UK Economic Crime Group: Enforcement Update
In this edition of the UK Enforcement newsletter, we provide an update on recent anti-corruption and fraud developments, as well as other economic crime issues in the UK. We consider recent enforcement actions by the Serious Fraud Office (SFO), Financial Conduct Authority (FCA) and the National Crime Agency (NCA). We comment on the ninth Deferred Prosecution Agreement (DPA) negotiated with the SFO, as well as guidance issued by the SFO in relation to DPAs.
We also consider the impact of the UK/EU Agreement on their ongoing relationship in connection with criminal matters following the end of the Brexit transition period. In addition, we look at various reviews and inquiries into current legislation and international standards, as well as two reports regarding the FCA's regulatory conduct.
In terms of enforcement news, we consider:
- Update on the use of Unexplained Wealth Orders (UWOs) by the NCA
- New Memorandum of Understanding (MOU) agreed between the SFO and Competition and Markets Authority (CMA)
- SFO guidance on DPAs
- DPA agreed between SFO and Airline Services Limited
- FCA investigation into Airbnb over financial crime controls
- Market abuse regulatory action across Europe
- NCA Annual Report on Suspicious Activity Reports (SARs)
In relation to governmental matters and legislative reform, we discuss the following:
- Brexit impact on Europol and European Arrest Warrants
- FRC review into auditors' obligation to detect fraud
- UK Government continues consideration of Corporate Criminal Liability
- FCA criticism by Connaught Review and Gloster Review
Considering social commentary, we look at measures intended to assist with tackling diversity disparity amongst the judiciary, and the review of potentially imbalanced police "stop and search" powers.
Update on UWO Use by the NCA
Two notable UWO cases have provided recent success for the NCA, with the first UWO to yield recovery of alleged proceeds of crime and the challenge to the first ever UWO being refused by the Supreme Court in the past few months.
In early October 2020, the NCA was able to recover almost £10 million worth of assets that had been the subject of a UWO obtained by the NCA in July 2019. The subject of the investigation, businessman Mansoor Hussain, was alleged to have links to individuals involved in serious organised crime, including drug trafficking, armed robberies and supplying firearms. This UWO is notable as it was based solely upon a suspicion of involvement in serious organised crime, rather than being based on underlying criminal convictions. Having obtained the UWO, the NCA was able to seek information from Mr Hussain regarding the details and extent of his interest in eight properties, which were believed to be funded by criminal enterprise. Following provision of that information, the NCA was able to reach a settlement with Mr Hussain which resulted in him forfeiting ownership of the properties, as well as other assets and cash, with a total value of £9.8 million. In this case, the NCA was able to reach a settlement rather than having to bring civil recovery proceedings. It remains to be seen what success the NCA will have if they are required to go before the courts in order to obtain recovery of assets which have been the subject of a UWO.
Separately on 21 December 2020, in a further success for the NCA, the Supreme Court refused permission to appeal the decision of the Court of Appeal in the case of the UWO granted against Mrs Zamira Hajiyeva, the wife of a former Azerbaijani banker. As we reported in our April 2020 Enforcement Update, the Court of Appeal had dismissed Mrs Hajiyeva's appeal in her claim for discharge of a UWO which required her to explain the financial source of her £15 million London home and a £16 million shopping spree in Harrods. Following the Supreme Court's decision, Mrs Hajiyeva has now exhausted her rights of appeal and will need to comply with the UWO by explaining the source of the funds used to purchase her assets. If she is unable to do so, the NCA will be able to bring civil recovery proceedings in relation to those assets.
While these successes demonstrate that UWOs are a powerful tool in the NCA's arsenal, their use remains relatively limited. With it now being three years since the NCA gained the power to apply for UWOs, there have only been three public cases, yielding a total of six UWOs. With the completion of the Hussain case, the success in the Hajiyeva matter and the end of the Aliyev case (which we previously reported on in our July 2020 Enforcement Update), it will remain to be seen whether in 2021 the NCA is able to use the resources that have now been freed up, as well as the learnings from these cases, to bring further UWOs before the court in appropriate cases.
New MOU Agreed Between SFO and CMA
On 21 October 2020, the SFO and the CMA entered into a new MOU, extending their relationship and outlining their intention to cooperate in the investigation and prosecution of criminal cartels. The MOU is intended to ensure cooperation and the most efficient use of resources and expertise when investigating and prosecuting criminal cartel activity. The criminal cartel offence was established by Section 188 of the Enterprise Act 2002 and can be investigated by the SFO, the CMA or jointly by both agencies. Historically, the SFO has not prosecuted these types of offences, but with the release of this new MOU, it appears to be considering an extension of the cases it is willing to take on, as well as ways to cooperate further with the CMA.
