In this article we summarise some of the key points arising from two important reports regarding economic crime in the UK which have been published in recent weeks.
On 8 March 2019, the House of Commons' Treasury Committee published its "Economic Crime Antimoney laundering supervision and sanctions implementation" report (the "Treasury Committee Report"), which suggests improvements to be made in order to tackle economic crime and develop antimoney laundering ("AML") supervision.
2. General UKBA Commentary 3. AML Supervision 4. Financial Sanctions 5. Derisking 6. SARs 7. Information Flows 8. Resources and Delays 9. Contacts
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On 14 March 2019, the House of Lords' Select Committee on the Bribery Act 2010 ("UKBA") published a report titled "The Bribery Act 2010: postlegislative scrutiny" (the "UKBA Report") which considered whether the Act is achieving its intended purposes.
HSF FSR and Corporate Crime notes
House of Lords Select Committee appointed to review Bribery Act 2010
We outline below some of the key conclusions and recommendations of the reports, including in relation to:
Proposed Legislative Reform including potential changes to corporate criminal liability and the Bribery Act Guidance in relation to the "adequate procedures" defence and corporate hospitality;
Deferred Prosecution Agreements ("DPAs") suggested improvements including in relation to the court's discretion, discounts, the prosecution of individuals and their application to smaller companies;
AML Supervision the risks of the current approach to AML supervision by multiple bodies and suggested improvements;
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Financials Sanctions the effectiveness of sanctions for economic crime, including the possibility of introducing a discretion to block UK listings on the grounds of national security and the influence of e.g. Russian money in the UK;
Derisking recommend strategic action to combat derisking;
Suspicious Activity Reports ("SARs") consideration of the SARs reform programme and suggested improvements;
Information Flows potential information flows at bank level and the National Economic Crime Centre's (the "NECC") role as a co-ordinator of law enforcement, regulators and the private sector; and
Resources and Delays the impact of delays and a lack of resources on combatting economic crime.
1. Proposed Legislative Reform
Corporate Criminal Liability
Over recent years the Serious Fraud Office ("SFO") has raised concerns about the identification principle which, subject to some limited circumstances (e.g. s. 7 of the UKBA), means that for a company to be criminally liable it must be established that a person who was the "directing mind and will" of the company at the relevant time carried out the acts and had the necessary state of mind. The SFO's evidence to the House of Lords' Select Committee reiterated its concerns, stating that the identification principle makes it difficult to successfully prosecute larger companies, where roles are often delegated and the person who would typically be the "directing mind and will" may not be involved in the relevant decision-making.
The SFO suggested two possible changes which it considers would address the position:
Replacing the identification principle with a new principle whereby a company would be guilty of the offence if a person associated with it commits that offence intending:
To obtain or retain business for the company;
To obtain or retain a business advantage for the company; or
Otherwise to benefit the company (financially); or
Introducing a new offence of failing to prevent economic crime.
The Treasury Committee recommend that the Government should consider the SFO's proposals and set out a timetable for bringing forward legislation to improve the enforcement of corporate liability for economic crime. A specialist legal advisor to the committee has since stated that, while the committee made no recommendation, it was clearly in favour of an extension of the failure to prevent offence to other forms of economic crime.1 The Treasury Committee acknowledged that Brexit seems to have waylaid reform in this area but concluded that the consultation process should not be delayed until proposed legislation is in near final form and should be undertaken by the next Queen's speech (presumably this means by sometime in 2022).
The UKBA Report also considered whether the identification principle was effective in the context of bribery offences or if vicarious liability should be imposed instead. The report did not recommend a change to the UKBA offences and noted that a majority of witnesses considered that s. 7 (the failure to prevent bribery offence) to be a reasonable compromise.
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UK Bribery Act 2010 Guidance
The UKBA Report identified an inconsistency between the Ministry of Justice's "Bribery Act Guidance" and the "Quick Start Guide" in relation to the "adequate procedures" defence under s. 7 UKBA. The Select Committee proposed that amendments be made to the "Bribery Act Guidance", discussed below, after which the "Quick Start Guide" should be withdrawn.
