White collar crime

Failure to Prevent Criminal Facilitation of Tax Evasion

The new UK “failure to prevent criminal facilitation of tax evasion” domestic and overseas offences will almost certainly become effective in or before September 2017. What does this mean for companies and firms? The offences threaten criminal liability in connection with policing the acts of others. Strict liability is imposed on firms and companies worldwide for the criminal acts of their “Associated Persons”. The offence incorporates a reverse burden of proof, meaning that to defend itself, the firm or company must show that it put “reasonable prevention” procedures in place.

European and UK financial services firms, accountants, and lawyers have been here before. When they were brought into the anti-money laundering regulatory world they were transformed into “gatekeepers”. A big cultural shift had to follow, as organisations and professionals, (some under protest), eventually subscribed fully to the notion of being responsible stakeholders with government in the international fight against terrorism and organised crime. This time though, the net is wider. This offence is not just for regulated firms in the EU/UK. All corporates and firms in all sectors, and potentially anywhere in the world, will be affected.

Section 7 of the UK Bribery Act (“UKBA”), upon which this new offence is modelled, brought in strict liability for UK and international corporates, making them responsible for the acts of their “Associated Persons”, so this concept is familiar. Compliance procedures are in place, with the UKBA being perceived as the new post “FCPA “gold standard”. International firms and partnerships must in the same way pay attention to this new law. Both the UK and the foreign tax evasion offences could affect them.

The law first creates a corporate offence of failure to prevent UK tax evasion by an entity’s “Associated Persons”. The one available statutory defence is that reasonable procedures were in place to prevent the facilitation, or at the time it was reasonable not to establish additional procedures. A second offence, the “foreign tax offence” is also created, effective as long as the “foreign tax” and facilitation crimes would be recognised as offences in the UK. The UK Government ostensibly plans to prosecute, or encourage overseas governments to prosecute foreign tax evasion by international companies which have a link to the UK. Potentially this offence has enormous scope. It could cover foreign tax evasion facilitation by an employee of an overseas company, which has no links at all with the UK but which sends an employee on a flying UK visit, if such visit plays a part in foreign tax evasion. Will this actually happen, and will foreign governments support the UK in this initiative?

Is this new law a positive step in the right direction, to discourage “professional enablers” from aiding and abetting criminals, or does it go too far in imposing yet further regulatory and criminal risk burdens on UK and international entities which are already incurring substantial costs for regulatory compliance?

Whatever the pros and cons of this legislation, it is crucial for firms and corporates to undertake a risk assessment for this offence now. How will you draft your procedures after your risk assessment? The UK Government draft guidance (incorporating core principles as in the Bribery Act), is now being scrutinised by the various sectors, who will want to assist their members with some specific guidance. Such guidance can be submitted to Government for approval.

For the UK legal profession, Louise Delahunty is chairing the group that is assisting the Law Society of England and Wales to draft such guidance. The group includes Natasha Kaye and other Cooley lawyers.

White collar crime

Tesco announces Deferred Prosecution Agreement

It was announced last week that Tesco PLC’s subsidiary, Tesco Stores Ltd, has finalised the terms of a Deferred Prosecution Agreement (DPA) with the SFO (subject to court ratification on 10 April 2017). The DPA concludes the SFO’s two-year investigation into accounting practices in 2014 that left a £326 million hole in Tesco’s accounts.

Under the agreement, Tesco is to pay a financial penalty of £129 million plus costs. The precise terms of the DPA will not be revealed until it has received court approval, so it is not yet known what discount Tesco received as a result of its cooperation. The standard discount is 33%, which is what ICBC Standard Bank received in 2015 in the first DPA to be concluded. However, the subsequent two settlements, with “XYZ Limited” in 2016 and Rolls Royce in January 2017, both involved a 50% discount for reasons including ability to pay and “extraordinary” cooperation. Tesco announced the discovery of the irregularities in September 2014, after a whistle-blower approached the newly appointed CEO, David Lewis, regarding improper accounting practices.

Unlike the fates of Rolls Royce executives, which are yet to be decided by the SFO, it was announced in October 2016 that three Tesco executives would face trial for fraud and false accounting in September 2017. This does not include the chief executive at the time, Philip Clarke, who was interviewed under caution as part of the investigation but is not to face further action.

