UNITED KINGDOM

High Court considers extraterritorial application of compulsory powers In the case of R (On The Application Of KBR Inc) v The Director of the Serious Fraud Office [2018] EWHC 2368 (Admin) (KBR), the High Court dismissed a judicial review brought by the applicant, finding that the SFO was able to compel the production of documents located outside the jurisdiction held by a foreign company. This is the first time that an English court has reasoned that compulsory disclosure powers exercisable by a UK criminal enforcement agency have extraterritorial application. For our full briefing on the case, please click here

Sanctions clauses in a changing sanctions regime

How far can a sanctions clause protect a party from having to perform their contractual obligations – and in the case of Iran-related sanctions concerns, how does this interact with the Blocking Regulation? In Mamancochet Mining Limited v Aegis Managing Agency Limited and Others [2018] EWHC 2643, the High Court held that, in order to avoid payment of a claim, insurers were required to show that payment would expose them to sanctions under US or EU law. A mere exposure to the risk of a sanction was not sufficient.

In this post, our Insurance Disputes team consider the implications of the decision.

Unexplained Wealth Order upheld, anonymity order discontinued

In National Crime Agency v A [2018] EWHC 2603 (Admin), the High Court dismissed an application to discharge unexplained wealth orders (UWOs) brought by the NCA.

UWOs were brought into effect in January under the Criminal Finances Act 2017 (see here and here) and allow certain law enforcement agencies to obtain and order which compels respondents to provide information as to how they acquired assets worth over £50,000, located anywhere in the world. A UWO can only be imposed where the subject of the order (or someone connected to them) is a politically exposed (PEP), or there are reasonable grounds to suspect that the subject (or someone connected to them) has committed a serious crime, and there are reasonable grounds for suspecting that the known source of the person's lawfully obtained income would have been insufficient for the purposes of acquiring the assets.

In this case, the NCA argued that Mrs A's husband, a former chairman of a state-owned bank in Azerbaijan was a PEP, and that there was reasonable suspicions in relation to how some of their properties were afforded. Mrs A challenged the UWOs on various grounds, including with arguments that her husband was not a PEP.

Mrs A also obtained an anonymity order, which she argued should continue to apply, on the basis that Mrs A and her husband were at risk of unfair criminal proceedings and detention on conditions that would violate their rights under Article 3 and 8 of the European Convention on Human Rights (ECHR) if the couple returned to Azerbaijan, where they were originally from. The application was refused on the grounds that disclosure of identity did not violate these rights, that there was no evidence of the couple returning to Azerbaijan and therefore no evidence of being at risk, and that there was a clear public interest in identifying the individuals and publishing a full report of the judgment.

Mrs A has been identified as Mrs Zamira Hajiyeva, whose husband is a former chairman of the International Bank of Azerbaijan, and is currently serving a 15-year prison sentence for embezzlement in Azerbaijan. The court found Mr Hajiyeva to be a PEP, and as such Mrs A was a person against whom a UWO could be granted. Mrs Hajiyeva has since been arrested based on the basis of an extradition request from authorities in Azerbaijan and currently faces two charges of embezzlement.

OFSI publishes Annual Review  On 5 October 2018, HM Treasury's Office of Financial Sanctions Implementation (OFSI) published its Annual Review for the 2017-18 financial year. This is the first such review published by OFSI and provides an overview of OFSI's activities in 2017-18, as well as looking to the future. We set out some of the highlights of the Annual Review below. The Annual Review confirms that 122 new asset freeze targets (or "designated persons") were added to the UK Consolidated List, mostly under the DPRK and ISIL regimes. During this period, the UK also introduced 'avoidance of delay' provisions allowing new UN sanctions regimes to be implemented immediately after the relevant resolution is adopted (rather than waiting for EU action, as was previously the case), reducing the risk of asset flight. In 2017-18, 122 suspected breaches of financial sanctions were reported to OFSI. OFSI did not impose any monetary penalties in 2017-18 (having had the power to do so since April 2017), but it is currently investigating several cases where a penalty may be appropriate. OFSI states that it is likely to impose monetary penalties in 2018-19, although the majority of case will continue to be resolved by enforcement activity short of a penalty. The Annual Review says that OFSI will continue to raise awareness of financial sanctions obligations in 2018-19, by producing guidance and speaking at events. It will ensure it maintains a central role in global sanctions implementation as the UK prepares to leave the EU. It is said that the Sanctions and Anti-Money Laundering Act, which received Royal Assent in May, will help to achieve this.

Treasury Select Committee inquiry into the Bribery Act 2010 hears evidence  The Select Committe on the Bribery Act 2010 heard evidence from the City of London Police, the SFO and the FCA about how the UK deals with bribery cases, whethere there is sufficient funding and resources, and what improvements could be made.  The Committee was appointed on 17 May 2018 and a call for evidence was published on 20 June 2018. On 13 November 2018, evidence is expected from, amongst others, Lisa Osofsky, Director of the SFO and Max Hill QC, Director of Public Prosecutions. 