The MOU sets out how the SFO and the CMA will engage with each other to investigate cartel offences. Going forward, initial enquiries for these offences will be conducted by the CMA, with the SFO providing any information it receives that suggests criminal cartel activity to the CMA for investigation. After initial enquiries, the CMA may refer a case to the SFO if it considers that it would be more appropriately dealt with by the SFO. The SFO will then determine whether or not to accept the matter for investigation. In addition, the MOU sets out the basis for the sharing of confidential information gathered in the course of investigations and the terms on which it can be shared between the agencies. The MOU recognises the differing competencies and focuses for each agency, allowing each to play to their own strengths when dealing with cartels, which should result in greater efficiency and more effective investigations and prosecutions.
SFO Releases Guidance on DPAs
On 23 October 2020, the SFO released guidance on DPAs, adding a new chapter to the publicly available sections of its internal handbook. The guidance does not mark any particular shift in policy nor provide any revelations in respect of how the SFO approaches DPAs. Given that the SFO has now negotiated nine DPAs, much of the guidance could be discerned from the judgments and documents associated with those DPAs. Nonetheless it is a welcome publication to have the guidance in one place and does provide further transparency and clarity as to the SFO's approach.
The guidance emphasises that the invitation to enter into DPA negotiations is within the power of the SFO, and there is no guarantee that a company will be offered a DPA even if it complies with the other aspects of the guidance.
The guidance reiterates throughout that cooperation is "a key factor to consider when deciding whether to enter into a DPA". Self-reporting, taking remedial action and preserving evidence are all included as actions which demonstrate cooperation. In relation to self-reporting, the guidance states that companies must make a self-report "within [a] reasonable time of the offending conduct coming to light". This is a welcome clarification, confirming that companies may have a grace period in which to conduct an internal investigation, to be able to make an informed decision on whether the conduct requires self-reporting. The issue of whether to waive privilege remains a less clear element of cooperation. On the one hand the guidance states that a company failing to waive privilege will not be penalised, but on the other hand, the company will also not necessarily be able to show the requisite cooperation to be eligible for a DPA.
While not providing any substantive changes, having this guidance published provides companies with further food for thought when considering whether to self-report and in determining what cooperation may look like once engagement with the SFO has commenced.
DPA Agreed With Airline Services Limited
On 30 October 2020, the Hon. Mrs Justice May approved the DPA between the SFO and global aviation services group Airline Services Ltd (ASL). With this ninth DPA, we now have a good understanding of the requirements on a company to position itself to be eligible for a DPA, with a clear emphasis on self-reporting and cooperation. In this case, the SFO has achieved another substantial settlement and it seems likely that the trend of an increasing number of DPAs being agreed will continue in 2021.
As part of the DPA, ASL accepted responsibility for three counts of failing to prevent bribery between 2011 and 2013, arising from its use of an agent to secure three contracts worth over £7.3 million to refit commercial airliners for Deutsche Lufthansa AG and one of its subsidiaries. In delivering her judgment, May J described ASL's compliance procedures during the period of 2011 to 2013 as "woefully inadequate", concluding that from the implementation of the UK Bribery Act 2010 in July 2011 to the start of 2015, ASL did not have in place any adequate procedures and as a result failed to prevent bribery.
The offending came to light following an unrelated internal investigation initiated in 2014 by ASL, which subsequently self-reported to the SFO in July 2015. In approving the DPA, May J made reference to various factors which rendered a DPA appropriate in this case, including ASL's timely self-reporting, its active cooperation with the SFO throughout the subsequent investigation, the fact that the offending was not recent and that ASL took immediate steps to identify the deficiencies within its compliance programme.
ASL agreed to pay a financial penalty of £1.23 million, reflecting a 50% discount granted to the company for its early self-report and cooperation, as well as disgorgement of profits and a contribution to the SFO's investigative costs. ASL is also obliged to cooperate fully with the SFO and any other law enforcement agencies on matters relating to the ongoing investigation. As with other DPAs, we may see charges in 2021 in relation to individuals involved in this matter.
FCA Investigates Airbnb Over Financial Crime Controls
In November 2020, accommodation company Airbnb announced in a Securities and Exchange Commission (SEC) filing ahead of its US initial public offering that it was under investigation by the FCA. The FCA is investigating concerns that the company's UK operations may be facilitating the flow of illegal funds through criminals recruiting hosts and booking sham stays, with a focus on the effectiveness of the company's internal financial controls to detect money laundering and other financial crime.
