The two most impactful changes in the Bribery and Corruption sector in 2017 were the court’s comments on the scope of privilege in internal investigations, and the new corporate liability for failure to prevent tax evasion offence in the Criminal Finances Act 2017. We explore those impacts below.
In May 2017, the question of privilege in respect of internal investigations again came before the English High Court in the case of Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd  EWHC 1017 (QB).
In deciding the case, the High Court applied a strict interpretation of the scope of the rules of privilege in internal investigations.
- notes taken by lawyers of the evidence given to them by ENRC's employees, former employees, subsidiaries, suppliers and other third parties;
- materials generated by forensic accountants, as part of a “books and records” review, with a focus on identifying controls and systems weaknesses and potential improvements; and
- emails between a senior executive and the head of mergers and acquisitions at ENRC, who was a Swiss qualified lawyer
were not privileged.
The documents in question did not contain legal advice. A note of what a solicitor was told by a prospective witness was not, without more, a privileged document, even if the solicitor had interviewed the witness with a view to using the information that the witness provided as a basis for advising the solicitor’s client. Nor were the documents prepared with the sole or dominant purpose of conducting litigation. The Court drew a distinction between “the reasonable contemplation of a criminal investigation” and “the reasonable contemplation of a prosecution”.
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. 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 caused consternation at the time. It is remarkable in that, whilst it is consistent with the prevailing trend to be tough on corrupt practices, it may have a negative effect by impeding responsible businesses from investigating allegations of misconduct and therefore discourage early self-reporting (which is being championed by the Serious Fraud Office).
On 10 October 2017, the Court of Appeal granted ENRC’s application for permission to appeal the first instance decision. Compliance professionals, in-house counsel and private practice litigators will all await the decision on appeal with interest.
Criminal liability introduced for corporates facilitating tax evasion
The UK Government’s drive to extend the scope corporate liability, particularly in connection with financial crime, continues with the coming into force of the Criminal Finances Act 2017 (CFA) on 30 September 2017.
We summarise the key points arising from the CFA below, including the steps that corporates need to be taking now in order to ensure that they can avail themselves of the only defence available prescribed by the CFA.
What are the new offences?
The two new offences are:
- The failure to prevent the criminal facilitation of UK tax offences (the UK Offence); and
- The failure to prevent the criminal facilitation of foreign tax offences (the Foreign Offence).
More specifically: “A relevant body (B) is guilty of an offence if a person commits a UK [or foreign] tax evasion facilitation offence when acting in the capacity of a person associated with B.” A "tax evasion facilitation offence" means an offence consisting of: • Being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person; • Aiding, abetting, counselling or procuring the commission of a tax evasion offence; and • Being involved in the commission of an offence consisting of being knowingly concerned in the fraudulent evasion of a tax.
Who can be held liable for the new offences?
A relevant body includes companies and partnerships, including those formed or headquartered outside the UK but which carry on business in the UK.
For whose actions can corporates be held liable?
Persons associated with the company include:
- An employee, acting in the course of their work;
- An agent, acting in their capacity as an agent; or
- Any person who performs services for or on behalf of a company in their capacity of performing a service.
Corporates will be liable for the actions of “persons associated” regardless of whether the conduct occurs in the UK or anywhere else in the world, provided that the conduct infringes UK law.
What taxes are covered?
The taxes covered are any tax imposed under the law of any part of the UK, including national insurance contributions, or under the law of the relevant foreign country.
What defences are available?
The only defence is for the relevant body to prove that, at the time the facilitation offence was committed, it had in place such prevention procedures as it was reasonable in all the circumstances to have in place, or it was not reasonable to expect the relevant body to have any prevention procedures in place.
Is there any guidance on what constitutes “reasonable prevention procedures”?
The Chancellor of the Exchequer must prepare and publish guidance about procedures that relevant entities can put in place to prevent the commission of offences. In the meantime, HMRC has issued guidance formulated around the following six guiding principles:
- Risk assessment.
- Proportionality of risk-based prevention procedures.
- Top-level commitment.
- Due diligence.
- Communication (including training).
- Monitoring and review.
The six principles are identical to those required to defend a charge under section 7 of the Bribery Act 2010. However, it is not enough simply to rely on existing anti-bribery policies and procedures. Entities must thoroughly assess the risks and tailor policies to ensure that it looks to prevent the facilitation of tax evasion by its associated persons. Entities will be required to demonstrate that they had reasonable policies and procedures in place which took account of these principles to defend any charges.
What is the penalty for being found guilty?
An entity guilty of the UK Offence is liable to an unlimited fine and the confiscation of assets. An entity guilty of the UK offence is liable to an unlimited fine. For both offences there is the obvious associated risk of (potentially significant) damage to reputation not only on conviction, but on the investigation becoming public.
In the event of a prosecution, these offences may be dealt with using the new Deferred Prosecution Agreement scheme if the Serious Fraud Office agree the case is appropriate.
What is the appetite for prosecutions under the CFA?
Entities will technically become liable for the offences from the first day it is in force. That said, HMRC recognises that it will take entities some time to implement or amend relevant policies and procedures. It is therefore unlikely that the prosecuting authorities/HMRC will hold entities to account immediately. HMRC does, however, expect there to be “rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force.”
In the wider context, however, this is the latest in the UK Government’s move towards compelling corporates to take responsibility for the actions of their associates both at home and abroad. We see the “strict liability” nature of the new offences, and the way that the available defence is clearly modelled on the section 7 Bribery Act 2010, as part of a growing trend towards making economic crime generally a problem that it is incumbent on corporates to stamp out and prevent, rather than the burden being on the prosecuting authorities to pursue individuals.
The UK Government clearly sees enforcement of an aggressive anti-corruption regime not only as politically expedient globally, but as economically desirable. The comments from retiring SFO Director David Green in last month bear this out:
“If we take our foot off the pedal in relation to corporate crime and commercial bribery, others will fill the void. The Department of Justice in Washington is not shy about enforcing the Foreign Corrupt Practices Act against foreign companies. If we don’t, they will…
It is surely right that the UK should lead enforcement in relation to UK companies or companies with strong connections here. That demonstrates our commitment to the level playing field and ensures that hefty financial penalties go to UK public coffers rather than elsewhere.
We also await with interest the result of the Ministry of Justice’s call for evidence on the question of corporate criminal liability, particularly the possibility of creating a new offence of a company failing to prevent acts of economic crime by persons associated with it, on the Section 7 model.”