Executive Summary
In this edition of the UK Enforcement newsletter, we provide an update on recent economic crime matters in the UK. We consider anticipated legislative and regulatory updates, as well as recent actions from the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), and the Financial Reporting Council (FRC).
With respect to legislative and regulatory reform and enforcement actions, we consider the following:
- The potential impacts on the criminal justice system following the UK general election
- The SFO's five-year strategic plan
- The disclosure process under the SFO
- The FCA's plans to “name and shame” companies under investigation
- Recent actions by the FRC
- Recent developments within the UK sanctions regime
We are also proud to have been recognized alongside numerous colleagues on the Pro Bono Recognition List of England and Wales.
Potential Impacts on the Criminal Justice System Following the General Election
On May 22, 2024, Prime Minister Rishi Sunak called a general
election, scheduled for Thursday, July 4, 2024. According to the
latest opinion polls, a Labour victory is anticipated, which would
mark an end to almost 15 years of Conservative government.
In the lead up to the general election, the subject of tackling
financial crime has featured in various different party manifestos,
speeches, and election campaigns. This includes proposals from most
of the largest parties, outlining their plans to combat fraud,
business crime, and corruption.
If Labour is elected, as the opinion polls suggest, Labour plans to
reform the criminal justice system when it comes to financial
crime, including introducing a “new fraud strategy.” In
a speech on May 21, 2024, Labour's David Lammy, Shadow
Foreign Secretary, advocated for the creation of an international
anti-corruption court to prosecute the most serious crimes and
outlined two key policies that Labour is looking to introduce as
part of their approach to combating financial crime.
Firstly, Labour is proposing the incentivization of whistleblowing
in relation to breaches of the financial sanctions regime, offering
whistleblowers rewards of up to 25% of any fines handed down by the
Office of Financial Sanctions Implementation (OFSI). While
Labour's proposal only relates to sanctions, it may well be
expanded to other financial crime offenses, with the SFO recently
pushing for whistleblowing rewards to be reconsidered. Secondly,
Labour will make further amendments to the registration and
transparency requirements for UK corporate entities, including
widening the registration requirements for UK trusts in the UK
mainland, UK crown dependencies, and overseas territories.
Further details on Labour's plans to combat financial crime
are set out within the party's manifesto and include a pledge
to “appoint a fixed-term Covid Corruption Commissioner and
use every means possible to recoup public money lost in
pandemic-related fraud” and a pledge to modernize His
Majesty's Revenue & Customs (HMRC). Labour will also
create a new “Regulatory Innovation Office” to bring
together existing functions across government, with the office
anticipated to speed up regulatory delays by helping regulators to
update regulation, speed up approval timelines, and coordinate
issues. Labour likewise plans to support innovation and growth
through new technologies including Open Banking and Open Finance
and ensuring a pro-innovation regulatory framework for
crypto-assets and tokenization regulation. Regarding artificial
intelligence (AI) specifically, Labour will be introducing AI
regulations to ensure the safe development and use of AI.
Labour has also proposed expanding deferred prosecution agreements
for tax evasion offenses to individuals, not just corporations, as
well as changes to disclosure rules in criminal procedure to
reflect the increase in data since the rules were introduced.
Labour's proposals are certainly ambitious, but do lack
specific details, including how they are to be funded. It should
also be recognized that the size of any majority obtained by Labour
will play a fundamental role in how successful implementation of
any such policies will be, with the risk that any cross-party
coalition could dampen legislative drive. Nevertheless, with
prominent Labour figures such as David Lammy and Emily Thornberry
being committed to tackling financial crime, as well as Keir
Starmer's previous experience as the Director of Public
Prosecutions, many are hopeful that Labour's plans have
substance behind them.
The Conservatives have likewise been vocal about their plans to
tackle financial crime, pledging to “continue to clamp down
on fraudsters.” During their election campaign, the party
highlighted some of the recent measures they have already
introduced to combat fraud, including the new National Fraud Squad,
use of crime statistics, and the new “failure to prevent
fraud offence” under the Economic Crime and Corporate
Transparency Act 2023.
