Financial Crime Time - Your update from RPC: 2023 Q2

On 30 March 2023, the government published its Economic Crime Plan 2, 2023-2026 (ECP2). Its main objectives are to:

• reduce money laundering and recover more criminal assets;
• combat kleptocracy and drive down sanctions evasion; and
• fight fraud.

The government considers ECP2 is necessary as fraud accounted for 41% of all crime experienced by adults in England and Wales in the year ending September 2022. Financial scams by overseas fraudsters are estimated to cost the UK £7 billion a year. 

Under ECP2, 475 new financial crime investigators will be recruited within the National Crime Agency (NCA), City of London Police, and Regional Organised Crime Units, HMRC and Crown Prosecution Service Proceeds of Crime Division, to improve the detection and disruption of money laundering, criminal use of crypto and money mules, and increase asset recovery. 

ECP2 will also establish a new multi-agency Crypto Cell to enhance law enforcement capacity to pursue and prosecute the use of cryptoassets to launder money, and expand the existing NCA Combatting Kleptocracy Cell, which investigates and disrupts corrupt elites and oligarchs accessing the global financial system. 

ECP2 signals that the government's focus on money laundering, sanctions evasion and cryptoassets is only going to increase.   Businesses should ensure they incorporate the ECP2 outline into their compliance and governance programme.

The much discussed Economic Crime and Corporate Transparency Bill 2022-23 (ECCT) has passed through the House of Commons and will come before the House of Lords for further amendments in late June 2023, and it could be passed into law as early as late summer 2023.

If introduced in its current form, the ECCT will introduce a radical new offence of 'failure to prevent fraud'; reform Companies House’s powers; and introduce new powers for law enforcement agencies to deal with cryptoassets.  

The most significant change the ECCT proposes is the new 'failure to prevent fraud' offence. The aim is to 'hold organisations accountable if fraud is committed by their employees with the intention of benefitting the organisation', and the organisation did not have reasonable prevention procedures in place. As with other 'failure to prevent' offences, the offence is one of strict liability, which means that there is no requirement that the organisation knew of the underlying offence. 

This new offence, following one of the Law Commission's recent recommendations (see our podcast episodes on the issue and the options), was initially proposed to be of general application to all partnerships and companies. This proposal was met with significant resistance due to the potential compliance burden on SMEs and, as a result, it will only apply to 'relevant bodies', which are large corporates or partnerships (as defined in the Companies Act 2009) who satisfy two or more of the following criteria:

(i) a turnover of more than £36 million; 
(ii) more than 250 employees; or 
(iii) more than £18 million in assets.

Relevant bodies will be liable for the strict liability offence if:

• a specified offence has been committed by an employee or agent of the relevant body, namely, offences under the Fraud Act 2006, false statements by company directors, false accounting, fraudulent trading or cheating the public revenue; 
• the offence was committed with the intention of benefitting the relevant body or any person to whom, or to whose subsidiary, the associate provides services on behalf of the relevant body; and 
• the relevant body did not have reasonable prevention procedures in place. 

The ECCT will provide the Registrar of Companies House with greater powers to request information from companies in relation to filings where information is identified as potentially fraudulent, suspicious, or might impact the integrity of the register. Companies House will be able to cross-check this data with other public and private sector bodies to ensure accuracy. These powers are supported by new criminal offences for failing to respond to requests for information and failing to record, or keep updated, the address of the company's registered office.

Finally, the ECCT will amend the Proceeds of Crime Act 2002 (POCA) to explicitly apply criminal and civil asset recovery powers to cryptoassets. This includes allowing officers to 'recreate' cryptoasset wallets and transfer assets into a law-enforcement controlled wallet and additional seizure powers to allow the seizure of devices on which cryptoasset access may be recorded. 

The ECCT will be the biggest change to corporate crime in the UK for over a decade. The Bill could be passed in late summer 2023, and it is vital organisations start to prepare for the changes now.  

Recent data obtained as a consequence of a freedom of information request, shows that in the last year, 25 new criminal investigations were opened by HMRC’s Offshore, Corporate and Wealthy Unit (the OCW). 

