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 economic crime issues in the UK. We consider recent regulatory and enforcement actions by the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA) and the Financial Reporting Council (FRC), as well as the ongoing strains on the criminal justice system as a result of the pandemic.
Considering social commentary, we look at Black History Month, the UK government’s review into the Human Rights Act and the plight of refugees from Afghanistan, as well as considering the FCA’s discussion paper on improving diversity and inclusion in the financial services sector and reviews of the Metropolitan Police.
In terms of enforcement, we consider the following topics:
- The SFO announces three further Deferred Prosecution Agreements (DPAs)
- Petrofac fined £77 million for failure to prevent bribery
- British American Tobacco accused of bribing former Zimbabwean leader, Robert Mugabe
- FCA actions in relation to various money laundering concerns
- Increasing focus by the FCA on cryptocurrency
- The FRC’s proposals to enhance governance over audit firms
- Ongoing effects of COVID-19 on the Criminal Justice System
- Recent updates from the European Union
With respect of social issues, we discuss the following:
- Black History Month
- Government review of the Human Rights Act
- Afghan Refugees in the UK
- FCA, Prudential Regulation Authority (PRA) and Bank of England set out plan to improve diversity and inclusion in the financial services sector
- Investigations into the culture of the Metropolitan Police
The SFO Announces Three Further DPAs
The SFO has agreed to three new DPAs in recent months, and has published further details in relation to a prior DPA, following the lifting of reporting restrictions. This takes the number of DPAs agreed to between the SFO and companies to 12, with these new DPAs providing further indications of the approach the SFO takes when considering a DPA.
On 28 April 2021, the SFO published the Statement of Facts accompanying the DPA which had previously been agreed to with Serco Geografix Ltd (Serco) on 4 July 2019, after reporting restrictions on its publication were lifted. Details came to light of how Serco defrauded the Ministry of Justice by hiding the extent of the profits being made between 2010 and 2013 by its parent company, Serco Limited, through fraudulent reporting and related false accounting. The Statement of Facts reveals details of the extent of cooperation provided by Serco, which included refraining from interviewing witnesses (and so allowing the SFO to conduct first interviews with witnesses), and providing access to email accounts of employees and former employees with only a very narrow privilege review, as well as agreeing a waiver of privilege in relation to certain material.
As we reported in our April Enforcement Update, two former Serco executives were acquitted in relation to this matter in April 2021, following disclosure issues being identified in the course of their trial. It was as a result of the collapse of this trial that the Statement of Facts was published, as the prior reporting restrictions were no longer required.
The issue of seeking to hold individuals responsible where companies are able to agree to a DPA with the SFO also arises in the three new DPAs that have been recently approved. The first, in relation to Amec Foster Wheeler Energy Limited (AFWEL), contains introductory wording stating that the court “made no findings of fact or any determination or assessment of the culpability of any individuals who may have been involved in the company’s wrongdoing.” The other two DPAs were agreed simultaneously and relate to two unnamed UK limited companies, with the names of the companies withheld to ensure a fair trial for related individuals. To date the SFO has failed to successfully prosecute any individuals where DPAs including facts indicating illegality have been agreed with the relevant companies. It appears that with these three DPAs, more thought has gone into ensuring there is no prejudice to individuals, in an attempt to ensure successful prosecution.
The AFWEL DPA also provides a cautionary tale for those involved in company acquisitions, as the company was bought during the SFO pre-investigation stage. Its new parent company, John Wood Group PLC, was unaware of the SFO investigation and did not take it into account in its valuation of AFWEL, as the investigation was announced shortly after its offer was made and the offer was based only on publicly available information. This highlights the necessity and importance of pre-transaction anti-bribery and corruption due diligence, in order to identify issues that may arise and be inherited.
As will be apparent, with the three new DPAs, given the anonymity and reporting restrictions, it will be interesting to see how the SFO approaches the investigation and prosecution of individuals, and we will certainly be providing further updates as these matters progress.