Contained in their manifesto, the Conservatives propose a new Fraud
Bill, which will give the Department of Work and Pensions powers
similar to HMRC, to treat benefit fraud like tax fraud with new
powers to identify, investigate, and pursue fraudsters. Similarly,
they pledge to “intensify our fight to stop money laundering
and dirty money and ensure all British Overseas Territories and
Crown Dependencies adopt open registers of beneficial
ownership.”
If re-elected, the Conservatives are also proposing to enact a ban
on “SIM farms,” which are used to send mass fraudulent
texts, often targeting the older members of the community.
Likewise, they plan to ban cold calls in relation to financial
products to prevent the sale and purchase of fake
investments.
In turn, the Liberal Democrat manifesto proposes to combat the rise
of fraud and scams by (1) naming and shaming the banks with the
worst records on preventing fraud and reimbursing victims; (2)
requiring banks to reimburse victims of automated push payment
scams unless there is clear evidence that they are at fault; and
(3) launching a high-profile public awareness campaign to help
people spot, avoid, and report frauds and scams.
In contrast, Reform UK's manifesto only briefly touches on
financial crime when addressing domestic corruption and money
laundering and is silent on business fraud. Their plans include
launching an “Anti-Corruption Unit for Westminster”
with legal powers to investigate past and future scandals, working
to ensure that public officials face sanctions if they break the
rules, including prison. Nigel Farage, Leader of Reform UK, has
similarly been vocal about his plans to clamp down on cash-only
shops, arguing that these are often used as a front for money
laundering.
Regardless of which party is elected, businesses should expect
financial service-related reforms, with both the Conservatives and
Labour parties advocating to cut down regulatory bureaucracy in
order to promote economic growth and innovation. One further area
to watch following the election will be whether the National Crime
Agency (NCA) takes a controlling stake in the SFO or if the SFO is
left to continue forging its own path. Likewise, despite the
Conservative and Labour manifestos pledging to combat fraud, there
has yet to be an explicit pledge of investment in the SFO, despite
the agency's calls for funding. Whether the SFO will receive
greater funding under the new government will be a key development
to follow.
SFO Announces Five-Year Strategic Plan
Recently, the SFO has published its five-year strategic plan,
outlining key priorities for 2024 through 2029. Announced on April
18, 2024, the plan covers themes including methods for swifter
prosecutions, use of new technologies, and innovations to tackle
financial crime, and emphasizes the SFO's commitment to
becoming more “influential both domestically and
internationally.” At the heart of the SFO five-year plan is
the ambition for the agency to evolve and avoid “falling
short of what the public needs.” In this respect, the plan
makes no bones about the agency's shortcomings under
predecessor Lisa Osofsky.
The plan contains four overarching strategic priorities: (1)
identifying, recruiting, developing, and retaining a highly
specialized, engaged, and skilled workforce; (2) harnessing the
technology and tools of a changing world; (3) combating financial
crime via intelligence, enforcement, and prevention; and (4)
collaborating on a global and domestic level.
As criminals make greater use of technological advancements, the
SFO is clear that it needs to use new tools and technologies to
bring about swift prosecution and effectively combat financial
crime in the rapidly evolving threat landscape. This involves
engaging external facing technologies, and also improving internal
systems, including streamlining casework via a new case management
system and developing machine-learning and AI for mechanical and
administrative tasks.
In recent years, the SFO has frequently faced criticism for
protracted timeframes in bringing about prosecutions. The
SFO's intelligence-gathering and case-building process can
often be slow due to logistical and legal challenges, fueling
delays in enforcement. These delays and lower prosecution rates
arguably undermine the SFO's deterrent and prevention
capabilities. The SFO plans to address this by exploring potential
legislative developments, such as a disclosure regime and
incentivization options for whistleblowers, and working more
closely with other partners, including the NCA and City of London
Police, to increase shared intelligence and expand crime prevention
activities. The SFO has also suggested increasing its use of covert
powers and opting for more timely alternatives to formal
prosecution where appropriate, such as deferred prosecution
agreements.