The SEC filing referred to the FCA's public "Dear CEO" letter of July 2019, in which it called on UK electronic money institutions to review their compliance with the requirements on safeguarding of customer funds and to notify the FCA in the event they identified any material non-compliance. According to the filing, Airbnb notified the FCA that it had identified gaps in its compliance and was undertaking remedial action. In August 2020, Airbnb submitted a gap analysis to the FCA of its compliance with the requirements of the fourth and fifth Money Laundering Directives, which identified in-progress remedial action.
The FCA, in turn, appointed a third-party skilled person to perform a review of Airbnb's safeguarding systems and controls. As part of its review, the skilled person identified certain issues with Airbnb's anti-money laundering and counter-terrorist financing systems and controls. The FCA's investigation continues amidst Airbnb's floatation on the NASDAQ in December 2020.
Market Abuse Regulatory Action Across Europe
In December 2020, the European Securities and Markets Authority (ESMA) published its report in relation to administrative and criminal sanctions imposed under the Market Abuse Regulation in 2019, collating data from each Member State of the EU. Although there was a decrease in the number of sanctions levied, the value of these has increased substantially. This appears to fit with ESMA's prior stated intention to focus on market abuse within its 2019 work plan.
In 2019, national competent authorities across the EU imposed 279 administrative sanctions and measures, totalling approximately €82 million in financial penalties. A further 60 criminal sanctions were issued in the same period, within financial penalties of €6 million. This total of €88 million is a significant increase from the €10 million worth of fines levied in 2018. However, the figures show an inconsistent application across the EU; the authorities in certain countries have taken a lead in market abuse cases, with 17 Member States implementing administrative sanctions and only two Member States (Germany and Poland) imposing criminal sanctions.
The UK was among the 11 Member States which did not impose any administrative nor criminal sanctions in 2019 for breaches of the Market Abuse Regulation. Nonetheless, the FCA used its annual report in September 2020 to highlight that detection of market abuse remains a key priority for the FCA. The FCA is focused on improving the quality of firms' transaction reports in order to use these to identify and investigate potential market abuse. In the period 1 April 2019 to 31 March 2020, the FCA received 5,336 Suspicious Transaction and Order Reports from the firms it regulates, as well as 788 other external notifications about potential market abuse. As a result, the FCA opened 415 preliminary market abuse reviews in the same period, following which 53 enforcement investigations have been opened. In addition, 102 non-enforcement actions have been taken, including supervising interventions and issuing letters of education to firms.
Despite the end of the Brexit transition period on 31 December 2020, the EU market abuse regime largely continues to apply in the UK as a result of the Market Abuse (Amendment) (EU Exit) Regulations 2019. Given the FCA's focus on market abuse and the volume of new investigations in 2019 / 2020, it will be interesting to see how many of these investigations come to fruition and whether any sanctions will be imposed.
NCA Annual Report on SARS
In its annual report on SARs, the NCA stressed its commitment to fighting crime that threatens the economy and summarised its successes in doing so, highlighting the work done by both the UK Financial Intelligence Unit (UKFIU) and HMRC in this area.
Between April 2019 and March 2020, the UKFIU, which operates the reporting system for suspicious and money laundering activity, received over 570,000 SARs (an increase of 20% from the previous year) and over 62,000 Defence Against Money Laundering applications (an increase of 81% from the previous year). The majority of SARs originated from banks and building societies, which made up over 80% of the SARs. The most significant growth in SARs was seen from financial technology (fintech) companies, which had a 264% increase in SARs filed from the previous year. This is not surprising given the FCA's focus on electronic money institutions, as demonstrated by the FCA's Dear CEO letters of July 2019, in which it called on UK electronic money institutions to review their compliance with the Money Laundering Regulations.
The UKFIU also highlighted the effectiveness of SARs in relation to combatting terrorist financing, as well as its engagement with the National Terrorist Financial Unit, the Office of Foreign Sanctions Implementation and other public sector organisations.
Looking ahead to 2020/2021, the UKFIU expects the increasing in numbers of SARs to continue. In order to promote further efficiency, the UKFIU has produced a new Target Operating Model and Organisational Design which it will implement and put into action in the coming year.
Legislative Reform and Government Matters
Brexit Impact on Europol and European Arrest Warrants
The start of 2021 was heralded by the agreement determining the new relationship between the UK and the EU following the end of the Brexit transition period on 31 December 2020. Whilst the UK's primary legislation concerning law enforcement and criminal proceedings remains largely unchanged, there are some notable provisions that will affect cross-border criminal matters.
