We look back at how our forecasts for the corporate crime world played out last year, and we look forward at what’s in store for the year ahead.
We said in January last year that we might not be any closer to understanding the precise implications of Brexit for the corporate crime world by the end of 2017. Well, even though we are nearly a year through the two year Article 50 notice period, we still have no details of what the UK’s future cooperation with the EU on such matters will look like. That said, nothing has happened to change the view we expressed a year ago either.
We still do not expect Brexit to have any real impact on the UK’s substantive legal regimes in relation to bribery and corruption, anti-money laundering or proceeds of crime. It likely will have an impact on some procedural measures for international cooperation in criminal matters, but we expect the UK Government and the EU to want to preserve the benefits of those measures as a priority, through new bilateral agreements. The big question remains in relation to extradition: what will replace the European Arrest Warrant and Part 1 Extradition procedures?
Last year, in the wake of the SFO’s record Deferred Prosecution Agreement (“DPA”) with Rolls Royce, we suggested the SFO had a bright future. Certainly, the SFO had its successes in 2017. It finalised another large DPA, with Tesco, generating £129 million. It started a prosecution of Barclays Bank and some of its highest ranking former executives in respect of the bank’s 2008 Qatari funding (see below). It also won the controversial ENRC privilege decision, establishing that litigation privilege will not apply to documents generated in a corporate investigation when criminal proceedings are not genuinely in prospect (see below).
2017 also saw the revival of Theresa May’s pet project to merge the SFO with the NCA, despite almost universally negative reaction to the idea among commentators and practitioners. In the end, it was Mrs May’s electoral misfortune which granted the SFO a reprieve, with the plan now confirmed as dropped again. Our own experience, and what we hear anecdotally from others involved in corporate crime matters, is that the SFO starts 2018 as a much emboldened enforcement agency, prepared to take an increasingly hard line with potential defendants both individual and corporate. However, its annual budget remains limited and it still has to go cap-in-hand to the Treasury for ‘blockbuster’ funding when it needs more money to pursue larger cases. We see no real prospect of that changing in 2018. It will also gain a new director in 2018. Whilst David Green has clearly made a significant success of his tenure, much will depend on whether the new director elects to continue down the path set by Green (a focus on corporate bribery & corruption, DPAs, individual and corporate prosecutions) or takes a different approach.
Criminal Finances Act
2017 saw the arrival of the Criminal Finances Act, and, most notably, the introduction of the new corporate offence of failure to prevent the facilitation of tax evasion, which came into force on 30 September. The speed with which the offence was enacted and implemented has left corporates across the globe scrambling to address the adequacy of their prevention procedures.
As of 31 January 2018 Unexplained Wealth Orders will be a weapon against any person or company with an interest in property over £50,000 which appears to be inconsistent with their “known”(for which read declared) income. Investigators will be able to temporarily freeze and ultimately forfeit assets, even where the target has not been convicted. These are some of the most draconian anti-corruption and anti-tax evasion powers in the world. We expect to see the National Crime Agency and HM Revenue & Customs use these new powers almost immediately to investigate property held by beneficiaries where there appears to be a disparity between the value of their interest and the level of their declared income. More information on UWOs.
2017 saw an expansion of sanctions under UK, EU and US law against individuals and entities from North Korea, Venezuela and Russia. The changes include asset freezes and travel restrictions against individuals and stricter export controls across certain borders. Cross – border business will of course be impacted.
2018 may see the development of an innovative solution by the impacted countries to soften such impact – Russia and Venezuela are talking about creating virtual currencies, and this could allow them to side-step some of the sanctions. Furthermore, we expect to see more challenges to (existing and future) sanctions legislation. Take Rosneft for example, which has reopened a legal challenge against EU sanctions levied against it.
The question of dishonesty
In what was surely the “criminal law” case of the year (that was actually a claim under a betting contract), the Supreme Court in Ivey v Genting Casinos unanimously decided that the second, subjective limb of the “Ghosh” test (whether the defendant knew what they were doing was dishonest by the standards of ordinary reasonable and honest people) should no longer apply. Juries need now only consider, irrespective of the defendant’s beliefs about honesty, whether the defendant’s conduct was honest or dishonest by the objective standards of ordinary honest people. There remains a subjective limb but this is a matter of evidence to be determined prior to the question of dishonesty. While the judgment is strictly speaking obiter as regards criminal cases, the Court of Appeal has recently applied the case.
We expect that the rate of convictions in criminal trials involving dishonesty will increase following the removal of the traditionally difficult hurdle of subjective dishonesty. Its removal also has consequences for claims against professionals, such as those in the Solicitors Disciplinary Tribunal, which followed the criminal test. Usually, as is the case in corporate crime, it is straightforward to establish that what a professional was doing was objectively dishonest. Needless to say, we don’t expect there to be any change on the test for civil dishonesty which already follows the single-tiered objective test.
Interesting criminal cases
In the early months of last year we saw the SFO secure its third and fourth DPAs with Tesco and Rolls Royce, netting it collectively just over £800 million in fines. In addition to Ivey, as already noted, the decision of the High Court regarding privilege in investigations in the case of the SFO v ENRC sent shockwaves through the legal profession – though the recent decision of Bilta (UK) v RBS has said a realistic and commercial approach should be taken. Further afield, a number of prosecutions have been brought and settlements reached arising out of alleged fraudulent and anti-competitive practises in the foreign exchange marketplace. We saw several banks reach agreements with US and other regulators to pay fines in relation to market manipulation, and a number of individuals charged and convicted.