The OCW was created following the 2016 Panama Papers leak, forming part of HMRC's Fraud Investigation Service. Its aim is to tackle high value tax evasion, financial fraud and money laundering. 

The OCW’s remit includes both corporates and high-net worth individuals. The OCW deems a taxpayer to be within its target if they are earning over £200,000 a year or have assets equal to or above £2 million in any of the last 3 years. 

The number of prosecutions brought by HMRC has materially increased over the last 10 years, from 165 in 2009-10 to 573 in 2019-20. The OCW has assisted HMRC to increase the number of prosecutions for tax fraud.  

A Serious Fraud Office (SFO) investigation has concluded with three lengthy prison sentences being imposed against three individuals involved in the international steel trade, following charges for a range of fraud offences. This was the culmination of an investigation by the SFO spanning 36 jurisdictions and costing at least £6 million, with a 20-week trial adding a further £2 million to the bill. See the SFO's announcement here.

Balli Steel collapsed in 2013 owing $500 million to over 20 creditor banks. This led to an investigation and allegations that the company had fabricated contracts for non-existent steel shipments to secure short-term bank loans which were then used to fund the company's operations. The contracts were certified, not by an independent shipping company, but by an in-house shipping company incorporated in the Cayman Islands and operated via fax machine from the company’s UK office. 

Nasser Alaghband (former CEO of Balli Steel and Director of Balli Group) pleaded guilty to one count of fraudulent trading before the trial began. In a sentencing hearing in April 2023, he received a prison sentence of six and a half years. 

Two other executives, Louise Worsell (Managing Director of Balli Steel Middle East FZE) and Melis Erda (Balli Group Treasurer) were convicted after trial of multiple counts of conspiracy to defraud and each received prison sentences of over three years. 

The company's Finance Director was found not guilty of fraudulent trading with intent to defraud creditors. The final defendant of the five accused is still to stand trial.

In Fresh View Swift Properties Ltd v Westminster Magistrates’ Court [2023] EWHC 605 (Admin), the Administrative Court, in dismissing a judicial review of a £67,372 forfeiture order, took the opportunity to clarify the scope of the phrase 'property obtained through unlawful conduct' in section 242 of POCA .

The judicial review related to a successful application by the Metropolitan Police for an order to forfeit £67,372 in a UK bank account in the name of Michael Kaleajaiye. The funds were stated to be the property of Fresh View Swift Properties Ltd (Fresh View) and had derived from a series of transactions from Nigeria to the UK via an unlicenced remittance business operated by Mr Kaleajaiye, contrary to Regulations 56(1)(b) and 86(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. 

Following an initial freezing order on 28 April 2022, District Judge Minhas, sitting in the Westminster Magistrates' Court, ordered the forfeiture of all of the funds held in the account on the basis that it was 'recoverable property' within the meaning of POCA. He rejected Fresh View’s submissions that the bulk of the funds were not recoverable property, since the payment had been lawful in Nigeria and had been in good faith, for valuable consideration. 

Fresh View brought judicial review proceedings of the Magistrates' Court's decision on two grounds: 

(1) The funds had not been obtained by unlawful conduct within the meaning of section 242 of POCA as, throughout the transaction, the funds had always belonged to Fresh View; the only possible recoverable property was the fees paid to Kaleajaiye’s unlicenced business. 
(2) The forfeiture order was unnecessary and disproportionate to Fresh View’s property rights under Article 1 of Protocol 1 (A1P1) of the European Convention of Human Rights (ECHR). Fresh View argued that as simply a customer of Kaleajaiye’s business, it was not involved in any wrongdoing. 

The Administrative Court agreed with the Judge at first instance that to be recoverable property, the only requirement was that it was obtained by someone’s unlawful conduct, whether in the UK or overseas. Further, 'obtained' meant only 'having possession', it did not require ownership or any benefit from the property. The funds were therefore 'obtained' by being deposited in Kaleajaiye’s bank account. 

It was accepted during the hearing that A1P1 was engaged, however, the court noted that Fresh View knew the remittance business was not licenced and the methods used to transfer the funds were 'entirely unlawful'. The Court considered that the forfeiture order was a proportionate response to serve the public interest in tackling money laundering offences.

