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.

Anti-corruption

Home Affairs Select Committee concludes UK needs to do more to address money laundering and corruption

The House of Commons Home Affairs Committee has published a report entitled ‘Proceeds of Crime’ in which it is highly critical of the efforts being made and systems in place in the UK to prevent money laundering and to recover the proceeds of crime. Chair to the Committee, Rt Hon Keith Vaz MP, was keen to stress on the UK Parliament Website that: “At least a hundred billion pounds, equivalent to the GDP of Ukraine, is being laundered through the UK every year. The Proceeds of Crime legislation has failed to achieve its purpose. London is a centre for money laundering, and its standing as a global financial centre is dependent on proactively and effectively tackling money laundering[1]. The report lists various statistics to demonstrate how ineffective current efforts are especially against criminals increasingly sophisticated at concealing the proceeds of crime.

The Committee, who consulted various stakeholders and experts in the course of its inquiry, highlighted the inadequacy of the key tool for detecting suspicious financial activity across the financial services sector and connected industries as an ongoing and serious issue. The report concluded that the ‘ELMER’ database (which captures Suspicious Activity Reports (SARs) on behalf of the National Crime Agency (NCA)) is overloaded, rendering it “completely ineffective”. This is perhaps unsurprising if the NCA report to the Committee, that ELMER was currently processing 381,882 SARs, despite having been designed originally to cope with just 20,000, is correct.

However, the Committee concluded that more is needed than simply an upgrade of the SAR processing database highlighting the regret expressed by many of those providing evidence that the recovery of criminal assets was often only an afterthought after a conviction. The report also highlighted an inconsistent and seemingly unenthusiastic approach to the recovery of the proceeds of crime at both prosecutor and court level and confirmed its agreement with the National Audit Office that the Asset Recovery Incentivisation Scheme (ARIS) was flawed and unfit for purpose.

In addition, as Mr Vaz emphasised: “Investment in London properties is a major route which tarnishes the image of the capital. Supervision of the property market is totally inadequate, and poor enforcement has laid out a welcome mat for launderers and organised criminals[2] and yet, of the 1.2 million property transactions in the UK last year, only 355 suspicious activity reports were actually generated. According to Transparency International, who were themselves consulted in the preparation of the report, 36,342 properties in London are held by ‘offshore’ companies and that, while in many cases there may be nothing untoward in that, 75% of properties owned by people under criminal investigation for corruption are held through secret offshore companies[3].

The Committee called for much tougher oversight of the market, including stronger supervision of agents, buyers and sellers and for full responsibility for tackling money laundering, which is currently fragmented between different authorities, to be handed to the NCA. The Committee also proposed various other specific measures to be taken to address the issues it highlighted in general including:

  • The freezing of assets simultaneously with criminals becoming aware of the investigation against them for the first time – often at the time of arrest.
  • Initial and ongoing financial investigative training to be given to police officers.
  • An overhaul of ARIS.
  • The replacement of ELMER with a robust system for handling SARs by 31 December 2016.
  • The creation of a specialist ‘confiscation court’ designed to hear complex cases featuring cross-border financial transactions, use of corporate vehicles or very high value proceeds to combat the current lack of interest and expertise in confiscation orders among prosecutors and judges.

The report comes just a couple of months after the Government published its new anti-money laundering Action Plan[4] and the new Prime Minister, then Home Secretary, emphasised the importance of sending a clear message that such behaviour will not be tolerated and announced that the Home Office was reviewing its anti-money laundering rules. She also announced that it was considering a number of new policies, including “unexplained wealth orders (UWO), requiring those suspected of money laundering to declare their wealth”, as well as tougher powers for the NCA[5]. However, the report also comes at a time of distinct uncertainty following the Brexit referendum which, with a weakened pound and cuts to law enforcement budgets that have been reported to have increased the attractiveness of London to those who wish to launder their money through property, should make the Government’s response to the report of even greater significance.

 

[1] http://www.parliament.uk/business/committees/committees-a-z/commons-select/home-affairs-committee/news-parliament-2015/proceeds-of-crime-report-published-16-17/

[2] http://www.parliament.uk/business/committees/committees-a-z/commons-select/home-affairs-committee/news-parliament-2015/proceeds-of-crime-report-published-16-17/

[3] http://www.transparency.org.uk/publications/corruption-on-your-doorstep/

[4] https://www.gov.uk/government/publications/action-plan-for-anti-money-laundering-and-counter-terrorist-finance

[5] https://www.gov.uk/government/news/biggest-reforms-to-money-laundering-regime-in-over-a-decade

Anti-corruptionBriberyWhite collar crime

UK’s Serious Fraud Office secures second deferred prosecution agreement – this time with the UK Subsidiary of US Corporate

Lord Justice Leveson has approved the Serious Fraud Office’s (“SFO’s”) second application for a Deferred Prosecution Agreement (“DPA”). The Agreement is with a company which cannot be named because of continuing related legal proceedings. The first DPA was with ICBC Standard Bank in December 2015. Further agreements under the DPA system have been keenly awaited, and this second DPA sends a strong message to UK Plc and international companies that the DPA model is here to stay.

The DPA involved a small to medium sized (“SME”) UK company and allegations of overseas bribery in a number of countries with bribes paid through third parties in Asia. The agreement encompasses financial orders totalling £6.5m, and continuing co-operation by way of an annual report to the SFO on third party intermediary transactions, and the company’s anti-bribery controls, policies and procedures. Charges laid under both pre Bribery Act and Bribery Act law have been suspended and will be discontinued within 5 years as long as the company is compliant with the DPA.