Petrofac Fined £77 Million for Failure to Prevent Bribery
On 4 October 2021, Petrofac Limited (Petrofac) was ordered to pay £77 million following its guilty pleas in respect of seven counts of failure to prevent bribery contrary to the Bribery Act 2010, relating to conduct between 2011 and 2017. Petrofac admitted that former senior executives of the Petrofac group had paid more than £32 million in bribes in order to secure more than £2.6 billion worth of contracts for the company in the oil and gas sector in Iraq, Saudi Arabia and the United Arab Emirates.
This case is another example of the perils of using agents and the necessity of monitoring such agents, with senior executives using elaborate schemes involving agents to obscure the payment of bribes. The methods used included paying agents across borders, disguising payments through sub-contractors, creating fake contracts for fictitious services and passing bribes through multiple agents in multiple countries.
On the same day, David Lufkin, former Head of Sales at Petrofac was also sentenced, having previous pleaded guilty to 11 counts of bribery in 2019 and a further three counts in January 2021. He was given a suspended sentence of two years. In addition to pleading guilty, Mr Lufkin cooperated with the SFO investigation, which is a factor that would have been taken into consideration during his sentencing.
BAT Accused of Bribing Former Zimbabwean Leader Robert Mugabe
A Bureau of Investigative Journalism report has claimed that British American Tobacco (BAT), Britain’s eighth-largest company, was involved in facilitating bribes to former Zimbabwean leader Robert Mugabe and officials in South Africa. The report also suggests that the company used illegal surveillance against its rivals in both countries.
As part of a joint investigation by the Bureau of Investigative Journalism, the BBC’s Panorama programme and the University of Bath, leaked documents were identified which appeared to reveal payments of between $300,000 and $500,000 to Mugabe’s political party, Zanu-PF in 2013, ahead of a critical election. The payments were allegedly made in return for the release of three agents who had been arrested while working for BAT. BAT was hoping to expand into Zimbabwe and had outsourced work to a South African private security company called Forensic Security Services (FSS), to monitor competition in the country on BAT’s behalf.
The investigation reported that the leaked documents suggested that in order to secure access to information on BAT’s competitors, FSS had bribed customs officials and police officers, as well as tapping the phones of rivals and placing tracking devices on their delivery vehicles. Additionally, FSS is said to have personally recruited and paid informants who were working at rival factories.
Although it is unclear whether the bribes were actually paid, the investigation suggests that BAT was aware of the negotiations. Amongst the leaked documents, the investigation reported identifying discussions around January 2013 of the donation to Zanu-PF, shortly after the release of the agents in early January. Charges against the arrested individuals were officially withdrawn on 13 March 2013 and it was reported that FSS’s operations for BAT in Zimbabwe resumed that same month.
It is currently unknown whether any law enforcement bodies are investigating this matter, following the media coverage. The SFO in particular may be asking some questions of the company, given that it was only in January 2021 that the SFO closed a prior investigation into BAT, having concluded that the case did not meet the threshold for prosecution. It will be interesting to see whether a new investigation is launched in the near future.
FCA Actions in Relation to Various Money Laundering Concerns
Over the summer, the FCA has undertaken several actions in respect to money laundering concerns, highlighting once again to the firms it regulates, its zero tolerance approach in its role as money laundering regulator.
On 21 May 2021, the FCA sent “Dear CEO” letters to the retail banks it regulates, highlighting common failings that it is frequently identifying in its assessments of retail banks’ financial crime systems and controls. The FCA flagged a number of issues associated with governance and oversight, including in particular the merging of roles between the business and compliance, negating the “checking” role of compliance. In addition, the FCA identified that many firms had poor quality business-wide risk assessments and generic customer risk assessments, which together result in firms having a limited recognition of the risks of money laundering. Further the FCA highlighted inadequate performance of or recording of customer due diligence and failure to consider whether enhanced due diligence is required. The FCA also identified issues with suspicious activity reporting, noting that firms frequently do not have appropriate measures in place to investigate potential suspicious activity, once reported internally.
The FCA required the retail banks receiving the letter to conduct a gap analysis by 17 September 2021 in light of the common weaknesses identified, with firms expected to resolve any identified gaps. While the FCA is not requiring firms to report on the outcome of this gap analysis, it is to be expected that in future audits of retail banks, the FCA may request documentation on this issue and so those affected will need to comply to avoid enforcement action in the future.
