been reported, the company dismissed a senior executive in charge of the project at the time and its head of legal affairs, stating that they had "failed to maintain the standards expected of them under our global code of conduct." This, along with the company's self-report in 2016, is likely to be considered when negotiating terms of the DPA, although how much weight these remedial efforts will carry is unclear at this stage. Even less clear is whether the SFO will pursue criminal proceedings against senior individuals involved in any alleged wrongdoing. Given the SFO's failure to date to obtain convictions of any individuals following a DPA, its approach to pursuing senior individuals at the company if and when a DPA is finalised will be closely followed.
Europol Warns Banks Are Used to Launder Match-Fixing Cash
The Union of European Football Associations estimated that in 2019 fewer than one percent of matches across all sports were fixed. However, given that the annual global betting market for all sports is estimated at over €1.5 trillion, it is clear that there is potentially a great deal for criminals to profit from match fixing. Organised crime groups have identified this opportunity. In a report published in August, Europol estimated that, in 2019, organised crime groups benefitted in excess of €120 million from betting-related match fixing—the value of the bets affected by this criminality is of course likely to be a significantly larger figure.
Europol expresses concern that tennis, basketball, beach volleyball, handball and ice hockey may be affected by match-fixing, but the predominant focus of organised crime groups is football, in particular lower-level leagues where clubs and players are seen as more susceptible to improper influence due to the greater prevalence of financial/personal difficulties. There are larger profits to be made through corrupting football betting because the volume of bets placed is so great. To date there has been little enforcement impact on the organised crime groups leading this corruption, prosecutors and public reporting focussing instead on individual players and the issue of sports integrity rather than the overarching organised crime.
However, the risk to global payments systems is clear—over €120 million a year in illicit profit is being moved, at various stages of the corrupt schemes, between businesses. Whilst organised crime groups are adept at using unregulated money transfer mechanisms, the Europol report also highlights how cross-border transfers in particular require connections into traditional banking structures. The complexity of organised crime groups' structures means that there are a number of levels at which innocent businesses may become contaminated with the proceeds of crime. Opportunities presented by online betting and the emergence in popularity of alternative betting business such as in-play betting and customer-to-customer betting mean that sports betting remains a potentially lucrative medium from which organised criminals can profit. Europol recommends an increase in cooperation between public authorities and private businesses and the wider public, including development of whistleblower reporting mechanisms, in order to tackle the problem at a higher level than current sports integrity monitoring. It is clear that such approaches will take time to reduce offending, however, and that the risks from laundering the proceeds of sports-related organised crime will continue until this happens.
1MDB Bribery Scandal
The corruption scandal that has plagued the Malaysian development fund 1Malaysia Development Berhad (1MDB) has thus far resulted in a 12-year prison sentence for former Prime Minster Najib Razak for one of the five trials he is facing, and criminal charges being dropped against Goldman Sachs as part of a $4 billion settlement. However, related litigation continues in the English courts as Malaysia pursues billions of dollars' worth of stolen state assets.
Among those affected, Clyde & Co found itself unable to release funds that it was holding in escrow on behalf of its client, PetroSaudi. The funds were awarded as damages that an arbitration tribunal seated in Paris ordered the Venezuelan state-owned oil company, PDVSA, to pay PetroSaudi. On 16 July, the day before the award was made, the High Court in Kuala Lumpur issued an injunction prohibiting Clyde & Co from releasing the funds on the basis that PetroSaudi was one of many companies through which 1MDB siphoned off state funds and that any contractual damages that PDVSA owed PetroSaudi should in fact be paid to Malaysia.
PDVSA has since brought proceedings in the Cour d'Appel in Paris to annul the arbitration award and obtained an English injunction, prohibiting the release of any sums to PetroSaudi, later varied to allow for discrete amounts to be released to cover its legal costs. Clyde & Co, concerned that any payment it made would violate the UK's Proceeds of Crime Act (PoCA), had already made an authorised disclosure to the UK's NCA. Consent to the transaction was refused, and when the High Court varied the injunction to accommodate PetroSaudi's legal costs, the 31-day statutory moratorium period on the transaction was still running.
