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July 1, 2024

UK Economic Crime Group: Enforcement Update


Executive Summary

In this edition of the UK Enforcement newsletter, we provide an update on recent economic crime matters in the UK. We consider anticipated legislative and regulatory updates, as well as recent actions from the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), and the Financial Reporting Council (FRC).

With respect to legislative and regulatory reform and enforcement actions, we consider the following:

  • The potential impacts on the criminal justice system following the UK general election
  • The SFO’s five-year strategic plan
  • The disclosure process under the SFO
  • The FCA’s plans to “name and shame” companies under investigation
  • Recent actions by the FRC
  • Recent developments within the UK sanctions regime

We are also proud to have been recognized alongside numerous colleagues on the Pro Bono Recognition List of England and Wales.

Potential Impacts on the Criminal Justice System Following the General Election

On May 22, 2024, Prime Minister Rishi Sunak called a general election, scheduled for Thursday, July 4, 2024. According to the latest opinion polls, a Labour victory is anticipated, which would mark an end to almost 15 years of Conservative government.

In the lead up to the general election, the subject of tackling financial crime has featured in various different party manifestos, speeches, and election campaigns. This includes proposals from most of the largest parties, outlining their plans to combat fraud, business crime, and corruption.

If Labour is elected, as the opinion polls suggest, Labour plans to reform the criminal justice system when it comes to financial crime, including introducing a “new fraud strategy.” In a speech on May 21, 2024, Labour’s David Lammy, Shadow Foreign Secretary, advocated for the creation of an international anti-corruption court to prosecute the most serious crimes and outlined two key policies that Labour is looking to introduce as part of their approach to combating financial crime.

Firstly, Labour is proposing the incentivization of whistleblowing in relation to breaches of the financial sanctions regime, offering whistleblowers rewards of up to 25% of any fines handed down by the Office of Financial Sanctions Implementation (OFSI). While Labour’s proposal only relates to sanctions, it may well be expanded to other financial crime offenses, with the SFO recently pushing for whistleblowing rewards to be reconsidered. Secondly, Labour will make further amendments to the registration and transparency requirements for UK corporate entities, including widening the registration requirements for UK trusts in the UK mainland, UK crown dependencies, and overseas territories.

Further details on Labour’s plans to combat financial crime are set out within the party’s manifesto and include a pledge to “appoint a fixed-term Covid Corruption Commissioner and use every means possible to recoup public money lost in pandemic-related fraud” and a pledge to modernize His Majesty’s Revenue & Customs (HMRC). Labour will also create a new “Regulatory Innovation Office” to bring together existing functions across government, with the office anticipated to speed up regulatory delays by helping regulators to update regulation, speed up approval timelines, and coordinate issues. Labour likewise plans to support innovation and growth through new technologies including Open Banking and Open Finance and ensuring a pro-innovation regulatory framework for crypto-assets and tokenization regulation. Regarding artificial intelligence (AI) specifically, Labour will be introducing AI regulations to ensure the safe development and use of AI.

Labour has also proposed expanding deferred prosecution agreements for tax evasion offenses to individuals, not just corporations, as well as changes to disclosure rules in criminal procedure to reflect the increase in data since the rules were introduced.

Labour’s proposals are certainly ambitious, but do lack specific details, including how they are to be funded. It should also be recognized that the size of any majority obtained by Labour will play a fundamental role in how successful implementation of any such policies will be, with the risk that any cross-party coalition could dampen legislative drive. Nevertheless, with prominent Labour figures such as David Lammy and Emily Thornberry being committed to tackling financial crime, as well as Keir Starmer’s previous experience as the Director of Public Prosecutions, many are hopeful that Labour’s plans have substance behind them.

The Conservatives have likewise been vocal about their plans to tackle financial crime, pledging to “continue to clamp down on fraudsters.” During their election campaign, the party highlighted some of the recent measures they have already introduced to combat fraud, including the new National Fraud Squad, use of crime statistics, and the new “failure to prevent fraud offence” under the Economic Crime and Corporate Transparency Act 2023.

Contained in their manifesto, the Conservatives propose a new Fraud Bill, which will give the Department of Work and Pensions powers similar to HMRC, to treat benefit fraud like tax fraud with new powers to identify, investigate, and pursue fraudsters. Similarly, they pledge to “intensify our fight to stop money laundering and dirty money and ensure all British Overseas Territories and Crown Dependencies adopt open registers of beneficial ownership.”

If re-elected, the Conservatives are also proposing to enact a ban on “SIM farms,” which are used to send mass fraudulent texts, often targeting the older members of the community. Likewise, they plan to ban cold calls in relation to financial products to prevent the sale and purchase of fake investments.