It was also announced that Tesco has agreed with the FCA to a finding of market abuse in relation to a trading update published on 29 August 2014. The FCA is not imposing an additional financial penalty but Tesco has agreed to establish a compensation scheme for those who purchased Tesco shares and bonds on or after 29 August 2014 and still held those securities when the statement was corrected on 22 September 2014. It estimates the cost of this to be approximately £85 million (before interest). It is the first time the FCA has used its section 384 powers to compensate losses, rather than fine, which will be of interest to listed companies considering future self reports.

The total cost to Tesco of the penalty, the compensation scheme and associated costs is estimated to be approximately £235 million.

White collar crime

UK/European crime-fighting coordination post Brexit “a priority”

As anticipated in our blog last June, the impact of Brexit on how the UK’s crime-fighting agencies will interact with their European counterparts is now firmly on the agenda.

On 6 March, the Home Secretary, Amber Rudd, announced that remaining in the European Arrest Warrant (EAW) system will be “a priority” in the Brexit negotiations. The following day, Europol’s director, Rob Wainwright, declared that the UK will be heading into “unchartered territory” should it wish to continue to have access to Europol’s shared platforms post Brexit.

Ms Rudd’s statement will cause some controversy. Remaining in the EAW system does not sit with the Government’s determination to extract the UK from the influence of the European Court of Justice.

However, as demonstrated in the 2014 Commons debate about the UK’s membership of the EAW system, there are mixed views on it. There is significant unease about there being no opportunity for UK judges to review the evidence underlying the warrant but during the debate in 2014, Theresa May, then Home Secretary, was an advocate of the system and argued that opting out would make the UK “a honeypot for all of Europe’s criminals on the run from justice”. The fact that over 7,000 individuals suspected of serious crimes have been extradited from the UK under the EAW system since 2010 is a strong reason to stay in it.

In contrast, the need to secure the UK’s continued access to the EU’s criminal intelligence network is uncontroversial. The UK is one of the most active users of Europol’s various platforms. How exactly that will be achieved and at what cost is not yet clear. Europol now has agreements with 19 non-EU states, which include access to a communication system and arrangements for the exchange of information. However, new regulations coming into force in May 2017 give the EU significant supervisory power over Europol and prevent it from entering into operational agreements with non-EU states. As a result, a direct agreement between the UK and Europol will not be an option. The alternatives are yet to be fully explored but if the arrangement is similar to those with the non-EU states currently in place, the UK is unlikely to have immediate access to the intelligence network.

These are significant issues and it is important that they are prioritized by the Government for the safety of both Remainers and Brexiteers alike.

Anti-corruption

UK Government responds to International Development Committee’s Fourth Report 2016/2017

In October 2016, the International Development Committee put forward 13 recommendations for the improvement of the UK Government efforts to tackle overseas corruption. Last month the UK Government published its response.

The Government agreed with seven recommendations:

  • assess the extent of money laundered through the UK and continue to lobbying the UK’s Overseas Territories and Crown Dependencies to apply the same level of transparency and accountability;
  • develop a cross-government Anti-Corruption Strategy;
  • continue prioritisation of anti-corruption efforts during Brexit negotiations and afterwards;
  • apply research into the effectiveness of different anti-corruption methods;
  • include foreign parliaments in DFID’s anti-corruption country strategies;
  • work with foreign governments to increase protection for whistleblowers; and
  • DFID to monitor progress of anti-corruption programmes.

The Government partially agreed with the following four recommendations:

  • reappoint the anti-corruption “Champion”;
  • further work on the inclusion of developing countries in discussions and decisions on international tax matters;
  • develop DFID rolling strategies with a 10 year horizon; and
  • DFID’s publication of anti-corruption country strategies.

The Government disagreed with the following proposals:

  • lobby the UK’s Overseas Territories and Crown Dependencies to create public beneficial ownership registers; and
  • publish country by country reporting of profits and payments to governments by multinationals.