FCA TR18/3: Money laundering and terrorist financing risks in the e-money sector  The FCA published its thematic review (TR18/3) of money laundering and terrorist financing risks in the electronic money (e-money) sector. The FCA visited 13 e-money institutions to review e-money products, including prepaid cards and digital wallets and found that the firms had reasonably effective anti-money laundering and counter-terrorist financing systems and controls. The review did however highlight some weakness, such as firms not effectively using their business-wide risk assessments and having differing approaches to training. The FCA has encouraged all firms to avoid any complacency.

CMA launches new cartel awareness campaign

The Competition and Markets Authority (CMA) launched a new campaign to spread awareness about unlawful practices and encourage individuals to come forward if they suspect a business has taken part in cartel behaviour, such as fixing prices or contracts. This follows the CMA's February 2018 campaign and new research by ICM Unlimited highlighting companies' continuing lack of awareness of how to comply with competition law. The CMA has said that previous campaigns have driven a 30% rise in the number of tip-offs to its cartels hotline.

The CMA's campaign is targeting industries including construction, manufacturing, recruitment, estate agents and property management and maintenance. These are sectors identified as particularly susceptible to cartels.

Since April 2015, the CMA has issued over £155 million in fines following investigations into anti-competitive practices and it is currently investigating 15 cases.

HMRC: List of businesses that have not complied with the Money Laundering Regulations 2017  HMRC published a list of businesses that have not met with their obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which came into effect on 26 June 2017. HMRC has a duty to publish details of businesses that have been penalised for not complying with the regulations. 

Government launches Counter Fraud Profession

The UK government announced its commitment to tackle fraud and error across the public sector. The Government Counter Fraud Profession will deliver new standards, guidance and tools to help build counter fraud capability across 10,000 public sector counter fraud specialists.

Privilege no defence to notice requiring production of client's privileged documents to regulator  The High Court held that an audit client could not withhold documents on grounds of privilege when responding to a notice requiring the production of documents in connection with an investigation into the auditor’s conduct: The Financial Reporting Council Ltd v Sports Direct International Plc [2018] EWHC 2284 (Ch).

The decision suggests that, where privileged documents are provided to a regulator for the purposes of an investigation into the conduct of a regulated person, and the privilege belongs to a client of the regulated person, there is no infringement of the client’s privilege. Accordingly, the fact that documents are subject to a client’s privilege will not justify a refusal to provide the documents to a regulator in response to a demand under its statutory powers, whether or not the statute can be taken to override legal professional privilege.

The decision also confirms (though it was not actually in doubt) that non-privileged documents do not become privileged merely by being attached to privileged lawyer/client communications for the purpose of giving or obtaining legal advice.

For our full briefing on the decision, please click here.

Court of Appeal decision in ENRC: Orthodoxy restored on litigation privilege, but narrow interpretation of "client" remains for now The Court of Appeal handed down its eagerly awaited decision in the ENRC appeal: The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Ltd [2018] EWCA Civ 2006. At first instance, the High Court took a restrictive approach to both litigation privilege and legal advice privilege (see our summary of the decision here). The Court of Appeal has allowed the appeal on the question of litigation privilege but has, with apparent reluctance, dismissed the appeal on legal advice privilege, concluding it is a matter for the Supreme Court.  

In relation to litigation privilege, the Court of Appeal has, helpfully, disagreed with the High Court’s overly strict approach to whether documents have been prepared for the dominant purpose of litigation. The High Court found that, where ENRC’s purpose was to investigate allegations made by a whistleblower, this was not sufficient to meet the dominant purpose test. The Court of Appeal disagreed, finding that this was all part and parcel of preventing or defending litigation. It also disagreed with the High Court’s problematic view that documents prepared in order to avoid contemplated litigation were not covered by litigation privilege. In the Court of Appeal’s judgment, the purpose of avoiding or settling proceedings is covered by litigation privilege, just as the purpose of resisting or defending them.

In relation to legal advice privilege, the Court of Appeal considered itself bound by Three Rivers No 5 to find that the privilege is limited to communications between a lawyer and those tasked with seeking and receiving advice on behalf of the client company. In other words, it agreed with the judge’s interpretation of the effect of Three Rivers No 5 [2003] QB 1556, as also arrived at by Hildyard J in the The RBS Rights Issue Litigation [2016] EWHC 3161 (Ch) (considered here).

