Financial Crime Time - Your update from RPC: 2022 Q4

On 3 October 2022, the UK-US Data Access Sharing Agreement (the Agreement) came into force. The Agreement enables closer law enforcement cooperation between the UK and the US and allows 'complying' US Orders to be directly enforceable in the UK and vice versa. 

The new system is intended to replace the arcane and complex Mutual Legal Assistance Treaty procedure. 

The Agreement extends the powers granted under the Crime (Overseas Production Orders) Act 2019 (the Act) to UK law enforcement agencies and prosecutors, enabling them to issue Overseas Production Orders (OPOs), requiring businesses outside the UK to provide certain electronic data in investigations into serious criminal matters. 

For an OPO to be granted under the Act, a judge must be satisfied that there are reasonable grounds to believe that: 

• the data controller in question is based outside the UK in a country party to an international co-operation agreement (e.g. the Agreement);
• an investigation into a criminal offence has begun;
• the data controller has possession or control of all or part of the data sought;
• all or part of the data is of high value and likely to be relevant to the investigation; and
• there is sufficient public interest to justify granting the OPO.

The powers granted under the Act and the Agreement are wide-ranging, however, there are number of exceptions within the Act, including data protected by legal professional privilege, data that is a confidential personal record and telecommunication data.

There are also protections for journalistic data, which requires the application for the OPO to be made on notice so the person against whom the OPO is sought has an opportunity to make representations about the appropriateness and the scope of the proposed OPO.

If granted, the OPO is sent directly to the data controller in the overseas country, who then has seven days to provide the information sought. 

It is important that any business in receipt of a production/disclosure order seeks expert legal advice and acts promptly to ensure they understand (1) the scope of the information they need to provide and (2) how to comply. 

The Director of the Serious Fraud Office, Lisa Osofsky, and the Director of Public Prosecutions, Max Hill KC, have renewed calls for an extension of the scope of 'failure to prevent' offences to include a broad 'failure to prevent fraud' offence. These calls stem from an increased scrutiny on telephone and internet service providers and an increasing demand to hold them to account for the use of their networks and services by fraudsters. 

The House of Lords report on fighting fraud, published on 12 November 2022 (the Report), echoed these calls. The report outlines a series of recommendations to government to help 'break the fraud chain'. This includes introducing a new corporate criminal offence of 'failure to prevent' fraud. 

The Law Commission Options Paper on Corporate Criminal Liability adopts a slightly different approach. The paper outlines that there is a difficulty with the 'failure to prevent' approach to addressing fraud due to the multitude of ways in which fraud can be committed. The paper suggests that if a failure to prevent offence was to be introduced, it should initially be limited to the 'core' fraud offences of false representation, obtaining services dishonestly, cheating the public revenue, false accounting, fraudulent trading, dishonest representation for obtaining benefits and fraudulent evasion of excise duty. 

For further in-depth analysis on 'failure to prevent' offences, see our commentary here, the Taxing Matters podcast episode with David Allan speaking on behalf of the Law Commission, and the Taxing Matters podcast episode with Dr Robin Lööf reviewing the competing options to tackle corporate crime.   

The largest corporate penalty in the UK has been imposed on Glencore, following guilty pleas entered in June 2022 to seven counts under the Bribery Act 2010.

The trial judge required Glencore to pay £281 million in fines, costs and confiscated profits. 

This is not only the biggest corporate penalty imposed in a case prosecuted by the SFO, it is also its first conviction of a company charged with bribery offences. 

This follows Glencore's agreement in May 2022 to pay $1.1 billion to US authorities in relation to violation of US bribery laws under the Foreign Corrupt Practices Act. 