The two areas where the Government declined to follow the Committee’s recommendations appear to reflect a concern that although the UK should be seen as a leader in the fight against anti-corruption, it should not go too far ahead. The Government emphasises that the UK’s Overseas Territories and Crown Dependencies already go further than other jurisdictions as they allow law enforcement to access the information. In respect of the publication of profits and payments to governments by multinationals, the Government expressly states that this should be a multilateral effort.

White collar crime

Government considering reform to hold companies more accountable for economic crime

The Ministry of Justice has announced that it has commenced a consultation with businesses on the introduction of legislation aimed at tackling corporate economic crime and is seeking views on the extent to which reform is required. This follows on from the Prime Minister’s anti-corruption summit on 12 May 2016 and the Attorney General’s 5 September 2016 announcement of the commencement of such discussions.

Currently, in order to establish criminal liability on the part of a corporate body, prosecutors in the UK must show that the individuals involved in the wrongdoing represent the “directing mind” of the company. It has, however, been argued that this high hurdle has prevented the successful prosecution of companies, particularly in the financial sector, and the Government is asking for views on potential alternatives. The proposals under consideration (as set out in a Consultation Paper published with the Call for Evidence) include a ‘vicarious liability’ offence under which the corporate entity could be liable for the acts of its employees irrespective of whether it was complicit in them and a ‘failure to prevent’ approach, so that companies which cannot prove they have taken steps to prevent offences such as fraud, money laundering and false accounting will be held liable. This initiative follows on from The Section 7 Bribery Act ‘failure to prevent’ offence, and the UK Government’s more recent initiatives to consult on a ‘failure to prevent fraud’ offence and the launch of the ‘failure to prevent tax evasion’ offence under the Criminal Finances Bill.

The implications are potentially very significant for corporations as the reverse burden of proof and increased risk of being found liable for the acts of individuals will result in the need to incur further expense on corporate governance. The Call for Evidence will remain open until 24 March 2017 and views can be submitted here. Unsurprisingly, there is a range of opinions on this issue but we will continue to monitor developments in this area as the Government appears committed to strengthening the UK regulatory regime in its efforts to repair trust in businesses and improve corporate accountability.

Asset recovery

The new Criminal Finances Bill setting out new anti-money laundering powers has had its first reading

On 13 October 2016 the Criminal Finances Bill (the “Bill”) had its first reading in the House of Commons. In addition to introducing Unexplained Wealth Orders (described in our blog below), the Bill sets out a number of new anti-money laundering powers. The Bill will:

  1. enable the seizure and forfeiture of the proceeds of crime that are stored in the UK, extending the current provisions to include value stored in bank accounts and high-value property, such as precious metals and jewels;
  2. enable the sharing of information between regulated companies, helping to ensure that they provide the best possible intelligence for law enforcement agencies to investigate;
  3. create new powers to assist investigations, including a power to extend the moratorium period in which Suspicious Activity Reports (SARs) can be investigated (originally 31 days) with extensions of 31 days (with a cap of six extensions equating to 186 additional days) and giving the National Crime Agency new powers to request information from regulated companies; and
  4. permit disclosure orders for money laundering investigations, requiring someone suspected of possessing information relevant to an investigation to provide information (bringing disclosure powers in money laundering investigations in line with corruption and fraud investigations).

The introduction of the Bill progresses the legal changes outlined in the UK Government’s Action Plan for Anti-Money Laundering and Counter-Terrorist Finance that was published in April this year and its Response to the Consultation on the Legislative Proposals, published on 13 October 2016. The Bill shows that, despite the change of prime minister and much of the cabinet, the Government remains determined to tackle financial crime.

Asset recovery

New crime bill to introduce Unexplained Wealth Orders

The Government is due to publish a new proceeds of crime bill tomorrow, which will introduce Unexplained Wealth Orders (UWOs), as reported in The Times (paywall).

UWOs would allow the police to apply for an order to require individuals to explain their source of wealth where it exceeds their lawful income. They will be an useful antidote to foreign public officials on low salaries and no other obvious source of legal income who hold valuable UK property, as reported  following the release of the Panama Papers.

Our James Maton was a member of the Transparency International panel that developed a detailed proposal for UWOs (see summary here). We will publish our analysis of the Government’s proposal once it is published.