Similarly on 9 September 2021, a further “Dear CEO” letter was sent by the FCA and PRA to firms conducting trade finance activity, requiring them to conduct financial crime risk assessments of their systems and controls for the detection of money laundering, sanctions evasion, terrorist financing and fraud. The common weaknesses identified in relation to money laundering issues included overly generic client risk assessments and limited credit analysis. As risk assessments appear to be a thematic risk that the FCA has identified, it seems likely that the FCA will continue its focus on these and firms should consider how robust their risk assessments are.
In addition, on 31 August 2021, the FCA reminded firms about the continuing need for strong systems and controls to identify potential financial crime, in response to the developments in Afghanistan. While the country is not currently listed as a high-risk jurisdiction under the money laundering regulations, risk sensitive enhanced due diligence measures should be applied. Firms were specifically reminded that they should ensure they are monitoring and assessing transactions to Afghanistan, as well as reporting any suspicious activity to the National Crime Agency.
Separately in the enforcement sphere, the FCA has commenced an investigation into digital bank, Monzo, in respect of potential breaches of anti-money laundering and financial crime controls between October 2018 and April 2021. Limited information is available while the investigation is ongoing, with the disclosure of the investigation having been made in Monzo’s annual report. Nonetheless, this emphasises the FCA’s focus on money laundering and shows that the FCA is looking to enforce against firms where they find shortcomings.
Increasing Focus by the FCA on Cryptocurrency
Research conducted by the FCA estimates that around 2.3 million adults in the UK hold crypto-assets. As interest in cryptocurrency continues to grow, the FCA has identified the FinTech sector as an area for more regulation and has in the past few months taken a number of steps, seeking to protect investors and alleviate money laundering concerns. The FCA is keen to ensure that investors are aware of the risks that they face in investing in crypto-assets and frequently warns that investors should be prepared to lose all of the money they invest in such assets.
In early June 2021, the FCA announced that it would extend the date for the temporary registration regime for crypto-asset businesses until 31 March 2022. This means that any business which had applied to the FCA prior to December 2020 to continue their UK operations while the FCA reviewed their registration applications under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), will be able to continue operating past the prior deadline of 9 July 2021. This demonstrates the complexity of regulating these businesses, as the FCA is still getting to grips with reviewing registrations and considering what firms need to do to be approved to conduct regulated activities in the UK.
On 26 June 2021, the FCA published a supervisory notice in respect to Binance, the world’s largest cryptocurrency exchange. The notice makes clear that Binance is not permitted to undertake any regulated activities in the UK without prior consent from the FCA. It appears that as part of the registration process under the MLR 2017, Binance had failed to provide the information requested by the FCA and as a result, the FCA was unable to review or process its registration. The notice was updated on 25 August 2021, to explain that Binance had now provided the required information. However, the FCA explained that given the difficulties with supervising its activities, Binance is still not permitted to undertake regulated activities in the UK. It remains to be seen whether the FCA will be able to get comfortable with the risks associated with Binance’s business and approve it for regulated activities in the UK.
On 24 July 2021, the FCA issued a consumer warning in relation to Coinburp Limited, which had published promotional material relating to the launch of Coinburp $BURP Token. The FCA noted that Coinburp does not yet hold FCA registration as required by the MLR 2017, although it had applied for such registration. However, this company is not eligible for the temporary registration regime as it was not already carrying on its business in the UK prior to December 2020. The FCA noted in its warning that the activities of Coinburp are not covered by the Financial Services Compensation Scheme and that consumers would not have recourse to the Financial Ombudsman Service in respect of these tokens.
It seems clear that the FCA is currently focused on its responsibility to regulate crypto-asset businesses and is intent on protecting consumers and combatting the risks of such assets being used for money laundering. We expect to see further action from the FCA in this sphere in the coming months.
FRC’s Proposals to Enhance Governance Over Audit Firms
On 26 August 2021, the FRC announced proposals to bolster the Audit Firm Governance Code (Code) in order to promote high-quality audit and audit market resilience. Currently, the Code applies to the Big Four firms, Deloitte, Ernst & Young (EY), KPMG and PwC, and to other firms auditing FTSE 350 companies. It is also likely to apply to other types of public interest entities in the future.
