In his opening remarks Herbert Smith Freehills partner Rod Fletcher (London) highlighted the increased risks and complexity faced by corporates in relation to corporate crime issues. Following the financial crisis, some critics had argued that corporate misconduct was not being tackled. Since then, policy and legislative reach has been extended and a more aggressive stance adopted by law enforcement in the UK and other jurisdictions. There have been developments in international whistleblowing, a new offence to be brought into force of taking a decision which causes a financial institution to fail, the introduction of deferred prosecution agreements in the UK, developments in the cartel offence, the publication of new sentencing guidelines, and increasing discussion of extending corporate criminal liability.
As a result, businesses face greater risks and emerging themes include greater international prosecutor and regulator co-operation, competing jurisdictions and challenges in global settlements.
2. Corporate witnesses and suspects – a prosecution perspective
Alison Saunders, Director of Public Prosecutions ("DPP"), suggested that many of the historic misconceptions about prosecuting fraud have now been debunked. There had been a perception that fraud was not being investigated by the police but instead dealt with via civil resolution, and that there was little point in pursuing trials because fraud offences are not understood by juries. Now there are specialist fraud investigators at all levels of law enforcement, and an approximate 85% conviction rate for fraud demonstrates advances made in responding to crime.
Following the merger of the Crown Prosecution Service ("CPS") and the Revenue and Customs Prosecution Office, the central specialist fraud division has grown in both expertise and resources. The CPS also has a new asset recovery strategy, and is looking at how it can increase recoveries both in the UK and overseas.
The CPS has agreed with the Serious Fraud Office ("SFO") to take a consistent approach to Deferred Prosecution Agreements ("DPAs"). There are currently no CPS cases being considered for DPAs, but the CPS is keen to discuss their potential application with interested corporates.
In a specific message to corporates that are witnesses in fraud prosecutions, the Director asked for "trust" that the CPS will prosecute, and deal with disclosure, properly. The CPS understands that corporates have confidentiality concerns – it does apply the disclosure test critically.
Adrian Leppard, Commissioner of the City of London Police, commented that despite the enormous scale of fraud, studies show that only around 10% of frauds are reported. The City of London Police is working closely with the private sector to improve reporting mechanisms.
The police face a number of challenges when investigating fraud, particularly frauds committed by organised criminal groups operating in countries where it can be difficult to obtain investigative assistance. Prevention is therefore key, and businesses can sign up to receive alerts from the National Fraud Intelligence Bureau to help protect themselves.
Turning to the Bribery Act 2010 (the "Bribery Act"), there is no Government mandate for the police to specifically target facilitation payments for prosecution. The Commissioner noted that the Bribery Act is aimed at changing mindsets, to increase awareness by corporates of their responsibilities, and to help the UK to become a better place to do business.
Nick Purnell QC, from Cloth Fair Chambers, emphasised the importance of prosecutors understanding that companies can be highly complex organisations, and that confidentiality and disclosure may be concerns for individual employees as well as businesses. The potential conflict between the position of a corporate and its senior management was discussed further in the context of DPAs during the panel session featuring David Green.
3. International Developments Part 1 – FCPA and local developments – what do companies need to know?
Herbert Smith Freehills partners Kyle Wombolt (Hong Kong), Scott Balber (New York), Jonathan Mattout (Paris), and Rob Hunt (Hong Kong) brought a local perspective to this energetic debate. They highlighted the different approaches, aims and resources of the various enforcement agencies in Asia, France and the US, and this was contrasted with the SFO stance discussed by David Green.
Increased local enforcement activity in Asia has been evidenced by the high-profile prosecution of the Kwok brothers in Hong Kong, and by an investigation into the bribery of doctors in the People's Republic of China. The trial of the Kwok brothers is a key case for Hong Kong's Independent Commission Against Corruption, challenging the perceived "cosy relationship" between tycoons and the Hong Kong Government. The PRC corruption investigation is an example of a more general trend in Asia, namely a shift away from a sole focus on prosecuting the recipients of bribes to also pursuing the bribe payers.
Asian law enforcement agencies are increasingly taking an interest where the US investigates conduct within their territories. Companies that are subject to investigation by more than one law enforcement agency may face multiple requests for disclosure, often complicated by differing privilege and data protection laws. Competing reporting and disclosure obligations may also arise, requiring careful management of information requests.
Increases in whistleblowing protections and incentives in the US have resulted in investigations worldwide, and recent legislative changes in France may have a similar effect.
Jonathan Mattout also highlighted a potentially very significant development in France in relation to anti-corruption enforcement, which is the recent granting of rights for accredited anti-corruption groups to commence criminal proceedings. NGOs such as Transparency International are expected to apply for such accreditation.
The third edition of our Asia Anti-Corruption Report will be available soon. Please contact James Martin if you would like a copy.