In turn, PetroSaudi applied for a mandatory order requiring Clyde & Co to release the sums for its legal costs and simultaneously applied to join the NCA to the proceedings for failing to explain why it was preventing such sums from being released. The day before the hearing, the NCA wrote in open correspondence that it had not prevented Clyde & Co from making any payments to its client (notwithstanding the fact that by releasing sums for its client's legal costs, Clyde & Co could have exposed itself to criminal liability). Ultimately, upon the court's invitation, the NCA clarified that its initial refusal did not relate to the release of sums for PetroSaudi's legal costs.
Interestingly, despite the immediate issues being resolved before handing down judgment, Mr Justice Snowden nevertheless examined the circumstances in which the NCA could be joined to proceedings. In his view, the NCA has a clear interest in the robust operation of the PoCA regime, which a court order, such as the mandatory order that PetroSaudi was seeking, should not frustrate or contradict. While Mr Justice Snowden did not believe there to be an express requirement for the NCA to explain itself to the court or parties, he did acknowledge that joining the NCA to proceedings may, in cases of real urgency, provide a procedurally efficient alternative to judicial review which would enable the court to properly understand the NCA's position.
The FinCEN Files
On 20 September 2020, thousands of documents belonging to the Financial Crimes Enforcement Network (FinCEN) were leaked, revealing that several international banks have processed trillions of dollars of potentially suspicious transactions over the past two decades. Certain documents from the FinCEN files suggest that despite filing thousands of suspicious activity reports (SARs), banks failed to adequately investigate warnings raised by their own compliance departments, and thus may have facilitated transactions for clients involved in corruption, money laundering and sanctions evasion. One bank for example is reported to have processed payments for Paul Manafort, the former Trump campaigner convicted of fraud and tax evasion, Jho Low, the orchestrator of the 1MDB fraud in Malaysia still at large, and Mukhtar Ablyazov, the Kazakh banker, found liable in English courts for embezzling billions of dollars.
FinCEN, a division of the US Department of Treasury, has called the leak an illegal disclosure that could impact US national security and compromise investigations. The named banks argue that most of the leaked documents relate to incidents that have already been investigated and resolved, and in general pre-date industry-wide efforts to bolster compliance and anti-money laundering controls.
While a SAR is not on its own evidence of criminal activity, of concern is whether banks should be able to file multiple SARs on one individual while continuing to process transactions without further investigation. Indeed, while prosecutors in recent times have been willing to negotiate deferred prosecution agreements in exchange for cooperation, improved compliance, and often hefty fines, this leak, like the Panama Papers, raises the question of whether law enforcement will push for more stringent conditions and/or possibly convictions.
Legislative Reform and Government Matters
FCA's Approach to the Listings of Cannabis-Related Companies
The FCA has responded to a growing number of queries from cannabis companies seeking a listing in the UK, and in turn, admission to its Official List that records whether a company's securities are officially listed in the UK. The FCA notes that while medicinal cannabis was legalised in the UK in 2018, investment in overseas-licensed cannabis businesses remains a legally complex area, largely because of the risk that proceeds from the business may constitute "criminal property" as defined within PoCA.
The FCA's approach to recreational cannabis companies is unequivocal: the proceeds from such companies, even when located in jurisdictions that have legalised it, are considered to be proceeds of crime under PoCA, and securities of these companies would not be admitted to the Official List. In turn, the FCA notes that the position in respect of purely UK-based medicinal cannabis and cannabis oil companies is clear: such companies can be admitted to the Official List as long as they have the requisite Home Office licences for their activities.
Overseas-licensed medicinal cannabis and cannabis oil companies however will be approached differently. The FCA will need to be satisfied that PoCA does not apply and will conduct its own review as to this risk. In conjunction with this review, the company will need to satisfy the FCA that its activities would be legal if carried out in the UK. The FCA will also require an understanding of the legal basis of the company's overseas activities such as its local licensing.