The start of 2018 has seen the trial of the three individuals from Tesco charged with fraud and false accounting offences abandoned following one of three suffering a heart attack. It remains to be seen whether a re-trial will be pursued. We also await the outcome in the US of BNP Paribas following its guilty plea to market manipulation.
Cryptocurrency and Blockchain
We saw cryptocurrency and blockchain technology catapult into the mainstream in late 2017, when Bitcoin surged in value thanks in no small part to an increased focus in the media on the performance of the cryptocurrency over the past year. As its popularity has risen, we have seen regulators scramble to keep up with a changing technology which does not always sit neatly within their regulatory regime. Last year, South Korea announced its intention to step up regulation of cryptocurrency, sparking rumours that it might be banned. The SEC published guidance clarifying what it expects from promotors offering Initial Coin Offerings (“ICO”). In November, the Financial Conduct Authority took a less aggressive approach, stating that the question of whether or not an ICO was a regulated activity would be decided on a case–by-case basis. It made clear that any firm offering Contracts for Difference where the underlying investment is cryptocurrency, would have to be regulated. Separately, we have seen more FinTech companies starting to rely on blockchain as a secure and reliable way of conducting due diligence on new service users.
With the rise of virtual banks and crowd funding, as well as the increase in prominence of cryptocurrencies, we expect to see more firms looking to blockchain as a cost effective and secure way of conducting due diligence on clients and transactions. We also predict an increased regulation of cryptocurrency. Given the relative ease with which ownership of cryptocurrency can be obscured, we anticipate that in many jurisdictions, this will take the form of compulsive transparency requirements, such as a central register of beneficial ownership, akin to the measures brought in last year in England and Wales to increase transparency around beneficial ownership of property.
Fifth Money Laundering Directive and the Office for Professional Body AML Supervision (“OBPAS”)
In 2017 we saw the European Union’s Fourth Anti-Money Laundering Directive (4MLD) come into force as part of the European Commission’s fight against terrorist financing. At the same time, the Fifth Directive (5MLD) is already under discussion. It seeks to harmonise 4MLD, providing a minimum standard for nations to adhere to, and it widens the applications of MLD4 to include virtual currencies. Virtual currency exchange platforms and custodian wallet providers, such as Coinbase and Electrum, will be subject to the same obligations to implement preventative measures as financial institutions. On 21 December 2017, we saw the supervisory body on anti-money laundering. OPBAS will oversee the 22 accountancy and legal professional bodies (so called ‘self-regulatory organisations (“SROs”)) and will aim to ensure that the UK is working effectively to prevent criminal practices.
As 2018 dawns we expect to see the European Parliament adopt 5MLD at its plenary session in April. If brought into force, it will give member states 18 months to bring national laws and regulations to be compliant. We expect to see OPBAS flex its new found information gathering powers and perform reviews over some SROs as it seeks to justify its existence ahead of HM Treasury’s planned ‘effectiveness test’ scheduled for June 2022. This will include annual questionnaires and anonymised reports, which they will liaise directly with SROs on. Firms have questioned the proposed effectiveness of the introduction of OPBAS, to regulate them. A positive note for regulated firms is that OPBAS has no authority to use their information gathering powers directly against them.
In 2017 we saw the chief executive of the Financial Conduct Authority announce that there would be a move away from LIBOR to “an alternative index”, due to the fragility of the process for setting the rate, and a drop in transactions which underpin the rate. Elsewhere, questions were raised, and appeals have been lodged after it came to light that the SFO’s main expert, by its own admission, “lacked integrity” and had texted friends for help whilst giving evidence during the criminal trial of the brokers. We also saw questions subsequently raised over the SFO’s medical expert in the trial of Tom Hayes, who was convicted in 2015.
This year we await the outcome of Hayes’s case which is under review by the Criminal Cases Review Commission. Other than that, we expect the long running Euribor prosecution by the SFO to reach trial on 9 April 2018.
As we predicted, privilege has remained a key issue for companies and their advisers. Following a number of controversial court decisions, regulators and prosecuting authorities seem to be winning in their battle to obtain disclosure of documents produced by companies conducting internal investigations in the face of regulatory investigation or criminal prosecution. Most controversial to date was Mrs Justice Rose’s decision in ENRC v SFO in July of last year. She ruled in favour of the SFO in respect of its disclosure requests in all but one category, ordering the disclosure of documents, including notes taken of employee interviews and documents procured by forensic accountants, as part of an internal investigation conducted by ENRC. While the majority of the judgment is consistent with what would now appear to be accepted principles with regard to internal investigations, it has attracted considerable criticism for having apparently narrowed the circumstances in which a party will be able to rely on litigation privilege when faced with a criminal investigation. We agree that this judgment is troubling since it appears to suggest that a party subject to criminal investigation would need to be aware that they were, in effect, guilty of a criminal offence, and be prepared to rely on those facts in support of its assertion of privilege, in order to demonstrate to the court that a criminal prosecution was reasonably contemplated.
The fight may not be over for ENRC just yet as it was recently granted permission to appeal to the Court of Appeal. The Law Society has sought permission to intervene in the appeal. Our own view is that not only is the decision too restrictive, but privilege and investigations needs revisiting by the courts, particularly the very narrow Three Rivers approach to who (in corporate terms) is a lawyer’s client. Unfortunately, there seems to be little appetite for such a challenge.