In focussing on the illegality of the property, rather than the conduct of the individuals who obtained the property, this decision sets a low threshold for the forfeiture of property obtained from unlawful conduct in the hands of recipients. It suggests that knowledge of wrongdoing is sufficient even if the recipient has no involvement in the underlying criminal conduct. 

This is a further reminder to businesses that due diligence is essential along with a detailed record of the decision making process.  

The City of London Law Society (CLLS), in its April 2023 report (the Report), has called for 'focused reform' of the SFO within the next three years. The Report points to consistent underfunding and institutional difficulties, as a cause of the current 'failing' of the SFO to effectively prosecute serious fraud. 

Fraud represents approximately 40% of all crime in the UK, yet, according to a House of Commons Justice Committee’s 2022-2023 report, just 2% of police resources are allocated to tackle it. The CLLS calls for the SFO's budget to increase by a minimum of 50% in order for the SFO to be able to invest in its people and infrastructure. 

Other recommendations in the Report include:

• a larger proportion of the money the SFO receives from corporate fines could be ear-marked to fund efforts to tackle economic crime;
• improving available technology and training to address the logistical issues arising from the proliferation of electronic communications;
• the SFO’s Board should include an independent disclosure specialist from private practice (a barrister or solicitor) at all times to ensure the delivery of disclosure training programmes; and]
• ensuring staff are supported by trained specialists and satisfactory IT resources. 

The Report also suggests that the SFO’s focus should be on crime which has 'the greatest potential to harm the economy, institutions or rule of law', such as bribery, money laundering and corporate fraud with crime outside of this core focus, delegated to existing law enforcement agencies. 

A judicial review challenging the discharge of a reporting restriction order (RRO) has been dismissed in R (MNL) v Westminster Magistrates’ Court [2023] EWHC 587.

The NCA brought proceedings against individuals involved in a money-laundering scheme labelled the 'Azerbaijani Laundromat', which led to $2.9 billion being siphoned through various European companies and banks. The applicant in the judicial review claim, MNL, who was neither a party, nor a witness, discovered he was likely to be referred to negatively in the proceedings, including allegations that he was connected to the defendant companies and that he had a role in the money-laundering scheme. 

MNL filed an application for an RRO, under section 11 of the Contempt of Court Act 1981, to prevent his name or any identifiable information about him being published by the press. The RRO was initially granted on the basis that it was 'reasonable and proportionate' to protect MNL’s Article 8 ECHR right to a private life, relying on his assertion that he was a 'highly successful businessman' with 'broad interests in this country and elsewhere', which  outweighed the media’s Article 10 ECHR right to freedom of expression. 

On a subsequent application by the BBC, the RRO was discharged on the basis that MNL had 'failed to provide clear and cogent evidence in support of the application for the RRO'. 

In dismissing the judicial review against the removal of the RRO, the court held that the common law principle of open justice was the 'starting point' and the infringement of the applicant’s private life must be sufficiently serious to warrant displacing this principle. The Court noted that an allegation that a person was associating with a money-laundering enterprise was likely to cause serious harm to that person’s reputation, but clear evidence of the degree of the interference with their right to a private life was required which, ultimately, MNL had failed to provide. 

The Court continued the RRO while MNL considers whether to appeal the decision.  

Those applying for reporting restrictions must provide clear and cogent evidence detailing the actual, as opposed to theoretical, impact on their lives if they wish to persuade a court to depart from the principle of open justice.

Following research from Ofcom that 41 million people were targeted by suspicious calls and texts in 2022, the government has released a report entitled Fraud Strategy: Stopping scams and protecting the public, which contains a number of new measures designed to tackle rising consumer fraud schemes (the Strategy).  

The Strategy proposes outlawing 'SIM farms', which are devices that host hundreds of SIM cards, allowing fraudsters to send thousands of scam text messages in seconds, and introducing new measures to prevent number 'spoofing', where scammers impersonate the phone numbers of legitimate businesses such as banks or utility companies. Most notably, the Strategy includes a ban on cold calls for all financial products. It is considered that  consumers will then be able to recognise a scam if they receive a cold call relating to a financial product.  