The proposals come after a series of high-profile corporate collapses in which the quality of audits has been called into question, and various enforcement actions that have been brought against audit firms and their employees. For example, on 25 August 2021, the FRC issued a fine of £2.2 million against EY, and a further fine of £70,000 against its former partner, Mark Harvey, following serious failings in the 2017 audit of Stagecoach, a London-listed transport company. It was found that EY had failed to obtain sufficient and appropriate audit evidence to support the company’s financial statements, even though this had been identified previously as an area of significant risk requiring a heightened audit response.
More recently, on 1 September 2021, the FRC announced a formal complaint against KPMG, a former KPMG partner and certain KPMG employees, for allegedly providing false and misleading documents about the audits of two UK companies. Both investigations were opened as a result of KPMG self-reporting this issue. A hearing to determine whether KPMG or its related individuals committed misconduct is scheduled for early next year.
Earlier this year, we reported on the consultation initiated by the Department for Business, Energy and Industrial Strategy in response to these collapses, which highlighted the waning confidence in audit and corporate governance. In furtherance of this consultation, the FRC plans to revise its Code to feature key measures such as an operational separation of the consulting and audit divisions firms, and a separation of roles between board chair and senior partner or chief executive.
The consultation is due to conclude in November 2021, with a revised Code due to be published in 2022. If the proposals are adopted into the Code, it is likely that the audit industry will be subject to a significant overhaul, with robust measures in place in order to manage conflicts of interest, and maintain the integrity, independence and quality of the audit function.
Ongoing Effects of COVID-19 on the Criminal Justice System
Over the past 18 months, we have reported on the adverse effects that the pandemic has inflicted across the justice system. Whilst many of these issues remain, with the strain on the criminal courts being at the forefront, further challenges have emerged that will require addressing.
In May 2021, the Crown Prosecution Service (CPS) released statistics demonstrating that between 20 March 2020 and 31 March 2021, approximately 30% of cases had been incorrectly charged under the Coronavirus Act 2020. This legislation codifies the government’s measures intended to tackle the virus, including lockdown orders, requiring individuals to wear face coverings in public, and limiting public gatherings. Shortly after the publication of these findings, further figures were released showing that more than 4,000 people in the UK had been prosecuted for a coronavirus offence through the single-justice procedure, a fast-track prosecution which is often criticised for its lack of transparency. Those convicted under this process could, however, request a rehearing and for their convictions to be voided.
In response to the incorrect charges, the CPS noted that everyone in the criminal justice system, and particularly those in enforcement, have had to contend with the pace of the legislation being implemented, whilst balancing the protection of public safety and the interests of justice. Notwithstanding the obvious challenges that enforcement of legislation brought about, both from the perspective of enforcement agencies and for members of the public, the legislation itself has been criticised for being overly complex, draconian and controversial. A House of Lords committee noted that with the COVID-related legislation, some of the most significant and far-reaching laws had come into effect as secondary legislation, bypassing prior approval from Parliament.
The legislation automatically lapses and must be renewed every six months, with the UK government having recently confirmed its intention to renew the emergency powers for a further six months up to March 2022. Although it has committed to allowing all of the temporary powers in the legislation to expire wherever possible, it will be interesting to see whether the government re-employs the full powers at its disposable in the coming months, amid growing criticisms.
Recent Updates from the European Union
Despite the UK’s departure from the EU, certain actions within the EU continue to have an impact in the UK, particularly for companies which are operating cross-border, in both the EU and UK.
On 28 June 2021, the EU Commission refused to provide its consent for the UK to join the Lugano Convention. In order to accede to the treaty, the UK would need to gain approval from each of the Member States, as well as the EU itself. With the EU Commission’s refusal and recommendation that member states refuse to provide their consent, the UK’s accession is unlikely to proceed. The Lugano Convention provides a set of rules for identifying which national court would have jurisdiction in cross-border disputes, as well as ensuring the enforcement of judgments throughout its member states. Without accession to the Lugano Convention, jurisdiction is likely to be more complicated to establish, with the risk of companies becoming involved in multiple and duplicative litigation in different jurisdictions. Moreover, companies are likely to find it more difficult to enforce judgments outside of the UK.