Finally, the SFO is deepening its collaboration with other UK
agencies, including the UK Financial Action Taskforce, and by
conducting more dawn raids alongside the police and the NCA.
Likewise, the SFO is looking to strengthen its overseas
partnerships, through shared trainings, pooling resources, agency
secondments, and increasing their involvement in global crime
prevention groups such as the OECD bribery working group.
While the SFO's 2024-2029 plan is certainly a step in the
right direction, it is high-level and lacking in detail. Its
success will come down to its exact implementation, including
whether budget constraints or political uncertainty causes aspects
to fall by the wayside. In this respect, areas to particularly
watch include changes to the disclosure process, whistleblowing
incentivization, and swifter prosecutions. Nevertheless, it is
clear from the plan that companies should prepare for a
reinvigorated SFO seeking more decisive enforcement action.
Disclosure Shortcomings Reviewed at the SFO
The SFO's prosecution of executives at Serco Geografix Ltd
and G4S Care and Justice Services (UK) Limited (G4S) revealed
limitations of the agency's document review software, which
allowed it to miss potentially relevant material that prosecutors
would have been expected to find and disclose. The disclosure issue
in the G4S prosecution is among several high-profile failings that
have adversely affected the SFO's reputation in recent years.
The identified disclosure shortcomings have set off a chain of
reactions.
Firstly, the concerns have prompted a comprehensive review by the
SFO's Gold Group Committee headed by Abigail Howarth of
whether any documents were overlooked in the SFO's previous
prosecutions, including the LIBOR investigations and their
subsequent convictions.
Secondly, the HM Crown Prosecution Service Inspectorate (HMCPSI)
published a report in April 2024 on the SFO's handling and
management of disclosure. The report found that the SFO's
disclosure process in the G4S case lacked continuity, proper
record-keeping, and planning, and that there were widespread
misconceptions about the functionality of the keyword searches. The
HMCPSI made six recommendations for the SFO, including that in 2024
the SFO revisit its guidance in the Disclosure Management Document
template; introduce a disclosure review process for every case by
an independent individual; and develop a long-term funding strategy
to support the SFO to discharge its disclosure obligations.
Thirdly, the Attorney General for investigators, prosecutors, and
defense practitioners issued guidelines on the application of the
disclosure regime contained in the Criminal Procedure and
Investigations Act 1996 Code of Practice Order 2020. The guidelines
came into effect on May 29, 2024 and emphasize high-level
principles, as well as detailed guidance on the various steps and
case factors applying to the disclosure process.
Finally, the Home Secretary appointed Jonathan Fischer KC to
independently review the challenges in investigating offenses
involving large quantities of digital material. His recommendations
will be provided to the Home Office later this summer, but he has
already indicated that this may include earlier engagement with
disclosure, for instance, by using the plea and trial preparation
hearing to agree to the prosecution's approach to disclosure
or seeking an early court hearing for disclosure issues to be
determined.
The focus on disclosure is something that has also carried through
into the SFO's own five-year strategy, as discussed above. It
is clear that resolving the disclosure issues within SFO
prosecutions and restoring confidence in its disclosure process is
key to making the SFO more effective and increasing the likelihood
of successful prosecutions, and is a focus for the agency.
FCA Announcement of Its Plans to “Name and Shame” Companies Under Investigation
The FCA recently unveiled its plans to name firms that are under
investigation by the regulator. The proposal was announced in
February and the public consultation on the proposal ended in late
April.
The FCA's proposals would bring forward the point at which
publication of the names of firms under investigation takes place.