The UK will continue to cooperate with and exchange information with Europol (the EU's law enforcement agency) and Eurojust (the EU's body for judicial cooperation in criminal matters), with the UK designating a specific liaison to each body. As part of this continued cooperation, personal information, such as DNA profiles and vehicle registration numbers, will continue to flow across the Channel. Indeed many of the annexes to the 1,200-page agreement concern the technical arrangements for the exchange of such data, with each state to be responsible for recording, notifying and storing criminal record information. Both sides will also continue to share in their efforts to prevent and stem money laundering and terrorist financing.
However, as the UK will no longer be able to issue or detain individuals pursuant to a European Arrest Warrant (EAW), arrest warrants and extradition will have to be requested through bilateral channels, which require parties to cooperate in instances of serious crime such as terrorism, narcotics trafficking and kidnapping. Similarly freezing and confiscation orders will pass through these bilateral channels. Whether these channels will be as efficient as the previous framework remains to be seen, as the agreement carves out exceptions to "cooperation", including lack of double criminality.
While the agreement stipulates that EAWs issued but not executed before the end of 2020 remain valid, it is silent in relation to executed EAWs where individuals have not yet been extradited from the UK. This question is currently before the court, with the applicant in the leading case arguing that such EAWs are no longer valid, while the Crown Prosecution Service argues that the EAWs were lawful when issued and continue to be, so extradition can go ahead. The outcome of this case will impact a number of EAWs executed during 2020 and once decided will fill the gap left by the UK / EU agreement.
FRC Launches a Review Into Auditors' Obligation To Detect Fraud
On 20 October 2020, the FRC announced proposals to amend UK auditing standard ISA (UK) 240 which sets out an auditor's responsibilities to detect fraud. The amended standard has been put out to consultation, with interested parties invited to comment before 29 January 2021. The amendments are intended to address concerns raised by Sir Donald Brydon's review into the quality and effectiveness of audit.
In particular, the proposed amendments are intended to make clear that auditors are obliged to plan and perform audits in order to obtain reasonable assurance about whether audited financial statements are free from material misstatement due to fraud. Providing "reasonable assurance" is a high, but not absolute, level of assurance. The proposed amendments also highlight the need to maintain professional scepticism when conducting audits, in order to ensure that the auditor remains unbiased. The request for comments within the proposal sets out 11 specific questions regarding the proposed amendments. Following the closure of the consultation period and subject to those comments, the intention is to have the amendments become effective on 15 December 2021.
In addition to the FRC reviewing ISA (UK) 240, the International Auditing and Assurance Standards Board (IAASB) is undertaking a review of ISA 240. However, the FRC consider that they should implement amendments in the short term, as it may still be a few years before the IAASB is able to proceed with revisions to the international standard.
UK Government Continues Consideration of Corporate Criminal Liability
The effectiveness of the UK's approach to criminal liability by corporations has been discussed frequently in the past few years and seems set to remain on the agenda for the foreseeable future.
On 23 October 2020 the Parliamentary Treasury Committee launched a new inquiry into the UK's progress in combatting economic crime. The inquiry will have two strands, looking at: (1) anti-money laundering systems and the sanctions regime, with a focus on the FinCEN papers and the works of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS); and (2) consumers, including emerging trends as a result of the coronavirus pandemic and Authorised Push Payment Fraud. During November, the Committee sought comments on the work of OPBAS, the impact of the FinCEN papers, corporate liability for economic crime and the work of Companies House. The Committee is expected to seek oral evidence during 2021, with a report to follow.
Separately, on 3 November 2020, the Law Commission announced that it had been instructed by the Government to review the UK's corporate criminal liability legislation and consider options for reform. The announcement of the review follows the January 2017 "call for evidence" during which the Ministry of Justice carried out a public consultation on corporate criminal liability. The findings from this consultation were not published and the evidence submitted was subsequently determined to be inconclusive. The Law Commission's report is likely to examine whether: a) the "failure to prevent" offence should be extended; and b) the "identification doctrine" is fit for purpose. The intention is to publish the report by the end of 2021.
On 13 January 2021, Members of Parliament debated an amendment to the Financial Services Bill which would provide for criminal liability for FCA-regulated companies who failed to prevent fraud, false accounting or money laundering being committed by their employees. However, the House of Commons declined to vote on the amendment, while the Law Commission review is ongoing. Given that the Law Commission report is not expected until late 2021, it seems unlikely that any legislative reform will be enacted before 2023.
FCA Criticised by Connaught Review and Gloster Review
On 17 December 2020, the FCA published the Connaught review as well as its response to it. This matter was in relation to the Connaught income fund which was an unregulated collective investment scheme which collapsed in December 2012. The Connaught review was created to review the response and investigations by the FCA and its predecessor, the FSA, in relation to the Connaught Fund between February 2007 and March 2015. The delay in commencing this review was a result of postponing matters to avoid prejudicing the enforcement actions in respect of this matter. The Connaught review identified five lessons to be learned from the matter for the FCA with reference to improved coordination between its teams and an updated system for whistle blowers.