4. International Developments Part 2 – International investigations and alternative resolutions to criminal matters
David Green QC, Director of the SFO, restated that the SFO is not a regulator, deal-maker or purveyor of advice but a prosecutor. Corporate self-reporting will not automatically lead to a criminal prosecution as the SFO will apply the standard test for prosecutions (contained in the Code for Crown Prosecutors). Even where the evidential requirements for a prosecution are met, there may be no public interest in prosecuting a company that has taken action, amended its compliance regime, compensated victims and co-operated with the SFO. The SFO's view is that there are very strong arguments in favour of companies self-reporting and Mr Green indicated that he hopes self-reporting will become the norm.
Mr Green said that DPAs are a useful addition to the prosecutor's toolbox but accepted that it remains to be seen how they will work in practice. Queries include whether offering a 33% discount in fines (the same as available for entering an early guilty plea) will be sufficient, and what corporate up-take will be given the difficulties for the prosecution in proving corporate criminal liability under the identification doctrine. To solve this problem, Mr Green is proposing that section 7 of the Bribery Act be amended to introduce a new corporate offence of failing to prevent acts of financial crime.
Outlining the benefits of DPAs, the Director said that the SFO's expectation of companies wishing to enter into a DPA will be "co-operation, co-operation, co-operation"; the SFO cannot and will not enter into DPAs where a company has been reluctantly forced to admit wrongdoing. Co-operation could be evidenced during an internal investigation via the provision of an accurate report of the extent and scale of the problem, assistance with data collection, waiver of privilege where appropriate - including over witness accounts - and admissions of guilt.
Richard Lissack QC, of Outer Temple Chambers, raised a number of problems that may arise as the DPA regime is put into practice, including: (i) the fact that the most serious cases (which, given their complexity, might be best served by a DPA) are, under the current guidelines, less likely to be appropriate for a DPA; (ii) the question of what happens to material provided by a co-operative company in the event that their matter does not proceed to a DPA; and (iii) whether companies will be prepared to sacrifice senior individuals involved in wrongdoing for the sake of entering into a DPA. Corporates will need to decide whether the DPA process is worthwhile, given the current uncertainty and challenges.
Chris Vaughan, General Counsel of Balfour Beatty plc, discussed the desire of ethical companies to respond appropriately to criminal conduct by employees, and was positive about the potential benefits of DPAs. He highlighted, however, the difficulties of advising a board to enter into a DPA without some degree of certainty. To that end, he looked forward to cases beginning to come through the courts to provide greater clarity on the availability and likely terms of DPAs.
The session concluded with questions on the overlap of prosecutor/regulator jurisdiction, legal professional privilege, and the impact on DPA discussions of potential decisions to prosecute senior managers.
5. Current challenges in global compliance programmes
Herbert Smith Freehills partner Susannah Cogman (London), moderated a panel of in-house lawyers representing companies from the extractive, financial and consumer goods sectors. It was noted that companies will have been at different points in the development of their compliance programmes prior to the Bribery Act coming into force. While for some industries the Bribery Act triggered a re-focusing of existing efforts, for others it represented more of a "watershed" moment. Notwithstanding these differing start points, almost 2 years after the Act came into force it is timely for companies to pause and reflect upon their position and progress to date.
Specific questions posed to the panel included: (i) what information should be reported to board level and incorporated in monitoring programmes; and (ii) the extent to which anti-bribery and corruption ("ABC") measures are the responsibility of the business as opposed to "control" functions. In respect of the first, the panel agreed that context is all important; the results of risk assessments must be brought to the attention of the board, including identified control gaps and mitigants, and management information ("MI") should be driven by risk. Possible areas of MI that were discussed included metrics on the effectiveness of the programme, for example relating to third party standing, concession payments, gifts and entertainment, whistleblowing, training, high risk transactions, and staffing and the cost of compliance. In some areas, such as gifts and entertainment, reporting may be more valuable on a "by exception" basis or on the basis of specific risk factors. Different elements of monitoring progress were also discussed. On the second issue, it was noted that tone from the top of the business is essential; where it exists, all subsequent steps are easy, and where it does not, all other steps will fail.
Panellists also shared their key observations more generally, including in respect of third parties, and gifts and entertainment. The extent to which influence can be exerted over non-controlled joint ventures was seen as a key challenge. On gifts and entertainment, whilst everyone agreed that it was important not to over-labour this area, nonetheless in light of cases such as R v Sale  EWCA Crim 1306 (see our corporate crime update for more details) as well as overseas arrests, it appeared that if conduct was blatant enough, and particularly in the public sector, the authorities may take action in respect of relatively low value cases. This is an area to watch.
6. Regulatory financial crime priorities, and trends in FCA supervision and enforcement
Taking account of the number of delegates from leading financial institutions, separate "break-out" sessions were hosted for financials and corporates. This financial sector session covered trends and themes in the regulators' financial crime supervisory and enforcement work, senior management accountability and the new senior managers' regime, attestations, and the current HM Treasury review of enforcement decision making and sanctions.