At present, the FCA generally only names investigated firms at the
stage of issuing a warning notice to that firm. This will have
followed an extensive investigation by the regulator, likely
spanning years and substantial advocacy on behalf of the
company.
Under the new proposals, the FCA would be able to issue details
about an investigation while it is ongoing, with firms receiving 24
hours' notice that the FCA intends to issue a press release
relating to the investigation. The decision to publish the name of
the firm at this earlier stage will depend on several metrics
including whether it could draw out whistleblowers and protect
consumers.
If progressed, this move would bring the release of information
about FCA investigations into line with other investigators, such
as the SFO, who announce investigations once they reach the formal
investigation stage, rather than waiting for a conclusion to such
investigations.
The UK regulator's rationale behind this plan is to increase
transparency and deter wrongdoing. Potentially seeking to quell
some of the objections to the proposal, the FCA Chief Executive
Officer, Nikhil Rathi, has stated that investigated firms will only
be named at an earlier stage in exceptional circumstances where
such action is warranted to protect consumers and whistleblowers.
The threshold of exceptionality is anticipated to be high, such as
the example of the investigation into FTX Trading Ltd. in September
2022, where the regulator suspected that the company was operating
illegally in the UK, and after which the company collapsed and was
convicted of fraud in the U.S. Nonetheless, once the FCA has the
power to name firms at an earlier stage, it will remain open to the
regulator to name any firm under investigation, and such
reassurances of a high threshold are unlikely to provide comfort to
FCA-regulated firms under investigation.
Opponents of the move have expressed concern that such
“naming and shaming” threatens companies with damage to
their reputation before the FCA has proven the misconduct, marking
a departure from the fundamental principle of innocent until proven
guilty.
A compromise position suggested by those opposing the FCA
proposals includes the FCA publishing an enforcement watch
newsletter describing the investigated conduct without naming the
firms under investigation. This would alert others in the industry
to behaviors that need to be identified and monitored within their
own companies, therefore fulfilling the aim of deterring wrongdoing
and enhancing consumer protection without threatening the image of
an investigated firm.
The FCA is expected to consider the consultation responses for
several months before announcing its decision. Regardless of the
outcome, the proposal itself indicates a willingness on the
FCA's part to put deterrence at the top of its priority
list.
Recent Actions by the FRC
Following the delay to the legislation that would have replaced
the FRC with the Audit, Reporting and Governance Authority (ARGA),
the shortcomings of the FRC in its current form are again being
highlighted, with a particular focus on the fact that the regulator
still lacks the statutory power to demand information from audit
firms or to control competition in the audit market. This has led
the FRC to make another call for increased powers.
In addressing the House of Commons Business and Trade select
committee, Richard Moriarty, the FRC's Chief Executive
Officer, emphasized that the absence of such powers resulted in the
FRC relying on information being voluntarily provided by audit
firms and the FRC having to “effectively beg” for
funding from the industry. The FRC's dependence on the
industry it regulates is in stark contrast to other regulators such
as the FCA, which are wholly independent and funded by the
government.
In March 2024, the FRC published its plan and budget for 2024-2025,
which sets out that it will be focusing on its “growth
duty” which entails supporting UK businesses to thrive and
remain competitive. The original strategic goals of the FRC remain
unchanged and the FRC has stated that in 2024-2025 it will be
particularly working on embedding the growth duty into its
decision-making process; finalizing the review of the UK Corporate
Governance Code; and improving audit quality and simplifying
corporate reporting, among other priorities. Given that the
regulator is eagerly awaiting a statutory grant of increased powers
and the existing funding challenges it faces, it is perhaps
unsurprising that the FRC has abandoned its plans to increase its
staff headcount, with a view to minimizing its costs.