In early June 2021, the new European Public Prosecutors’ Office (EPPO) was launched, with the aim of combating crime against the EU budget, with a focus on fraud, corruption and serious cross-border VAT fraud. This provides a new prosecutor to tackle criminal activity that falls between the national jurisdictions of the member states and the limited powers of Eurojust, Europol and the EU’s anti-fraud office, OLAF. 22 of the 27 EU member states are involved in the EPPO, with Denmark, Ireland, Hungary, Poland and Sweden opting out. The EPPO is expected to deal with 3,000 cases annually.
On 6 May 2021, the European Banking Authority (EBA) launched a public consultation on its draft Regulatory Technical Standards in relation to creating a centralised database on anti-money laundering. The purpose of the database is to allow national regulators to have greater awareness of identified risks and weaknesses of banks operating in their jurisdiction, particularly where such weaknesses have been identified in other EU member states. The creation of the database itself has already been mandated by the EU, with the EBA consulting on how and what data will be collected, as well as what should be considered a “weakness” to be included within the database. The consultation closed on 17 June 2021, with the expectation that the consultation responses will be published later this year. It is not expected that the database will be operational until at least mid-2022.
Black History Month
October is Black History Month in the UK and has been celebrated annually since 1987, marking the history and achievements of Black people throughout history. This year the theme for Black History Month is “Proud To Be”, with the campaign focusing on providing a personal celebration of heritage and culture, encouraging people to share their individual stories and to talk about what they are proud to be.
The campaign follows a message of the Black Lives Matter movement, with a focus on people being able to live life to the fullest, without having to compromise who they are or downplay their diversity. As Catherine Ross, Editor at Black History Month UK, the driving force behind the campaign, says “everyone deserves the right to be Proud To Be everything they are and want to be in life.”
The legal profession is actively engaging in the “Proud To Be” campaign, with the Law Society sharing stories of Black lawyers from across the profession, starting with the President of the Law Society, I. Stephanie Boyce, who is the first Black office holder.
At Arnold & Porter, diversity and inclusion are core values and the firm has an unyielding commitment to inclusiveness and we look forward to celebrating Black History Month together. This is an opportunity to promote knowledge of the positive contributions to our society arising from Black excellence, and how to challenge stereotypes. We are very proud that the London office is led by Kathleen Harris, the first Black Managing Partner of any of our offices. Later this month we will be holding an event with Alexis Curtis-Harris of Penna, reflecting on what the future looks like for racial equality and what we can all do to play our part.
Government Review of the Human Rights Act
The UK government is currently undertaking a review of the Human Rights Act 1998, to consider the relationship between the UK courts and the European Court of Human Rights and the impact of the Human Rights Act on the relationship between the judiciary, executive and legislature. The government has received substantial criticism for this review, with critics suggesting that it is politically motivated and reflects frustration from within the government following individual successes on human rights grounds in numerous judicial reviews and immigration cases against the government.
Earlier this year, the Independent Human Rights Act Review (IHRAR) received evidence from 150 individuals and groups, and has been conducting roundtables and roadshows around the country. The IHRAR is now preparing its report, which is expected to be delivered to the Lord Chancellor by the end of October 2021. Following the recent cabinet reshuffle, this will now be Dominic Raab, who in the past has criticised the Human Rights Act, which has sparked fears that the Human Rights Act could be repealed entirely. At the Conservative party conference in early October 2021, Dominic Raab confirmed his intention to overhaul the Human Rights Act before the next general election.
Much of the evidence provided to the IHRAR has emphasised the positive impact of the Human Rights Act and the far reaching consequences for diluting or watering down human rights. A coalition of 220 charities, trade unions, human rights bodies and religious or belief groups established by Humanists UK has said: “While every system could be improved, and protecting rights and freedoms for all is a balancing act, our Human Rights Act is a proportionate and well-drafted protection for the fundamental liberties and responsibilities of everyone in this country. The act guarantees the rights to free speech and expression, to life, to liberty, to security, to privacy, to assembly, and to freedom of religion or belief. It prohibits torture and guarantees fair trials and the rule of law.” Similarly, the Parliamentary Joint Committee on Human Rights stated that they consider that there is no justification for the government to change the Human Rights Act.