The FCA's approach is subject to a guidance consultation to follow in due course. While this announcement may encourage more UK-based medicinal cannabis and cannabis oil companies to make applications to join the Official List, overseas-licensed companies have yet to navigate the challenges that come with satisfying the FCA of the "PoCA risk" that is likely to be involved.
UK Human Rights Sanctions
On 6 July 2020, the UK imposed financial sanctions on 47 individuals and two entities suspected of serious breaches of human rights. Whilst the imposition of such sanctions is not new, these represent the first sanctions autonomously imposed by the UK (rather than, for example, implementing existing EU or UN-imposed sanctions) under powers conferred under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA).
SAMLA sets out the means by which the UK, which had until recently played a key role in developing and applying EU sanctions, will impose and enforce its own sanctions once it formally leaves the EU on 31 December 2020. Further, it provides the framework by which existing EU sanctions will be retained domestically following the UK's formal withdrawal from the EU.
The Global Human Rights Sanctions Regulations 2020 and its associated list targets two Generals in the Myanmar armed forces responsible for atrocities against the Rohingya minority, 20 people involved in the death of journalist Jamal Khashoggi, 25 people (including judges and doctors) involved in the mistreatment and death of Russian lawyer Sergei Magnitsky, and two government ministries responsible for prison camps in the Democratic People's Republic of North Korea. We can expect further action to be taken by the UK Government in the coming months, particularly in the light of the apparent state-sponsored poisoning in August of opposition politician Alexei Navalny. The fact of the UK implementing these human rights based sanctions is likely to cause the European Commission to consider listing the same individuals and entities under its own aegis.
Whilst sophisticated and responsible businesses should have little difficulty in keeping track of the changes that the UK's own imposition of sanctions will effect, it is worth taking note that now that the UK is doing so unilaterally the implementation of such measures will likely be swifter than when agreement between EU Member States was required. Compliance staff will need to ensure, particularly during the months immediately following the UK's formal withdrawal from the EU, that close attention is paid to the evolving sanctions landscape.
NCA's Annual Report 2019-20
On 21 July 2020, the NCA released its Annual Report and Accounts 2019-20 (the Report). The Report reiterates that the NCA's focus is the prevention and disruption of activities that threaten to undermine the UK economy, and includes analysis of the NCA's enforcement performance over the past year. There is clear emphasis on the agency's international liaison work and its success in this regard.
The Report highlights the performance of the National Economic Crime Centre (NECC) through its first full year of operation and particularly the anti-fraud investigations it has been involved in, resulting in the restraint or seizure of £3,398,776, £9 million of cash forfeitures, and a further £9 million in cash seizures. The NCA also assisted other agencies in the seizure of a further £17.6 million.
The UK's Financial Intelligence Unit (UKFIU), led by the NECC, received 570,000 suspicious activity reports in 2019-20, 22% more than in the previous year. Over 62,000 applications for consent to proceed with suspicious transactions were made—an increase of 94% over the previous year.
As an indication of the importance of the NCA's role in facilitating international cooperation in criminal investigations, last year the Joint Money Laundering Intelligence Taskforce - the second main responsibility of the NECC—supported 18 requests related to foreign bribery investigations. In addition to this the NCA's International Anti-Corruption Coordination Centre has been involved in supporting foreign investigations targeting high-level international corruption.
Through the National Data Exploitation Capability (NDEC) the NCA has reportedly used data analytics to identify previously unknown criminal networks. The NCA clearly sees this as an area in which it can continue to add value within the UK law enforcement network and has secured further funding for the NDEC into 2021.
The Report refers to challenges posed by COVID-19 pandemic, and warns that "criminals were likely to adapt to the new circumstances with likely increases in the threats from hidden-harms including child sexual abuse, cyber and fraud (particularly those using Covid-19 as a lure; for example, the online sale of PPE)". However, the NCA has sought to increase its use of technology to maintain its performance during the pandemic, ensuring where possible that law enforcement agencies can continue to communicate and share intelligence.