It was noted that in the Financial Conduct Authority ("FCA") business plan for 2014/2015 there has been a swing back towards focussing on anti-money laundering ("AML"). Although assessing the quality of decisions on AML issues is undoubtedly a difficult area for the FCA, it is attempting to tackle them through supervisory and thematic work. Financial institutions making judgments on AML issues should document both the process and the ultimate decision. Given that the regulations and guidance covering AML are by their nature high level, it is very important for financial institutions not only to have robust AML procedures but also to be able to demonstrate that these have been followed in practice.
Herbert Smith Freehills partner Jenny Stainsby (London) presented on themes in FCA supervision, including the current emphasis on culture, conduct and competition. The FCA is focusing on competition in a way that UK regulators have not done before, and have been significantly bolstering their competition expertise and training programmes.
In relation to senior management accountability, the scope and effect of the new senior persons regime was discussed. Highly relevant to senior management accountability is the increased use of attestations, which allow the FCA to link responsibilities within financial institutions to particular individuals. Herbert Smith Freehills partner Hywel Jenkins (London) outlined some practical tips on dealing with attestation requests.
7. Managing financial crime risk in M&A and Joint Ventures
Herbert Smith Freehills partners Ben Ward and Daniel Hudson (London) were joined by Henry Pugh of Risk Advisory, and led a lively panel discussion about the relevance of, and how to deal with, corporate crime considerations in M&A transactions and joint ventures. The panel highlighted the need to tailor due diligence to the jurisdiction and industry sector, noting that this may be key for businesses in deciding when sufficient enquiries have been made. Possible contractual protections, such as representations, warranties and indemnities, were also discussed although these are not a replacement for thorough due diligence particularly since wider losses, such as reputational damage, may be difficult to quantify.
Work and vigilance should not end on completion of a deal or transaction. ABC procedures and practices should be reviewed, and, if necessary, amended as soon as possible to avoid a loss of impetus and ensure consistency.
Should an ABC issue arise, the best approach is to assess it in light of the broader context and manage or deal with it appropriately.
8. Fraud and ABC oversight from the audit perspective
Herbert Smith Freehills consultant Kathryn Cearns (London), partner Scott Balber (New York) and David Snell, a London-based PwC partner, discussed the increasing focus on ABC issues when companies are audited, noting that this is part of a general and regulatory shift toward greater levels of transparency, constant monitoring and compliance for businesses.
The scope of audit opinions is broadening and auditors may soon be expected to verify risk statements. The discussion highlighted the different approach an auditor will take to assessing potential ABC issues, looking at their impact on a company's financial statements, as compared with the broader investigations and enquiries that will be made as part of corporate due diligence on a merger or acquisition.
A caution was raised that businesses' occasional reluctance to self-report could conflict with an auditor's obligation to do so if ABC issues are discovered. Businesses should not ignore issues and management and auditors should, where appropriate, speak to people "on the ground".
9. Employee relations: the latest on whistleblowing, investigations and disciplinary outcomes
The usefulness of establishing an effective whistleblowing programme to assist organisations in identifying risks to their business was agreed. In practice, nomenclature can be important, with employees in some jurisdictions more likely to use a hotline if it is called an "ethical practices" hotline or a "professional alert" system, thereby avoiding negative connotations that may be associated with the term "whistleblowing". The cultural significance of this was emphasised by panellists from Asia and France. Herbert Smith Freehills partner Jonathan Mattout (Paris) provided an update on whistleblowing developments in France, and the panel then discussed a case study, drawing out the very different approaches of different jurisdictions to the ability of companies to collect and use covertly-obtained information.
Andrew Durant of FTI Consulting provided an overview of the latest developments in forensic data collection and analysis. With the increasing number of instant messaging services being used for business communication, it is dealing with and distilling the volume of such communications that presents difficulties, rather than obtaining the data in the first place.
10. Compliance in crisis: communications, press and transparency
Herbert Smith Freehills partner Alan Watts (London) used his experience in dealing with defamation and libel allegations to lead a discussion among Suzi Ring, a financial crime journalist at Bloomberg, David Rigg, the Managing Director of Project Associates, and Herbert Smith Freehills consultant Graham More (London).
The panel discussed the fine line for a corporate involved in an investigation between pro-actively managing enquiries from, and maintaining good relationships with, journalists and legal considerations, including but not limited to confidentiality requirements, contempt laws and market/regulator notification requirements.
The panel also considered when companies might wish to respond to allegations circulating on social media. The clear advice was that not all forms of social media are equal and that resources should be directed to identifying and responding to points likely to be seen by, and to influence, a relevant audience.
Cautionary tales and "war stories" were told to great effect, including on the threat of legal action and the use of libel laws. Experience showed that letters threatening legal action often do not prevent the story from being run and that companies must be prepared to follow through - and to see their letters reproduced in the media.