The UKBA Report noted that the s. 7 offence had provided a model for the offences of failure to prevent facilitation of UK and foreign tax evasion offences in the Criminal Finances Act 2017 (the "FTPTE Offences"). However, the defence to the FTPTE Offences is not one of "adequate procedures"; instead, a company has a defence if it can show that its procedures were "reasonable in all the circumstances". HMRC's guidance about the FTPTE Offences provides more detailed examples than the Bribery Act Guidance. The UKBA Report recommends that the Ministry of Justice, in consultation with representatives of the business community, and especially small and medium sized enterprises ("SMEs"), should expand the Bribery Act Guidance to give more examples and to suggest procedures which, if adopted by SMEs, are likely to allow them to establish the defence. However, the report stresses that the Guidance should make it clear that all businesses are likely to need procedures tailored to their particular needs, and that staff will need to be trained to understand and follow those procedures.
The Select Committee also considered whether there is a danger that "adequate" in the Bribery Act 2010 will be interpreted too strictly, so that a company which had in place anti-bribery procedures which were reasonable in all the circumstances but did not in fact prevent bribery taking place, might be unable to use this defence. They concluded that the Bribery Act Guidance should be amended to draw attention to the different wording in the Criminal Finances Act 2017 and in the HMRC Guidance, and to make clear that "adequate" does not mean, and is not intended to mean, anything more stringent than "reasonable in all circumstances".
In addition, the UKBA Report concluded that it would be inappropriate for Government departments and agencies to provide advice on proposed conduct in individual cases; it is for companies and their advisers to determine whether activities they propose to undertake or procedures they propose to adopt will comply with the law.
The UKBA Report identified some confusion about the Ministry of Justice's Guidance with respect to corporate hospitality and suggests that professional organisations and trade associations should provide sector specific guidance on where their members should draw the line between bribery and corporate hospitality. The report states that the UKBA may have initially had an "overly deterrent effect" on corporate hospitality and that clearer examples of what might constitute acceptable corporate hospitality should be added to the guidance.
2. General UKBA Commentary
The UKBA Report reached the following conclusions regarding the UKBA:
Prosecutions - a lack of awareness of and training on the Bribery Act 2010 may be contributing to the lack of bribery prosecutions, so the Government should provide the resources for the City of London Police's Economic Crime Academy to expand its anti-bribery training programme, and should ensure that every police force has at least one senior specialist officer who has undertaken the training.
Reporting mechanisms - evidence suggests that the means for reporting bribery offences to police are not always clear. The Home Office has committed to launching a new reporting mechanism for allegations of bribery and corruption and is currently investigating options. The report commends this decision and considers that SARs could provide further assistance in identifying bribery.
Consent to prosecution - the requirement for prosecutions to be initiated only with the written consent of the Director of Public Prosecutions (the "DPP"), the Director of the SFO, or the Director of Revenue and Customs Prosecutions was deemed to be overly rigid and the report recommends that this
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requirement is removed and replaced with a provision allowing the Directors to delegate their power to initiate proceedings to officials, as they see fit.
Facilitation payments while some jurisdictions have made allowances for facilitation payments, doing so in the UK would be a retrograde step.
Guidance for SMEs - SMEs which are exporting for the first time to new markets should be given more assistance with corruption issues by properly trained and instructed officials. The smaller UK embassies must have at least one official who is expert in the local customs and cultures, or who can rapidly contact officials of foreign government departments on behalf of companies facing problems in their field.
Deferred Prosecution Agreements - greater discretion should be given to the court to manage the preliminary and final DPA hearings in whatever way seems appropriate. However, a declaration approving a DPA and giving reasons for it must be made in open court. The Select Committee noted that each case must be judged on its facts and stressed that the Crown Prosecution Service ("CPS") and SFO should ensure that smaller companies with fewer resources are treated fairly and offered DPAs in appropriate cases. In particular, some doubt was raised as to whether Skansen Interiors Ltd was dealt with fairly when it was recently prosecuted (and convicted) under s 7 of the UKBA rather than being offered a DPA, despite having self-reported the matter and being a dissolved company.