An area of concern to the NCA was to ensure that it maintains funding for key areas of its work. There are undoubtedly some UK agencies for which additional investment could prove hard to justify when, as expected, the government turns to spending reviews in the next financial year. However, the Report makes a strong case for maintaining the NCA's current level of resourcing and investment to keep it at the forefront of the UK's fight against serious crime and, in particular, complex financial crime.
FRC Publishes its Annual Enforcement Review
On 31 July 2020, the FRC published its second Annual Enforcement Review (AER). As well as providing an overview of cases from the past year, the AER focuses on key underlying reasons for recurring failures in audits, looking at the investigations the FRC has conducted into auditors over the past six years.
The FRC identified that the majority of cases were associated with a failure to obtain sufficient appropriate audit evidence and a failure to exercise professional scepticism when assessing the decisions and judgements made by management. It was noted that these issues have also featured in Audit Quality Review inspections in the past.
The FRC identified six key themes among the underlying reasons for these failings:
- Insufficient involvement of the audit partner and over-delegation to junior members of the team;
- Disorganised audit work;
- Failure to step back and take an overall look at the financial picture;
- Auditor too close to management;
- Failure to involve the audit quality assurance partner; and
- Insufficient communication when using experts and specialists to assist with audits.
Looking ahead, the FRC noted that COVID-19 may impact not only the auditing and actuary industries which it regulates, but also the ways in which the it conducts investigation and enforcement actions itself.
Impact of COVID-19 on the Criminal Justice System
In our July edition, we discussed how jury trials had resumed under severe social distancing restrictions. Despite this, the backlog of outstanding cases in the Criminal Courts remains largely unaffected, according to the Justice Select Committee. In a report published at the end of July, the Committee acknowledged that the number of outstanding cases in the criminal courts has risen, by some estimates nearly 25% since last year, while the speed at which such cases are being cleared has fallen nearly 35%.
There are concerns about the impact of trial delays on both victims and defendants, some of whom will have to wait until 2022 for justice to be delivered. It is also likely that several criminal suspects could be released who might otherwise have been kept in custody due to the lack of court space to try them before custody time limits expire. On 9 September 2020, the Hon. Mr Justice Keith Raynor sitting at the Crown Court at Woolwich accused the government of 'systemic failure' for not conducting trials in a reasonable time.
The obvious conclusion from the report was that capacity needs to be expanded. For example, increasing the number of court sitting days, optimising the physical estate and improving access to technology would help relieve the pressure on the criminal justice system. Yet such recommendations, made now in response to COVID-19, is not in fact a fresh call for reform. Last year the same appeal was made in response to a 10-year trend of court closures and dwindling capacity. The hope now is that COVID-19 has provided the necessary impetus to realise those much-needed reforms. While this has certainly been the case in the civil jurisdiction, which, having moved swiftly to remote hearings, is now operating at pre-pandemic capacity, the criminal jurisdiction has been slow to adapt.
Of course running jury trials remotely presents unique challenges to the criminal courts. Perhaps of some comfort, the Committee rejected the idea of doing away with jury trials for less serious offences. But what remedies are administered remains to be seen.
The Coronavirus Job Retention Scheme and the Finance Act 2020
Since April 2020, the Coronavirus Job Retention Scheme (the Furlough Scheme) has enabled companies to furlough their workers, with the government providing assistance for the salaries of those workers. Businesses could receive a reimbursement from the government for 80% of the furloughed employee's monthly salary, subject to a cap of £2,500 per month. According to HMRC by mid-August more than £35.4 billion had been claimed through the scheme, supporting approximately 1.2 million employers and 9.6 million jobs. From September the rate of reimbursed has reduced, with the Furlough Scheme closing entirely on 31 October 2020. A new Job Support Scheme will begin in November 2020, aimed at supporting those in "viable jobs which provide genuine security".