However, the court said that, if it had been open to it to depart from Three Rivers No 5, it would have been in favour of doing so. This was in part because, in the Court of Appeal’s view, the decision puts large corporations at a disadvantage, when it comes to legal advice privilege, compared to individuals and small corporations. Those tasked with seeking legal advice on behalf of a large corporation are less likely to have the relevant factual information, and will therefore have to rely on employees whose communications with the lawyers will not, on the reasoning in Three Rivers No 5, be covered by privilege (unless litigation privilege applies). The Court of Appeal also accepted that English law is out of step with international common law on this issue, which it considered undesirable. However, it said the matter would have to be considered again by the Supreme Court in this or an appropriate future case.

Julian Copeman, Anna Pertoldi and Maura McIntosh consider the decision further here.

European Commission communication on improving AML supervision The European Commission published a communication proposing to amend the Regulation establishing the European Banking Authority (EBA) in order to reinforce the role of the EBA in anti-money laundering (AML) supervision of the financial sector. The European Commission has also presented a strategy to improve information exchange and cooperation between prudential and AML authorities, and has invited the European Central Bank (ECB) to work with AML supervisors to conclude a multilateral MoU on exchange of information by 10 January 2019. A supplementary factsheet has also been published.

FCA closing more investigations than ever Data obtained from a Freedom of Information request by Global Investigations Review revealed that the FCA is closing more investigations than before but failing to cut down on its case load. The FCA closed 208 investigations in the year to March 2018, this compares to the 115 closed in the previous year and the 98 probes closed in 2015/2016. Of the 109 regulatory probes resolved in the last year, the FCA closed 70 with a penalty and ended 39 without sanction. The situation was reversed on the criminal side, with 73 investigations dropped and 26 brought to a close with a penalty. However, the number of cases closed has failed to make a dent in the agency’s workload. The FCA, as of 6 September, has 523 active investigations – 167 criminal, 325 regulatory and 31 civil – the most in its history.

SFO speeches at the Cambridge International Symposium on Economic Crime 2018  

All economic crime has victims

The SFO published a speech delivered by its Head of Proceeds of Crime and International Assistance Division, Elizabeth Baker, at the Cambridge International Symposium on Economic Crime 2018. In her speech, Miss Baker discussed processes for recovering proceeds of crime, and pursuing costly cases for the greater public interest. She also discussed recent SFO cases as well as the use of unexplained wealth orders.  Rendering accountable the wealth of criminals

The SFO published a speech delivered by Alun Milford, SFO General Counsel, at the Cambridge International Symposium on Economic Crime 2018. In his speech, Mr Milford discussed how best to identify and render accountable the wealth of criminals. He went on to note that this was achievable through adopting various theories of liability, using bespoke powers of investigation and enforcement, and working together with other nations and their legal systems.   Ensuring our country is a high risk place for the world's most sophisticated criminals to operate A speech by the Director of the SFO, Lisa Osofsky, described what she envisages for the SFO during her tenure as Director. This included:

working with newcomers to DPAs: Argentina, Canada and Australia; strengthening international cooperationn including by hosting international secondments; working closely with other domestic law enforcement agencies, including the NCA, police and HMRS and seconding staff to the National Economic Crime Centre; and closer work with regulators and non-governmental organisations. 

Ms Osofsky also noted the work of the SFO in exploring the use of technology to improve its intelligence function and the encryption of data and its use of DPAs. 

NCA speech at the Cambridge International Symposium on Economic Crime 2018 In a speech delivered by the deputy director of the NCA, Nigel Kirby, it has been announced that the head of the London unit of an unnamed foreign bank has been arrested on suspicion of bribery, following a seven-month investigation. The bank's commercial director has also been arrested. During his speech, Mr Kirby also noted that the NCA arrested 30 individuals, including both former and current foreign officials on suspicion of bribery and corruption and that it is working closely with the US Department of Justice on investigations. He also said that “several” UWOs were in the pipeline. Mr Kirby also stated there will be an increase of NCA asset freezing orders in the future.

Five sentenced in FCA's second largest criminal prosecution of £2.8 million investment fraud   In a case brought by the FCA (Operation Tidworth, which was the FCA's second largest criminal prosecution), five individuals have been sentenced to a total of 17.5 years' imprisonment for their roles in a share fraud carried out through a series of boiler room companies which led to the loss of more than £2.8 million of investors' money. The sixth defendant, Michael Nascimento (who was the instigator and main beneficiary of the fraud), was sentenced separately on 14 September 2018.

House of Commons report: The future of sanctions 

The House of Commons Library published a report on the future of sanctions. The report refers to the UK's new Sanctions and Anti-Money Laundering Act 2018, which is to be implemented when the UK leaves the EU. The report warns that there is a danger sanctions could become entangled with increasingly competitive and nationalist trade policies and, being less co-ordinated, could lose legitimacy. The report notes that the UK’s approach to sanctions is likely to remain closer to the EU’s, but the UK’s exit may itself change the EU’s approach. To read the full report, please click here.