It is a matter for all of us to show our support for the continuing application and protection of fundamental rights in the UK, and to ensure that any changes to the Human Rights Act are suitable and encourage greater protection of those fundamental rights.
Afghan Refugees in the UK
Following the rapid withdrawal of UK and US troops from Afghanistan and the advance of the Taliban, the humanitarian crisis has been horrifying to behold. The UK government has launched a resettlement scheme for 5,000 Afghan nationals, which could extend to up to 20,000 people in the coming years. The scheme provides priority to women and girls, as well as religious and other minorities, all of whom are most at risk of human rights abuses at the hands of the Taliban. However, the government has come under fire for its handling of funding for the refugees, with reports suggesting that around £400 million has been allocated to assist with resettlement, while it is estimated that an additional £557 million will be needed in the next few years.
Moreover, the Nationality and Borders Bill that is currently before the House of Commons includes criminal liability (with a jail term of up to four years) for individuals seeking refuge in the UK if they travel here by an illegal route. With the inherent dangers of the circumstances that refugees are fleeing, in their desperation, it is of course entirely common that at least some portion of a journey to the UK would encompass illegality. Such measures have the potential to criminalise the actions of refugees, from Afghanistan and elsewhere, at a time when the government is saying that it wants to support refugees. Punishing these people once they arrive in the UK is counterintuitive and betrays a lack of empathy for the difficulties that refugees face.
This of course says nothing for the people left behind in Afghanistan who are at risk from the Taliban. In particular, judges and lawyers, who over the years have upheld the rule of law in Afghanistan are likely to be targeted. It is understood that there are 270 female judges and 170 women lawyers and prosecutors based in the country, many of whom were unable to evacuate and find safe haven outside of Afghanistan.
FCA, PRA and Bank of England Set Out Plan to Improve Diversity and Inclusion in the Financial Services Sector
In a discussion paper published in July, the FCA, PRA and Bank of England, set out regulatory plans to improve diversity and inclusion in the financial services sector. Suggested policy options include the use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion in their firms, linking remuneration to diversity and inclusion metrics and the regulators’ approach to considering diversity and inclusion in non-financial misconduct.
The regulators believe that they need to make their expectations clearer to firms and to root them in the statutory objectives. The regulators consider that improving diversity and inclusion will result in improved governance, decision-making and risk management within firms, a more innovative industry, and products and services better suited to the diverse needs of consumers. The discussion paper also focuses on the importance of data and disclosure in order to enable firms, regulators and other stakeholders to monitor progress.
Nikhil Rathi, Chief Executive of the FCA said: “We are concerned that lack of diversity and inclusion within firms can weaken the quality of decision-making. We look forward to an open discussion on how we should use our powers to further diversity and inclusion within financial services, to the mutual benefit of firms and their customers.”
The discussion paper was open for comments until 30 September 2021, with a joint consultation planned for the first few months of 2022.
Investigations Into the Culture at the Metropolitan Police
The recent cases of Sarah Everard and Sabina Nessa have brought to the fore concerns women have for their safety when walking home, especially after dark. Moreover, the case of Sarah Everard raised concerns for women when dealing with the police. Following this case, Dame Cressida Dick, Commissioner of the Metropolitan Police announced an independent review into the force’s standards and culture. This was followed by an announcement by the Home Secretary, Priti Patel, that there would be Parliamentary inquiry into the matter as well.
Overall these investigations are a welcome development, with the aim of rebuilding trust in the police and offering women reassurance when dealing with the police. However, the government has decided to make the Parliamentary review a non-statutory inquiry, on the basis that time is of the essence in conducting this inquiry. Had this been a statutory inquiry, witnesses could be compelled to provide evidence, as well as there being legal safeguards and greater independence from the government. It will remain to be seen what impact a non-statutory inquiry can have, in particular in relation to the willingness of witnesses to give evidence.
© Arnold & Porter Kaye Scholer LLP 2021 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.