Given the rapid implementation and substantial use of the Furlough Scheme, concerns have been raised about the potential for fraud and false claims against the scheme. By mid-July, HMRC had received more than 6,700 reports from the public of alleged furlough fraud. Although UK firms have now voluntarily returned more than £215 million in furlough scheme payments that they did not need or took in error, this pales against HMRC's estimated figure of up to £3.5 billion having been paid out in error or claimed fraudulently. The types of activity that are being reported include employees being asked to work despite being furloughed, HMRC being informed employees are furloughed when they have not been or non-existent employees being claimed for.
The Finance Act 2020, which received royal assent on 22 July 2020, includes powers for HMRC to tackle furlough fraud. Section 106 and Schedule 16 of the Finance Act 2020 set out how businesses should deal with payments from the Furlough Scheme within their tax filings. In particular, it allows for a 90-day notification period (ending on 20 October 2020), during which time a business can notify HMRC that it has received payments from the Furlough Scheme to which it is not entitled, without being penalised. After this period, any payments from the Furlough Scheme identified by HMRC as having been wrongfully claimed may be subject to an additional penalty of 100% of the claimed amount, as well as repayment.
Additionally, fraud against the Furlough Scheme may be subject to a criminal investigation and could be an offence under the Fraud Act 2006 or common law offences. Moreover, a company may find itself under investigation for failure to prevent tax evasion. HMRC has already shown itself willing to act having arrested a number of people to date for suspected furlough fraud.
Tackling Racial Bias in UK Courtrooms
In early August, it was decided that defendants are no longer required to state their nationality at their first appearance before the UK's criminal courts. Under Theresa May's government, the policy was introduced as part of the "hostile environment" regime and was aimed at the expedited removal of foreign criminals from the UK. Failure to provide the correct information was punishable with a prison sentence and a fine.
The policy has now been recognised as an example of racial bias in the criminal system. A decision by the Criminal Procedure Rule Committee ruled that under the Data Protection Act 2018, the collection of nationality data at the beginning of a case was unnecessary, and HMCTS informed magistrates that the practice should cease with "immediate effect." Only those convicted and sentenced to prison can now be asked for their nationality for possible deportation.
The change in stance follows a report published in May 2020 which found that 96% of practitioners surveyed did not support the policy. It reported that inserting the issue of nationality into the criminal process from the outset polluted the sanctity of a fair trial and that ultimately, the policy undermined the criminal justice system and the rule of law.
Diversity and the Financial Conduct Authority
Despite maintaining a "diversity dashboard" of its own diversity statistics, the FCA does not track the racial and ethnic composition of the industry that it monitors. Over the years, the FCA has disclosed the diversity statistics of its own staff, with the number of Black, Asian and minority ethnic (BAME) employees increasing to 26% in its 2019 annual report, compared to 21% in 2014. The incoming chief executive of the FCA, Nikhil Rathi, has spoken about his plans to "shake up diversity and culture" at the FCA, noting that there was now an opportunity to think creatively about how resources for the FCA and talent could come from many more parts of the UK than historically.
The FCA has recognised that it must ensure financial services proportionately represent the population it serves. Amongst other efforts, it has supported and encouraged the increase in the number of people from BAME backgrounds at a senior position of leadership internally, suggesting this reaches 13% by 2025. However, the FCA, which regulates thousands of financial firms across the country, has confirmed that it is not collecting diversity data within the financial sector. This data gap emerged during a time where the FCA observed a risk that firms may reduce their focus on the importance of diversity as they redirect resources in response to the global pandemic.
Challenges faced by firms during the pandemic have also come at a time when diversity and inclusion are, arguably, under more intense scrutiny than ever before amongst many professions in the UK. It is hoped that the FCA achieves success at leading by example and setting the tone from the top. Part of its role is to promote a healthy culture and diversity amongst regulated firms, noting recently that "truly safe cultures support . . . diversity with an approach to inclusion that enables employees to bring their whole selves to work, and that creates a safe environment for people to present differing views, challenge accepted norms, and even call out where things may be going wrong."
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. 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.