White collar crime

Sanctions: what tech companies should consider

While sanctions restrict trade and dealings with specified individuals, entities and states, export controls restrict the distribution of specified products & services, namely military goods and items that can have a dual civilian and military use.

In the past, compliance with sanction and export regimes was largely seen to be an issue for companies that dealt with military hardware or products that had a clear potential military use & for banks supplying financial assistance to sanctioned entities. That mind-set is now dangerously outmoded.

Technological advancement in ‘civilian’ products and software has resulted in many of these products and services being caught by sanctions and export control regimes. The most obvious example being the now widespread use of encryption software in civilian products and services used to secure data that is transmitted wirelessly between electronic devices. This presents significant challenges for tech companies. These challenges are compounded by the ease with which technology and software services can be transferred globally and the difficulties with identifying and restricting potential access. With the ever-increasing use of cloud services, this is a growing issue.

Tech companies considering sanction and export compliance must address three fundamental questions:

  • Are any of our products or services (or part of them) controlled?

To establish the status of products/services, tech companies operating in the UK must refer to the UK Strategic Export Control Lists (which incorporate EU controls). They should also be aware of the US export control regime, which has wide-reaching extraterritorial effect. Exemptions may apply. For example, certain open source software and “mass-market” software products using encrypted technology are exempt from requiring a license.

  • To whom do we supply our products/services?

Companies should have a method of screening customers and related parties before access is given to products/services to ensure they are not on any sanctions list. This can be managed internally with specialised software or subcontracted to third party providers. These checks should also be carried out periodically on existing customers to capture any updates to sanction lists.

  • What is our geographic scope?

This can often be the hardest question for tech companies that supply goods/services electronically. All companies should understand their potential geographic scope of supply to ensure they are not providing goods or services to sanctioned states or entities. For companies supplying controlled products or services, it is essential that access is geographically limited or that appropriate export licences are obtained. Limitation can be achieved in a number of ways: by restriction of supply to specific servers; or, if cloud services are being used for distribution, ensuring that the cloud service itself has appropriate restrictions in place.

Navigating the complexities of international sanctions and export control regimes is daunting but crucial. Where there is any doubt as to the status of goods, the geographic scope of supply, or the application of sanction and/or export control regimes, legal advice should be sought as a matter of urgency.

White collar crime

High Court supports SFO bid to obtain documents claimed as privileged

In a landmark ruling on 8 May 2017, the High Court ordered that the Eurasian Natural Resources Corporation (“ENRC”) should hand over to the SFO documents prepared during an internal investigation, despite the fact that the documents had been generated by lawyers (including external solicitors).

In 2011, ENRC began an internal investigation into allegations of corruption, bribery and fraud within its operations, remaining in regular contact with the SFO whilst doing so. In 2013, the SFO launched its own criminal investigation into the company.

As part of their investigation, the SFO compelled ENRC to hand over certain documents under a Section 2 Notice. ENRC refused on the basis that the documents were protected by legal professional privilege (“LPP”).

Mrs Justice Andrews largely rejected ENRC’s claims to privilege. She held that there was no legal advice privilege because the documents in question, which included interview notes, did not contain legal advice. With regard to litigation privilege, Andrews J held that this could not protect the documents as they were not prepared with the sole or dominant purpose of conducting litigation. She made a distinction between “the reasonable contemplation of a criminal investigation” and “the reasonable contemplation of a prosecution”.

Part of her reasoning was that ENRC had, when conducting its investigation, intended to report to the SFO: documents produced with the intention of later disclosing them to the SFO could not attract privilege. In addition, she cited the fact that at the time ENRC was conducting its investigation, it did not know what had occurred and whether litigation or prosecution was in reasonable contemplation.

The Judgment has been met with concern by many commentators. The Law Society of England and Wales has branded it as “harmful” and an erosion of the fundamental right of LPP. Others see it as a logical interpretation of the rules of privilege.

It remains to be seen whether companies will be dissuaded from self-reporting and engaging with the SFO, as by doing so they may find themselves dealing with a ‘contemplated investigation’, rather than a ‘contemplated prosecution’. In the meantime, companies should be aware that all documents produced during internal investigations could potentially be disclosable to the SFO if they do not attract LLP.

ENRC has indicated that it intends to appeal the decision.

SFO v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB)

White collar crime

Court clarifies jurisdiction to exempt bank from potential criminal liability for making payments before NCA approval received

What happens when a company’s bank accounts are frozen and, as a result, faces imminent collapse, but the bank opposes a court application to process key transactions on the basis that if the bank is made to do so by the court, the bank may be guilty of a criminal offence under the Proceeds of Crime Act 2002 (POCA)? Are the court’s hands effectively tied by the requirements of POCA?