In a similar investigation which was also published on 17 December 2020, the Gloster review into the FCA's supervision of London Capital and Finance identified nine recommendations for improvements by the FCA. As we reported in our June 2019 Enforcement Update, this matter arose from an alleged £236 million mini-bond scam. Concerns were raised in relation to the FCA's supervision of London Capital and Finance as well as the regulation of mini-bonds. Investigations by the SFO and FCA into this fraud are continuing.
As a result of these two independent reports, the FCA accepted that issues had been identified and accepted all of the recommendations from both reports. The FCA's response outlined eight key actions to be undertaken in the next six months, which include restructuring the FCA for increased efficiency and effectiveness by having two further Executive Directors and a Chief Data, Information and Intelligence Officer, as well as improving training for staff. The FCA is also going to focus on tackling and disrupting online scams.
Reviews of Police "Stop and Search" Powers
Over the past two years, police use of stop and search has increased at a steady rate, returning to pre-2013 levels, when reforms were implemented to reduce reliance on those powers. Yet the real cause for concern is not the increased numbers themselves, but that black Britons continue to be disproportionally searched. Black people are nine times more likely to be stopped and searched than white people, and this disparity has increased since 2010, according to a briefing paper put before the House of Commons in November 2020.
The briefing paper is categorical in its findings that"[t]here is no evidence to suggest that BME people are more likely to carry items that officers have powers to search for [or]… to be involved in criminality associated with stop and search enforcement". Rather, the briefing paper concludes, "[s]ocietal racism and its effects (including unconscious bias in some officers) appears to explain most of the disparity in stop and search rates by ethnicity".
The briefing paper's findings are underpinned by the inverse correlation between the number of searches and their related arrest rate; that is, the rate of arrest resulting from a search has steadily increased as the number of searches themselves has dropped. When, in 2010, there were over 1000 searches, only 8% of those searches resulted in an arrest. Meanwhile in 2017, there were 280 searches, the lowest number of searches in the past ten years, and yet the arrest rate related to those searches was the highest, at 17%.
Equally important to highlight is that over 75% of searches resulted in officers finding nothing. Of the instances where searching officers were able to find something, most often it was drugs or stolen property. Offensive weapons, such as knives, were only found in 11% of such "successful" searches, undercutting the argument that stop and search will prevent knife crime.
Both the briefing paper and a separate review by the Independent Office for Police Conduct (IOPC) have put the spotlight on London, as the Metropolitan Police Service (MPS) conducts nearly half of all stop and searches in the country. Responding to community concerns, the IOPC was told of concerning instances in which the MPS used stop and search powers. The IOPC has since made series of recommendations to address these concerns, all of which were adopted by the MPS in full. Whether these remedial measures will result in better policing and community relations remains to be seen.
Tackling Diversity Imbalance in the Judiciary
Judges will participate in diversity training, among other efforts to improve inclusion in the judiciary, according to the action plan for "Judicial Diversity and Inclusion Strategy in 2020/25."
At present women represent only 26% of judges in the High Court, while BAME judges make-up only 4%. While these figures have improved in recent years, "[t]here is still a long way to go to realise a judiciary that fully reflects the society it serves," said Lady Justice Simler, chair of the Judicial Diversity Committee. Part of the problem, the Committee acknowledges, is that women and BAME individuals are poorly represented in the wider pool of experienced legal professionals from which candidate judges are selected. For example, nearly all High Court judges began their careers as barristers, yet only 32% of barristers with more than 15 years' experience are women, while 14% are BAME.
The Committee outlined a five-year plan, that would: 1) encourage applications for judicial office from the widest pool of applicants; 2) support the career aspirations of all serving judicial office holders, including those from less traditional backgrounds; and 3) provide training to all judicial office holders to "promote positive behaviour and a culture of respect that is sensitive to different needs and intolerant of any discrimination, bullying and harassment".
To help foster this cultural change, training intended to address implicit bias for judges will be in place by 2022. Meanwhile, to support applications, the already established Judicial Work Shadowing Scheme will continue to pair eligible candidates with serving judges so as to provide more insight into the profession and application process. Additional measures will also be taken to engage with the public at large so that students from socially deprived areas are equally exposed to the legal profession. Partnerships with legal education charities and the Department for Education will connect volunteer judges to schools and universities to make clear that "judicial careers are available to people of all backgrounds".
© Arnold & Porter Kaye Scholer LLP 2021 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.