The judgment is interesting to companies from all sectors, including financial services, in a number of respects:

  • The SME company is of limited means and the question of sentencing and the potential consequence of a company insolvency is addressed. SFO Director David Green has stated, “This case raised the issue about how the interests of justice are served in circumstances where the company accused of criminality has limited financial means with which to fulfil the terms of a DPA but demonstrates exemplary co-operation.” The fine was lower than the recommended guideline amount because of the risk of insolvency.
  • The bribery was discovered as a result of the SME’s US parent company implementing a global compliance programme.
  • The fine will be paid by the UK company but £2m of the disgorgement payment will be met by the US parent which is not accused of any misconduct, as a repayment of a significant proportion of the dividends that it received from the SME over the indictment period.
  • The judgment gives useful commentary on the meaning of co-operation, including the company providing comprehensive information on the initial self-report, and oral summaries of first accounts of interviewees. It also facilitated interviews, and responded promptly and completely to SFO requests for information.

UK and international corporates will follow this decision with interest. The entity and the amount involved may be modest, in this case but the guidance on several important DPA issues given by Lord Justice Leveson is crucial to any company which has any jurisdictional nexus with the UK, discovers it is affected by criminal conduct, and considers availing itself of the UK self-reporting regime.

Louise Delahunty, a partner in our White Collar Crime & Regulatory Defense practice, can provide more information if you need it.

Bribery

Beyond the Bribery Act

A recent petition heard in the Scottish Court of Session Outer House has highlighted the wide-ranging implications of the Bribery Act 2010 in the UK beyond the criminal offences of the Act itself.

The petition was brought by the former Chief Executive of a company, Mr Gray, who participated in a corrupt arrangement with an employee of a customer. Following an investigation, Mr Gray was dismissed for gross misconduct, although the dismissal was later suspended. Mr Gray brought the petition in the Scottish Court alleging unfair prejudicial conduct on a number of related issues including the conduct of the investigations into the bribery arrangement and the disciplinary proceedings against him.

Section One of the Bribery Act 2010 sets down the offence of bribing another person where one person gives a financial advantage to another intending to bring about an improper performance of a function by that other person. In this case, Mr Gray facilitated a financial advantage for the employee of a customer with the intention that the employee would direct more business to Mr Gray’s company. This violated the expectation that the customer’s business would be placed impartially by the employee and was therefore improper performance of his function. Whether or not Mr Gray was aware that this arrangement constituted a criminal offence under the Bribery Act was not relevant to the Court’s decision; only that he was at least complicit in its approval and creation.

Although the Court upheld three of his eight claims of unfair prejudice, a crucial issue related to a “Bad Leaver” clause in the company’s Articles of Association and the level of relief available to Mr Gray under s.996 of the Companies Act 2006 given his key role in the bribery. The clause provided that where a shareholder’s employment is terminated due to the board finding he has committed an act of gross misconduct, there will be a compulsory sale of his shares at an undervalue. The Court was tasked with determining whether Mr Gray’s shares should be sold at an undervalue as required by the “Bad Leaver” clause or whether the unfair prejudicial conduct suffered by Mr Gray should relieve him of the provision.

S.996 affords the Courts a wide discretion in determining the appropriate relief for unfair prejudicial conduct. Lord Tyre also cited a number of key principles which expand upon this general power:

  • Fairness includes the avoidance of unjust enrichment (established here);
  • The conduct of the petitioner may affect the relief which the court thinks fit to grant; and
  • The terms of a contractual agreement fairly entered into by shareholders are a relevant consideration when deciding upon relief (established here).

With these principles in mind the Court acknowledged that whilst the board had not actually dismissed Mr Gray for gross misconduct, there had clearly been a corrupt arrangement. The Court also held that such bribery would amount to gross misconduct and therefore Mr Gray’s conduct would trigger the “Bad Leaver” clause despite the fact that the board had not actually established gross misconduct itself. The Court therefore held that the proper approach in the circumstances was to ensure that Mr Gray was not put in a better position than he would have been had there been no unfairly prejudicial conduct. The Court held that Mr Gray was a Bad Leaver, despite there being no such determination from the board, and the compulsory purchase was ordered.

The Court’s broad application of the discretion afforded to it by s.996 is a clear affirmation of the Court’s refusal to reward a claimant who does not come to the Court with clean hands. As the Court found that Mr Gray was guilty of gross misconduct, refusing to grant Mr Gray relief from the unfairly prejudicial conduct suffered clearly demonstrates that the Court will exercise its discretion to the fullest extent to avoid the unjust enrichment of a party. In addition, by upholding the “Bad Leaver” clause even when unfairly prejudicial conduct has been established this case also affirms the Court’s reluctance to interfere in a freely negotiated contractual arrangement. Mr Gray was well aware of the implications of the “Bad Leaver” clause and by participating in bribery, he must bear the consequences of his actions as contractually agreed.

Although the criminal offences set down in the Bribery Act 2010 should act as a sufficient deterrent to individuals minded to participate in bribery, it is clear from this case that there may also be far wider commercial implications for those subject to “Bad Leaver” clauses.

Asset recovery

Backwards Tracing takes a step forward

The Privy Council recently extended the availability of ‘tracing’ in a novel way to increase the options available to states seeking to recover stolen property.

Before this decision a state could only trace property that had been altered, say by sale or transfer, into the proceeds of that alteration if those proceeds did not exist prior to the move. The process of tracing required the state to show what had happened to the property and to identify its proceeds and their recipient. This formed the basis of a claim against the recipient of the proceeds on the basis that those proceeds represented the original property. There was no tracing claim where the proceeds were already in the hands of the recipient.

The Privy Council’s extension of this principle means that where there is a ‘coordinated scheme’, property can be traced into proceeds that were in the hands of the defendant before the property was altered.

This is an extremely useful tool for states that are subject to sophisticated corruption or frauds designed to thwart recovery. We consider the claim in more detail here.