The committee considered that the main incentive of a DPA was the avoidance of a criminal conviction, and did not believe that limiting the discount to financial penalties to a certain percentage would discourage self-reporting. The committee proposed that, in order to encourage self-reporting, the discount should be greater for a company which has self-reported.
In addition, the report states that culpable individuals should still be prosecuted even if a DPA exists. The committee said that in DPA negotiations, the co-operation expected of a company must include provision of all available evidence which might implicate any individuals, however senior, who are suspected of being involved in the bribery being considered.
The report also considered non-prosecution agreements ("NPAs") but concluded that they would not add anything of value to the current law on DPAs.
3. AML Supervision
The Financial Task Action Force's (the "FATF") review of the UK's AML and counter-terrorist financing systems was published on 7 December 2018. The Treasury Committee Report observed that the FATF review, which is published on a ten-year cycle, is usually preceded by legislative reform which then stalls once the review is released. The report therefore recommends that a more frequent system of public review is instituted in order to ensure a constant stimulus to improve and reform.
The report noted that there are various different AML supervisors: with 13 Accountancy Professional body AML supervisors, nine Legal Professional body supervisors, and three Statutory AML supervisors. The report concluded that this fragmented approach to AML supervision poses a particular risk to the following three areas:
Property - the supervisory regime surrounding property transactions involves a number of parties who are governed by different supervisory bodies. A specific risk arises from the possibility that estate agents might not have registered with HMRC, so will be unsupervised and the report recommended that HMRC carries out further work to ensure that estate agents are registered with them and are following best AML practice;
Company formation - unregistered agents and businesses that register directly with Companies House and do not use agents present a weak link in AML supervision. The report recommends that these are identified by HMRC and dealt with as a matter of urgency. In addition, a number of weaknesses in the controls around the information at Companies House were acknowledged, including the fact that Companies House is not subject to requirements to carry out AML checks, could not refuse registration for reasons other than non-compliance with the registration requirements and cannot verify the
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information on the register. The report recommends that the Government urgently consider reform of Companies House to ensure that it has the statutory duties and powers to ensure it plays no role in helping those undertaking economic crime, whether in the UK or abroad. The report recommends that details of the reform be published by summer 2019; and
Core financial services - following comments that the FCA's fines have been too infrequent, the Treasury Committee Report states that the FCA need to ensure that they keep up a constant pressure on the core financial services businesses and take appropriate enforcement action against them.
The report also identifies a potential split in the supervisory regime between the core banking system, supervised by the FCA, and the "facilitators", such as estate agents, accountants and solicitors who have different supervisory bodies. The Treasury Committee recommend that the education of "facilitators" is improved to ensure that they have all information about their role, recouping any additional costs through fees and that this is followed with an "enforcement campaign" to ensure compliance.
Evidence produced to the Treasury Committee suggests that the use of professional body AML supervisors presents risks, as it considered that supervisors face a conflict of interest between lobbying on behalf of their members and acting as a regulator. The Treasury Committee identified the Office of Professional Body AntiMoney Laundering Supervision ("OPBAS"), which is part of the FCA and was launched in January 2018, as a potential solution and supports the external supervision that this body provides. However, it recommends that, within six months, the Treasury should publish a detailed consideration of how it would respond to a recommendation from OPBAS that a professional body should be removed as an AML supervisor.
The Treasury Committee Report also supports the creation of a "supervisor of supervisors", which it suggests should be OPBAS, given its current role. It also proposes that HMRC's role be given to OPBAS, so that the latter can act as a supervisor of last resort in the case of a failure of a professional body supervisor.
The Treasury Committee Report states that the CEO of HMRC is considering whether HMRC should retain its role in AML supervision. The report states that if HMRC is to retain its current role, it should:
include within its departmental objectives a single standalone objective related to its AML supervisory work; and
keep a clear reporting line between its AML supervisory work and its work investigating tax crime and associated money laundering offences.