To implement these proposals, the government will invest £100 million to improve the law enforcement, intelligence community and criminal justice system response. This will support the launch of a new National Fraud Squad with 400 new specialist investigators across the NCA, City of London Police and Regional Organised Crime Units, led out of the NCA. 

The Strategy proposes to replace the current fraud reporting service 'Action Fraud', which has received criticism in the past (our coverage can be read here). The government has pledged £30 million to create a new 'state-of-the-art reporting centre' which will include a new website for reporting crimes and accessing advice on protection against fraud. The new service will automate some processes and introduce a chatbot to deal with queries. 

Finally, the government is considering how legislation might need to be changed in order to allow payment service providers to adopt a risk-based approach and provide additional time for potentially fraudulent payments to be investigated.  

The announcement aligns with the government’s crackdown on nuisance calls generally in the Data Protection and Digital Information (No.2) Bill, which will increase the maximum fine the Information Commissioner's Office can impose on businesses operating nuisance call schemes. 

Both the Strategy and the ECP2 (discussed above), aim to prevent and deter fraud but with only one year of funding proposed and limited continuity planning, this goal may not be achieved.

On 3 May 2023, the European Commission set out its proposal to extend its Common and Foreign Security Policy sanctions framework to tackle serious acts of corruption, including the passive or active bribery of public officials, embezzlement or misappropriation by public officials, particularly in countries that the EU considers to be non-cooperative for tax purposes or 'strategically deficient' on measures to tackle money laundering or terrorism financing.

The EU sanctions under the proposal will apply to all non-EU nationals who commit high-level corruption, regardless of where the corruption takes place. 

The proposal comes at a time of rising EU focus on addressing concerns over foreign influence around the world and demonstrates a continuing intention to tackle global issues, while bringing the EU into line with existing regimes in the UK and US.

The collapse of FTX Trading Ltd (FTX) in December 2022, has increased calls for the introduction of an effective regulatory regime for cryptoassets. Our previous commentary on the collapse of FTX can be read here.

Sam Bankman-Fried (founder and former CEO of FTX) was charged by the US Securities and Exchange Commission for 'orchestrating a scheme to defraud equity investors' following the collapse of one of the largest cryptocurrency exchanges in the world. Mr Bankman-Fried is accused of amassing $1.8 billion from equity investors in FTX while concealing that FTX’s customers’ funds were  being diverted to his own private crypto hedge fund. 

The scandal has prompted calls for a closer look at the regulation of  cryptoassets in the UK and EU, in order to ensure the protection of both consumers and investors.  

On 1 February 2023, HM Treasury published a consultation paper entitled  'Future financial services regulatory regime for cryptoassets', which specifically focuses on the use of cryptoassets within financial services. The paper proposes to add new rules and regulations to the Financial Services and Markets Act 2000, which already provides a well-established framework. This will mean that firms will have to obtain authorisation from the Financial Conduct Authority before carrying out cryptoasset regulated activities. 

Those engaged in regulated activities will have to comply with additional obligations, such as providing detailed content requirements for admission and disclosure documents as well as performing due diligence on the entity admitting the cryptoasset. 

Such proposals build on earlier proposals such as legislation to require promotions of cryptoassets to be clear, fair and not misleading, and to regulate custody and issuance activities for fiat-backed stablecoins under the Financial Services and Markets Bill 2022. 

The European Council has adopted a new Markets in Crypto-Assets regulation to catch most cryptoassets which are outside the scope of current regulations: asset-referenced tokens, utility tokens and so-called stablecoins. Prior to the introduction of the regulation, there were no rules governing the exchange of cryptoassets for funds or trading platforms providing custody and administration of cryptoassets on behalf of clients. 

Issuers of cryptoassets caught by the regulation will be required to comply with additional requirements, including obtaining authorisation from a regulator before cryptoassets can be offered to non-professional investors. All relevant issuers must also produce a whitepaper, approved by a competent regulator, to inform prospective buyers about the traits and specific risks of the cryptoasset. These obligations will extend to already regulated cryptoasset service providers.