In turn, the Liberal Democrat manifesto proposes to combat the rise of fraud and scams by (1) naming and shaming the banks with the worst records on preventing fraud and reimbursing victims; (2) requiring banks to reimburse victims of automated push payment scams unless there is clear evidence that they are at fault; and (3) launching a high-profile public awareness campaign to help people spot, avoid, and report frauds and scams.

In contrast, Reform UK’s manifesto only briefly touches on financial crime when addressing domestic corruption and money laundering and is silent on business fraud. Their plans include launching an “Anti-Corruption Unit for Westminster” with legal powers to investigate past and future scandals, working to ensure that public officials face sanctions if they break the rules, including prison. Nigel Farage, Leader of Reform UK, has similarly been vocal about his plans to clamp down on cash-only shops, arguing that these are often used as a front for money laundering.

Regardless of which party is elected, businesses should expect financial service-related reforms, with both the Conservatives and Labour parties advocating to cut down regulatory bureaucracy in order to promote economic growth and innovation. One further area to watch following the election will be whether the National Crime Agency (NCA) takes a controlling stake in the SFO or if the SFO is left to continue forging its own path. Likewise, despite the Conservative and Labour manifestos pledging to combat fraud, there has yet to be an explicit pledge of investment in the SFO, despite the agency’s calls for funding. Whether the SFO will receive greater funding under the new government will be a key development to follow.

SFO Announces Five-Year Strategic Plan

Recently, the SFO has published its five-year strategic plan, outlining key priorities for 2024 through 2029. Announced on April 18, 2024, the plan covers themes including methods for swifter prosecutions, use of new technologies, and innovations to tackle financial crime, and emphasizes the SFO’s commitment to becoming more “influential both domestically and internationally.” At the heart of the SFO five-year plan is the ambition for the agency to evolve and avoid “falling short of what the public needs.” In this respect, the plan makes no bones about the agency’s shortcomings under predecessor Lisa Osofsky.

The plan contains four overarching strategic priorities: (1) identifying, recruiting, developing, and retaining a highly specialized, engaged, and skilled workforce; (2) harnessing the technology and tools of a changing world; (3) combating financial crime via intelligence, enforcement, and prevention; and (4) collaborating on a global and domestic level.

As criminals make greater use of technological advancements, the SFO is clear that it needs to use new tools and technologies to bring about swift prosecution and effectively combat financial crime in the rapidly evolving threat landscape. This involves engaging external facing technologies, and also improving internal systems, including streamlining casework via a new case management system and developing machine-learning and AI for mechanical and administrative tasks.

In recent years, the SFO has frequently faced criticism for protracted timeframes in bringing about prosecutions. The SFO’s intelligence-gathering and case-building process can often be slow due to logistical and legal challenges, fueling delays in enforcement. These delays and lower prosecution rates arguably undermine the SFO’s deterrent and prevention capabilities. The SFO plans to address this by exploring potential legislative developments, such as a disclosure regime and incentivization options for whistleblowers, and working more closely with other partners, including the NCA and City of London Police, to increase shared intelligence and expand crime prevention activities. The SFO has also suggested increasing its use of covert powers and opting for more timely alternatives to formal prosecution where appropriate, such as deferred prosecution agreements.

Finally, the SFO is deepening its collaboration with other UK agencies, including the UK Financial Action Taskforce, and by conducting more dawn raids alongside the police and the NCA. Likewise, the SFO is looking to strengthen its overseas partnerships, through shared trainings, pooling resources, agency secondments, and increasing their involvement in global crime prevention groups such as the OECD bribery working group.

While the SFO’s 2024-2029 plan is certainly a step in the right direction, it is high-level and lacking in detail. Its success will come down to its exact implementation, including whether budget constraints or political uncertainty causes aspects to fall by the wayside. In this respect, areas to particularly watch include changes to the disclosure process, whistleblowing incentivization, and swifter prosecutions. Nevertheless, it is clear from the plan that companies should prepare for a reinvigorated SFO seeking more decisive enforcement action.

Disclosure Shortcomings Reviewed at the SFO

The SFO’s prosecution of executives at Serco Geografix Ltd and G4S Care and Justice Services (UK) Limited (G4S) revealed limitations of the agency’s document review software, which allowed it to miss potentially relevant material that prosecutors would have been expected to find and disclose. The disclosure issue in the G4S prosecution is among several high-profile failings that have adversely affected the SFO’s reputation in recent years. The identified disclosure shortcomings have set off a chain of reactions.

Firstly, the concerns have prompted a comprehensive review by the SFO’s Gold Group Committee headed by Abigail Howarth of whether any documents were overlooked in the SFO’s previous prosecutions, including the LIBOR investigations and their subsequent convictions.