The Economic Crime and Corporate Transparency Bill had its second reading in the House of Commons on 13 October 2022. Part of the UK government's agenda to reform the legal landscape for corporate crime, the Bill proposes to introduce a number of significant changes. A government note on the Bill states that the UK's position as an open and attractive economy exposes it to increased risks of bad actors engaging in fraud and money laundering and seeks to introduce the following reforms:

• enhanced checks by Companies House including identity verification for new and existing company directors, Persons of Significant Control and anyone delivering documents to the Registrar on a company's behalf;
• additional powers for the Registrar to check, remove and decline information submitted or already present on the companies register; 
• greater hurdles to register as a limited partnership, including a requirement of a connection to the UK and higher degree of transparency; 
• powers for law enforcement agencies to seize cryptoassets believed to be the proceeds of crime and to target criminal exploitation of cryptoassets; and
• further anti-money laundering powers.

The Bill was criticised by some MPs during its second reading due to its lack of 'failure to prevent' provisions. 

HM Treasury’s Office of Financial Sanctions Implementation (OFSI) has issued general licence (GL) INT/2022/2252300 under the Russia and Belarus Regulations, permitting UK legal firms or UK counsel who have provided legal advice to a person designated under the Russia or Belarus regime, to receive payment of up to £500,000 and disbursements of up to the lower of 5% of the legal fees claimed or £25,000. A further specific licence application will be required for any amounts over and above these amounts.

While welcomed by the legal profession, the fee cap has prompted many who have been working on designation challenges and unravelling complex structures, to note that the general licence is unlikely to have a large impact on the volume of licence applications from law firms, particularly where translation of many lengthy complex documents is likely to mean that the disbursement cap is inadequate. 

OFSI and HM Treasury have published their much anticipated annual review of sanctions for the period April 2021 to August 2022, amending the usual reporting period to include information from the 6 months following the Russian invasion of Ukraine in February 2022.  

As expected, there has been a large increase in the reporting of frozen funds to OFSI. In the year to September 2021, there was £44.5 million in assets reported as frozen under the Russian regime. By contrast, between 22 February 2022 and 20 October 2022, £18.39 billion was reported as frozen. This demonstrates the immense impact that the Russian sanctions have had on businesses. 

OFSI has also received a large number of licensing applications relating to Russia since it invaded Ukraine, resulting in lengthy delays and resulting uncertainty. Although OFSI states that it prioritises licences that are 'urgent' figures contained in the Review show that in the period April 2021 to August 2022, only 11 licences were granted under the Russian regime, a relatively small number given that 642 licence applications were made in the period February to August 2022.

On 9 November 2022, the Law Commission published its final report on the confiscation regime relating to the proceeds of crime contained in the Proceeds of Crime Act 2002 (POCA). 

The Law Commission's report recommends that POCA be overhauled and proposes:

• accelerating confiscation proceedings through the use of strict timetables;
• empowering courts to impose "contingent enforcement orders" which would enable assets to be taken if payment is not made sufficiently swiftly; 
• strengthening "restraint orders" to stop defendants from seeking to place assets outside the scope of confiscation proceedings;
• strengthening enforcement agencies' responses through more effective police training and a joint national strategy;
• updating the provisions relating to defendants' "criminal lifestyle" to include gains from wider conduct; 
• giving greater consideration to defendants' ability to pay in order to make enforcement more efficient and effective;
• creating more flexible tools to ensure more effective enforcement, including empowering judges to adjust the amount of funds that must be paid back;
• setting out a clear statutory objective to govern the new confiscation regime. 

While the Law Commission report represents only a starting point for reforms, these proposals would fundamentally overhaul the way in which the proceeds of crime are dealt with.

On 4 November 2022, the Financial Reporting Council (FRC) announced that it had closed its long running investigation into preparation, approval and audit of Quindell plc's financial statements for 31 December 2011 to 31 December 2013, which was commenced in August 2015.  

The closure of the FRC's investigation follows the closure, in October 2021, of a parallel SFO investigation looking into the sale of Quindell's legal department to the law firm Slater & Gordon. 

The closure of the FRC's investigation follows fines levied on KPMG, for conduct which "fell significantly short of the standards reasonably to be expected" during the audit of Quindell's financial statements for the period ended 31 December 2013. 