Despite the institutional challenges facing the FRC, it has in
recent months imposed its largest fine against Ernst & Young
Capital Advisors, LLC to date and its third-largest fine against
PricewaterhouseCoopers LLC, totaling £9.3 million, for their
audit failures in relation to London Capital and Finance
(LC&F). The four-year investigation by the FRC found that the
auditors breached their duties due to their failure to identify the
risk of misstatements in the company's financial accounts
even though they were aware that LC&F was selling unregulated
financial products to retail investors who would have relied
heavily on audit opinions. The eventual failure of LC&F
resulted in the loss of £273 million of investors'
funds and criminal investigation by the SFO.
In a challenging economic environment, the importance of the
FRC's role in regulating audit firms and thus helping to
ensure that business and the wider market are aware of risks to the
financial stability of companies cannot be overstated. It does seem
that with the ARGA on hold, it is important for the FRC to be
further bolstered and empowered to regulate the audit market, and
we will be closely following the next government's approach
to this key area of regulation.
Recent Developments Within the UK Sanctions Regime
In recent months, the UK government has continued its focus on
the UK sanctions regime, particularly with respect to sanctions
against Russia, with further listing of designated persons and
trade restrictions across various industries.
Similarly, OFSI has continued in its efforts to engage with
business and the wider public with respect to compliance with the
Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia
Sanctions).
In May 2024, OFSI launched frequently asked questions (FAQs)
relating to financial sanctions which provide supplementary
regulatory guidance in the form of answers to specific sanctions
queries. There have long been calls for OFSI to publish FAQs
alongside its guidance, with emphasis placed on the fact that both
the EU and U.S. have had FAQs in place for a number of years. Much
of what has been published in the FAQs is reworked from the prior
guidance on the Russia Sanctions, but nonetheless it is a welcome
addition to the suite of information provided by OFSI and has
provided clarity over certain issues.
OFSI has also implemented changes in the Enforcement and Monetary
Penalties guidance. Consequently, OFSI will now always apply the
most recent iteration of the Enforcement Guidance when assessing
cases, simplifying the enforcement process for parties when
breaches span various versions of the guidance.
Alongside these updates, OFSI has shifted from issuing guidance in
static PDF format, to a live webpage option, which ensures that the
latest and current version is available at all times. OFSI is in
the process of converting all of its guidance to this new format,
seeking greater accessibility for the public.
With respect to enforcement, for some time now it has been expected
that OFSI will be issuing fines for breaches of the Russia
Sanctions, some of which have now been in effect for more than two
years. Nonetheless at the mid-point of 2024, we are still awaiting
a fine from OFSI under these regulations, although the regulator
has stated that enforcement action will commence in 2024.
By contrast, HMRC has been issuing fines for breaches of the Russia
Sanctions since last summer. Most recently, in March 2024, HMRC
issued a substantial compound settlement of over £1 million
to a UK exporter who was in breach of the Russia Sanctions.
Although HMRC does not name the exporter, it is clear that HMRC is
focused on its role in enforcing the trade sanctions under the
Russia Sanctions, and it is to be expected that there will be
further compound settlements throughout the remainder of the
year.
Pro Bono Recognition List
We are pleased to have been named alongside numerous colleagues
on the inaugural Pro Bono Recognition List, which recognizes
solicitors and barristers across England and Wales who have given
over 25 hours of their time to pro bono work during 2023.
Set up under the sponsorship of the Attorney General's Pro
Bono Committee, endorsed by the Lady Chief Justice, and with the
support of the Law Society, Bar Council, and all major pro bono
legal organizations in the UK, the Recognition List celebrates the
valuable contribution of individual lawyers at firms and
organizations of all sizes who provide pro bono legal help to those
in need.
We are very pleased that 37 Arnold & Porter lawyers were
recognized on the list, and that many of us have been able to offer
significantly more hours to pro bono matters than the 25 hours
needed for this recognition. While pro bono assistance cannot
replace the need for serious consideration of the state of the
Legal Aid sector, being able to offer our assistance to individuals
and companies who would otherwise face legal situations alone is
rewarding for all involved. We are proud of our colleagues for
their dedication, which is needed to amplify the voices of those
who otherwise might not be heard.
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