Secondly, the HM Crown Prosecution Service Inspectorate (HMCPSI) published a report in April 2024 on the SFO’s handling and management of disclosure. The report found that the SFO’s disclosure process in the G4S case lacked continuity, proper record-keeping, and planning, and that there were widespread misconceptions about the functionality of the keyword searches. The HMCPSI made six recommendations for the SFO, including that in 2024 the SFO revisit its guidance in the Disclosure Management Document template; introduce a disclosure review process for every case by an independent individual; and develop a long-term funding strategy to support the SFO to discharge its disclosure obligations.

Thirdly, the Attorney General for investigators, prosecutors, and defense practitioners issued guidelines on the application of the disclosure regime contained in the Criminal Procedure and Investigations Act 1996 Code of Practice Order 2020. The guidelines came into effect on May 29, 2024 and emphasize high-level principles, as well as detailed guidance on the various steps and case factors applying to the disclosure process.

Finally, the Home Secretary appointed Jonathan Fischer KC to independently review the challenges in investigating offenses involving large quantities of digital material. His recommendations will be provided to the Home Office later this summer, but he has already indicated that this may include earlier engagement with disclosure, for instance, by using the plea and trial preparation hearing to agree to the prosecution’s approach to disclosure or seeking an early court hearing for disclosure issues to be determined.

The focus on disclosure is something that has also carried through into the SFO’s own five-year strategy, as discussed above. It is clear that resolving the disclosure issues within SFO prosecutions and restoring confidence in its disclosure process is key to making the SFO more effective and increasing the likelihood of successful prosecutions, and is a focus for the agency.

FCA Announcement of Its Plans to “Name and Shame” Companies Under Investigation

The FCA recently unveiled its plans to name firms that are under investigation by the regulator. The proposal was announced in February and the public consultation on the proposal ended in late April.

The FCA’s proposals would bring forward the point at which publication of the names of firms under investigation takes place. At present, the FCA generally only names investigated firms at the stage of issuing a warning notice to that firm. This will have followed an extensive investigation by the regulator, likely spanning years and substantial advocacy on behalf of the company.

Under the new proposals, the FCA would be able to issue details about an investigation while it is ongoing, with firms receiving 24 hours’ notice that the FCA intends to issue a press release relating to the investigation. The decision to publish the name of the firm at this earlier stage will depend on several metrics including whether it could draw out whistleblowers and protect consumers.

If progressed, this move would bring the release of information about FCA investigations into line with other investigators, such as the SFO, who announce investigations once they reach the formal investigation stage, rather than waiting for a conclusion to such investigations.

The UK regulator’s rationale behind this plan is to increase transparency and deter wrongdoing. Potentially seeking to quell some of the objections to the proposal, the FCA Chief Executive Officer, Nikhil Rathi, has stated that investigated firms will only be named at an earlier stage in exceptional circumstances where such action is warranted to protect consumers and whistleblowers. The threshold of exceptionality is anticipated to be high, such as the example of the investigation into FTX Trading Ltd. in September 2022, where the regulator suspected that the company was operating illegally in the UK, and after which the company collapsed and was convicted of fraud in the U.S. Nonetheless, once the FCA has the power to name firms at an earlier stage, it will remain open to the regulator to name any firm under investigation, and such reassurances of a high threshold are unlikely to provide comfort to FCA-regulated firms under investigation.

Opponents of the move have expressed concern that such “naming and shaming” threatens companies with damage to their reputation before the FCA has proven the misconduct, marking a departure from the fundamental principle of innocent until proven guilty.

A compromise position suggested by those opposing the FCA proposals includes the FCA publishing an enforcement watch newsletter describing the investigated conduct without naming the firms under investigation. This would alert others in the industry to behaviors that need to be identified and monitored within their own companies, therefore fulfilling the aim of deterring wrongdoing and enhancing consumer protection without threatening the image of an investigated firm.

The FCA is expected to consider the consultation responses for several months before announcing its decision. Regardless of the outcome, the proposal itself indicates a willingness on the FCA’s part to put deterrence at the top of its priority list.

Recent Actions by the FRC

Following the delay to the legislation that would have replaced the FRC with the Audit, Reporting and Governance Authority (ARGA), the shortcomings of the FRC in its current form are again being highlighted, with a particular focus on the fact that the regulator still lacks the statutory power to demand information from audit firms or to control competition in the audit market. This has led the FRC to make another call for increased powers.

In addressing the House of Commons Business and Trade select committee, Richard Moriarty, the FRC’s Chief Executive Officer, emphasized that the absence of such powers resulted in the FRC relying on information being voluntarily provided by audit firms and the FRC having to “effectively beg” for funding from the industry. The FRC’s dependence on the industry it regulates is in stark contrast to other regulators such as the FCA, which are wholly independent and funded by the government.