The Treasury Committee Report noted that defining Politically Exposed Persons ("PEPs") proves difficult for institutions and recommends that the Government creates a centralised database of PEPs for AML supervisors to use.
4. Financial Sanctions
Evidence concerning the Office of Financial Sanctions Implementation's ("OFSI") lack of effectiveness was raised to the Treasury Committee. The committee suggest that public examples of enforcement will be necessary if OFSI is to be recognised as an effective deterrent. However, as OFSI has only been in existence for a year and a half, a review of its effectiveness should wait until two years after its formation.
The Economic Secretary had given evidence to the Treasury Committee that there should be a power for the Government to block a listing on National Security grounds and the committee requested a consultation on its scope and design. The report states that the UK must achieve a balance between focussing on financial flows from Russia, while not distorting the AML system, and creating a risk that other criminals slip by while attention is focussed on individuals with a specific nationality.
The Treasury Committee Report suggests that Brexit could allow additional flexibility in its use of sanctions and recommends that the Government ensures that it is ready to introduce any new powers it believes are necessary once any further flexibility regarding sanctions has become available as a result of the UK leaving the EU.
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The Treasury Committee heard evidence that derisking can have a significant negative impact on individuals and businesses, and cause illicit flows to move underground. The committee recommended that the Government publishes its strategy on how to address disproportionate derisking strategies within six months.
There is a reform programme underway for SARs reporting and Treasury Committee Report suggests that this reform should focus on the increasing number of SARs reports by those outside the core of the financial system, i.e. the facilitators. In addition, the Treasury Committee stated that, in a world of faster payments, NCA requested delays to payments could be better handled. While the Treasury Committee heard some evidence that quality, rather than quantity, of SARs should be encouraged, others gave evidence that modern data analytics means that quantity is also useful.
7. Information Flows
Evidence in the Treasury Committee Report noted that banks have requested additional powers to share information between each other. The committee noted that such a move would require consideration of customer privacy and should ensure that no customers unfairly lose access to financial services. The committee suggested that the Government review the scope to increase information flows at bank level over the next six months.
The Treasury Committee Report recommended that the impact of the NECC, whose role is to "plan, task and coordinate operational responses across agencies bringing together the UK's capabilities to tackle economic crime more effectively",2 will be monitored and annual updates of the measures of success of the NECC are published or provided to the Treasury Committee.
The UKBA Report stated that it is interested to see whether the NECC helps to tackle bribery through coordination of the many different bodies involved in investigation and prosecution. It also notes that the Government is establishing a National Assessment Centre for economic crime, including bribery, to facilitate improved intelligence sharing.
The Treasury Committee Report recommends that the Government retains, or replicates, the arrangements with the EU to maintain the flow of information to UK enforcement agencies on economic crime post-Brexit. The UKBA Report notes that measures with equivalent effect to the European Arrest Warrant, the European Investigation Order and other EU mechanisms for investigation and enforcement need to be in place before the UK leaves the EU.
8. Resources and Delays
The Treasury Committee Report states that the resources available to combat economic crime are greater in the private sector than the public. Consequently, any assistance from the private sector was said to be welcome. The report stated that lower salaries in the public sector mean that it is difficult to maintain the necessary expertise, so it recommended that the Government and public sector bodies consider pay flexibility in order to correct this. The committee also considered that the Government may not have allocated enough resources to marshal the private sector resources to achieve a 'hostile environment', so recommend funding any potential shortfalls.
The UKBA Report also comments on delays in SFO and CPS investigations, lack of progress updates and under-resourcing of the relevant agencies. Evidence indicated that delays could impose a significant financial and operational burden on companies, as well as a personal impact on individuals being investigated. The Select Committee recommends that the Director of the SFO and the DPP publish plans
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outlining how they will speed up bribery investigations and improve the level of communication with those under investigation for bribery.
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Herbert Smith Freehills LLP 2019 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.