While the recently-closed SFO and FRC investigations did not result in any adverse findings against Quindell, businesses need to remain vigilant and ensure that their financial reporting processes are robust. 

Professional 'enablers' are in the spotlight again after recent comments made in the House of Commons Public Committee stage in relation to the Economic Crime and Corporate Transparency Bill (see above). 

In yet another attack on lawyers and other professional services providers, the Committee has commented on 'facilitators' of sanctions and tax evasion. 

There has also been renewed calls to equate tax avoidance (a lawful act involving no dishonesty), with tax evasion (a criminal act characterised by dishonesty). 

You can read our previous commentary on enablers here and listen to Simon York of HMRC's Financial Investigation Service discussing HMRC's view of professional enablers on our podcast Taxing Matters here.  

The Financial Conduct Authority (FCA) has issued a £1.5 million fine to mortgage lender Gatehouse Bank for significant weaknesses in its financial crime systems and controls. In one example, the firm was found to have accepted $62 million into an account it set up for a customer without properly vetting any of the funds for money laundering risk.

The FCA stated that Gatehouse was in breach of several provisions of the Money Laundering Regulations 2007 (MLR 2007). This included: 

• failing to conduct sufficient checks on customers based in jurisdictions with a higher risk of money laundering;
• failing to conduct sufficient checks on customers based in jurisdictions with a higher risk of terrorist financing; and
• failing to require customers to collect information about their own customers' source of funds or wealth (and thereby contravening its own AML policies).

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, stated that there could be "no excuses for failures as serious as this". 

This is a stark reminder to businesses of the possible consequences for not adhering to the MLR 2007. It is important that businesses ensure their internal processes for managing money laundering risks are stringent and regularly reviewed. 

In October 2022, the judicial review claim brought by the Global Legal Action Network (GLAN) and the World Uyghur Congress (WUC) against the UK government for failure to investigate whether its imported cotton originates from Uyghur forced labour in China, was heard. 

GLAN and WUC claim that the cotton is criminal property under the Proceeds of Crime Act 2002 (POCA), because it is obtained as the result of forced labour and crimes against humanity. As such, any UK organisation that knowingly acquires the cotton is committing a money laundering offence under POCA.

Under the Modern Slavery Act 2015, businesses with an annual turnover of £36 million or more are required to publish a modern slavery statement, detailing their efforts to ensure that their supply chains are slavery free. 

UK businesses involved in the production of products containing raw or partially produced materials, may wish to consider their supply chains as, if this claim succeeds, it could lead to further legal challenges in relation to the use of materials obtained from regions with questionable human rights practices. 

The collapse of FTX, whose value stood at $32 billion as recently as January 2022, has shocked the crypto market. FTX filed for bankruptcy protection in the USA on 17 November 2022, following a liquidity crisis after customers tried to withdraw $5 billion. 

One impact of this collapse may be the end of crypto-friendly regulation in the USA. 

In the UK, the current regulatory guidance is set out in the Financial Conduct Authority's Guidance on Cryptoassets, which was published in 2019. This guidance outlines which tokens are regulated and which are unregulated. Bitcoin and Ethereum, the two largest cryptocurrencies, are only regulated in the UK for money laundering purposes. This means that individuals or organisations who buy these types of cryptoassets do not have access to the protections offered for other assets that are regulated, such as the Financial Ombudsman Service or the Financial Services Compensation Scheme. 

However, Parliament recently voted in favour of an amendment to the Financial Services and Markets Act 2000 to include stablecoins and cryptoassets within its scope.  

The Financial Services and Markets Bill (which contains the proposed amendments) recently passed through the Committee Stage but there is no indication of when it will be finalised or enter into law. 

Assuming the proposed amendments are enacted, businesses which promote or sell cryptoassets will have to conduct their affairs in the same way as businesses which sell more traditional investment assets.