The facts of the recent case of The National Crime Agency v N and Royal Bank of Scotland [2017] EWCA Civ 253 were that RBS froze certain of the accounts of a customer, N (a foreign exchange trading business), and sought consent from the NCA under s335 POCA to return the funds to N upon termination of the banking relationship. NCA gave consent. RBS did not request consent from the NCA to perform specific transactions, which N was seeking to undertake but merely to return all funds to N. The effect of RBS’s freezing of the accounts was to bring N’s business to a halt with potentially catastrophic consequences. N sought interim injunctions and declarations to require the Bank to process its transactions. RBS opposed the applications on, among other grounds, that it had no consent from the NCA to process the particular transactions, only to return the funds to N, and that if it did so without the NCA’s consent, it would be potentially liable to a criminal offence under POCA. The NCA, appearing on the application, and at first having been neutral, adopted the position at the hearing that the Judge had no jurisdiction to override the statutory regime by granting any orders, that RBS was obliged to seek consent for the specific transactions from the NCA, and that the statutory period the NCA would have to respond could not be shortened. N argued that its business would collapse before the statutory period elapsed.

At first instance, Burton J granted N’s applications. The balance of convenience favoured N given the catastrophic position it would be in if the relief were not granted given the statutory periods which would be required if the consent process for the specific transactions. Moreover, as the NCA had consented to the return of the money to N, it could be inferred that there was no suspicion that the money was or was suspected to be criminal property under s340 of POCA and therefore that RBS could be guilty of an offence if they transferred the funds prior to seeking the NCA’s consent. The Judge considered that he had jurisdiction to make the orders, the Court’s jurisdiction not having been ousted by the POCA statutory regime, and that he could also make a declaration that RBS would not be guilty of any criminal offence under POCA in effecting the transfers. He considered that the overall balance of convenience favoured the making of the orders so as to (a) protect N’s business from catastrophic failure and (b) not expose RBS to criminal sanction for complying with the order to effect the transfers.

The NCA appealed against the orders on several grounds, including that the Judge lacked the relevant jurisdiction to make the orders thereby overriding the POCA statutory framework, that the consent given by the NCA to transfer the funds to N did not mean that there was no evidence the monies were or were suspected to be criminal property, and that if the Judge did have jurisdiction this was not a sufficiently exceptional case to justify the interim declaration.

The Court of Appeal concluded that the Judge had been wrong to make the orders. The Court of Appeal, importantly, accepted that the Court’s jurisdiction to make such Orders was not ousted by the POCA statutory provisions. However, they were a highly relevant consideration to whether the discretion should be exercised to which the Judge had given insufficient weight. The Judge had also been wrong to conclude that the NCA’s consent to transfer of the funds back to N showed the funds were clean or that there was no criminality associated with them; judges should generally be careful about reaching similar conclusions at an interim hearing. A bank would be unlikely to be able provide sufficient evidence at an interim stage to allow a court to be satisfied that there was no criminality associated with the funds, and it would therefore be proper to make a declaration that the bank was not committing any offence by transferring the funds. Moreover, there could be many legitimate reasons where NCA consent might be given to release the money where there remain suspicions that it is criminal property and the Judge’s reliance on the NCA’s consent to transfer the funds to N as demonstrating that there was no evidence of criminality was misplaced. Moreover, the Judge had failed to consider that the tipping off provisions of POCA might well prevent the bank from adducing evidence at the application that would allow the court to determine the issue with sufficient certainty. It followed from all of that that the judge had been wrong to declare that RBS would not commit any criminal offence by transferring the funds.

As the Judge’s view that he could make the declaration that RBS would not be committing any criminal offence by transferring the funds was fundamental to his reasoning that he could then order the funds to be transferred, the appeal succeeded on that basis alone. However, the Court of Appeal also criticised the Judge’s weighing of the balance of convenience. He had been heavily influenced by the potential problems N would face if the transfers were not immediately permitted. The Court of Appeal considered that the balance of convenience would generally always favour the bank, as the potential prejudice the bank would face by being ordered to perform an act that could be a criminal offence would usually outweigh the inconvenience to the customer of the transactions not being processed. Although the prejudice against the bank could be overcome if there was no real evidence that the money could be criminal property, the Court of Appeal observed that there is rarely likely to be enough evidence before the court to determine this, which is why such orders would likely be truly exceptional.

The Court of Appeal was also influenced by a change in position of the NCA between the first instance hearing and the appeal. At first instance the NCA had indicated it was not willing to commit to any shortening of the statutory timelines for it consider whether to give consent to transactions under POCA. By the time of the appeal, the NCA noted in a case of real urgency, where a customer could face significant loss the NCA would act much faster than the periods specified in the statute, even within hours. A future court considering such an application is likely to be heavily influenced by whether the appropriate application has been made to the NCA as a matter of urgency, and how they have reacted.

As the Court of Appeal observed, the stringent and sometimes difficult provisions of POCA are Parliament’s carefully struck balance between the fight against money laundering and organised crime, and permitting commercial transactions to take place in a sensible and uninterrupted manor. Where those principles collide, as they did in this case, the court has jurisdiction to intervene, but will only rarely do so in truly exceptional circumstances.

This is an eminently sensible answer to a complex question. While the importance of the POCA regime has been underlined, the NCA’s commitment to act quickly to clear transactions should assist to avoid the worst injustice that the regime might provoke.

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.