In March 2024, the FRC published its plan and budget for 2024-2025, which sets out that it will be focusing on its “growth duty” which entails supporting UK businesses to thrive and remain competitive. The original strategic goals of the FRC remain unchanged and the FRC has stated that in 2024-2025 it will be particularly working on embedding the growth duty into its decision-making process; finalizing the review of the UK Corporate Governance Code; and improving audit quality and simplifying corporate reporting, among other priorities. Given that the regulator is eagerly awaiting a statutory grant of increased powers and the existing funding challenges it faces, it is perhaps unsurprising that the FRC has abandoned its plans to increase its staff headcount, with a view to minimizing its costs.

Despite the institutional challenges facing the FRC, it has in recent months imposed its largest fine against Ernst & Young Capital Advisors, LLC to date and its third-largest fine against PricewaterhouseCoopers LLC, totaling £9.3 million, for their audit failures in relation to London Capital and Finance (LC&F). The four-year investigation by the FRC found that the auditors breached their duties due to their failure to identify the risk of misstatements in the company’s financial accounts even though they were aware that LC&F was selling unregulated financial products to retail investors who would have relied heavily on audit opinions. The eventual failure of LC&F resulted in the loss of £273 million of investors’ funds and criminal investigation by the SFO.

In a challenging economic environment, the importance of the FRC’s role in regulating audit firms and thus helping to ensure that business and the wider market are aware of risks to the financial stability of companies cannot be overstated. It does seem that with the ARGA on hold, it is important for the FRC to be further bolstered and empowered to regulate the audit market, and we will be closely following the next government’s approach to this key area of regulation.

Recent Developments Within the UK Sanctions Regime

In recent months, the UK government has continued its focus on the UK sanctions regime, particularly with respect to sanctions against Russia, with further listing of designated persons and trade restrictions across various industries.

Similarly, OFSI has continued in its efforts to engage with business and the wider public with respect to compliance with the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Sanctions).

In May 2024, OFSI launched frequently asked questions (FAQs) relating to financial sanctions which provide supplementary regulatory guidance in the form of answers to specific sanctions queries. There have long been calls for OFSI to publish FAQs alongside its guidance, with emphasis placed on the fact that both the EU and U.S. have had FAQs in place for a number of years. Much of what has been published in the FAQs is reworked from the prior guidance on the Russia Sanctions, but nonetheless it is a welcome addition to the suite of information provided by OFSI and has provided clarity over certain issues.

OFSI has also implemented changes in the Enforcement and Monetary Penalties guidance. Consequently, OFSI will now always apply the most recent iteration of the Enforcement Guidance when assessing cases, simplifying the enforcement process for parties when breaches span various versions of the guidance.

Alongside these updates, OFSI has shifted from issuing guidance in static PDF format, to a live webpage option, which ensures that the latest and current version is available at all times. OFSI is in the process of converting all of its guidance to this new format, seeking greater accessibility for the public.

With respect to enforcement, for some time now it has been expected that OFSI will be issuing fines for breaches of the Russia Sanctions, some of which have now been in effect for more than two years. Nonetheless at the mid-point of 2024, we are still awaiting a fine from OFSI under these regulations, although the regulator has stated that enforcement action will commence in 2024.

By contrast, HMRC has been issuing fines for breaches of the Russia Sanctions since last summer. Most recently, in March 2024, HMRC issued a substantial compound settlement of over £1 million to a UK exporter who was in breach of the Russia Sanctions. Although HMRC does not name the exporter, it is clear that HMRC is focused on its role in enforcing the trade sanctions under the Russia Sanctions, and it is to be expected that there will be further compound settlements throughout the remainder of the year.

Pro Bono Recognition List

We are pleased to have been named alongside numerous colleagues on the inaugural Pro Bono Recognition List, which recognizes solicitors and barristers across England and Wales who have given over 25 hours of their time to pro bono work during 2023.

Set up under the sponsorship of the Attorney General’s Pro Bono Committee, endorsed by the Lady Chief Justice, and with the support of the Law Society, Bar Council, and all major pro bono legal organizations in the UK, the Recognition List celebrates the valuable contribution of individual lawyers at firms and organizations of all sizes who provide pro bono legal help to those in need.

We are very pleased that 37 Arnold & Porter lawyers were recognized on the list, and that many of us have been able to offer significantly more hours to pro bono matters than the 25 hours needed for this recognition. While pro bono assistance cannot replace the need for serious consideration of the state of the Legal Aid sector, being able to offer our assistance to individuals and companies who would otherwise face legal situations alone is rewarding for all involved. We are proud of our colleagues for their dedication, which is needed to amplify the voices of those who otherwise might not be heard.

© Arnold & Porter Kaye Scholer LLP 2024 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.