The fight against financial crime: enforcement

The rate of change in the law and its enforcement in financial crime has been dramatic and global in the past few years, resulting in a regulatory minefield for many businesses.

In this series of articles, we focus on different areas of financial crime, taking an incisive look at current regulation and what we can expect over the course of 2018. In this seventh edition we take a look at Enforcement, including the approach the UK and other jurisdictions are taking and how the changing landscape is influencing what compliance programmes need to address to sufficiently protect firm interests.

The current position

Many jurisdictions are aligning their approach to enforcement with models that are now tried and tested. In particular, the availability of Deferred Prosecution Agreements has spread from the US to a wide range of jurisdictions, now including the UK, Singapore (see here), France (see here), Australia, and Canada, where they will be called “remediation agreements”. Switzerland is also considering introducing a form of DPA.

With four DPAs approved by the courts, the UK model if now reasonably well established and the expectations of the SFO fairly clear. See our DPA Tracker for more detail.

The French courts approved the first DPA (or CJIP) in 2017, within a year of their introduction. On 23 February 2018, two further CJIPs dealing with bribery of domestic officials were approved by the High Court in Versailles. These arose from a report from a French energy provider of an employee of the Purchasing Department asked for the payment of commissions in exchange for the award of procurement contracts. 2018 undoubtedly will see further use of French prosecutors’ and judges’ new powers to resolve allegations of financial crime, including in the anti-corruption sphere.

Laws designed to force companies to put in place effective compliance programmes are also being seen across the globe. The UK’s introduction of “failure to prevent” offences for companies with the Bribery Act in 2011 is now widely viewed as a success, with the availability of an “adequate procedures” defence encouraging better compliance. The UK has adopted this model of offence for the facilitation of tax evasion and is still considering whether to extend it to all economic crime.

Spain adopted a similar framework in 2015, with criminal liability for companies where their authorised decision-takers commit an offence on the company’s behalf, or more junior staff commit an offence and management failed to properly supervise and monitor their actions. As under the UK regime for bribery, there is an express defence of adequate procedures, but the Spanish regime goes further, with specified minimum requirements for a compliance programme. See here for more.

France’s wide-ranging “Sapin II” law directly requires companies with more than 500 employees and an annual turnover of over €100m to implement specific anti-corruption compliance measures. See here for more.

In Hong Kong, listed company fraud has been named a top enforcement priority by the SFC, which is pursuing aggressive enforcement action against those involved, albeit mostly in the civil courts. The vogue for ‘failure to prevent’ corporate crimes has not reached Hong Kong; however, recent amendments to the AML legislation have extended the prescriptive AML compliance requirements beyond the financial services industry to designated non-financial professions, such as lawyers, accountants and trust or company service providers. See here for more.

Key issues to think about

The widening availability of DPAs places greater emphasis on firms’ decisions as to how to react to discovering any form of wrongdoing. Many prosecution agencies emphasise the importance of self-reporting and co-operation when considering the appropriate disposal for a case. In Germany the government has in February 2018 produced guidelines on reductions in administrative fines for companies based on self-reporting and co-operation. In the UK the SFO has taken an increasingly aggressive stance to co-operation over the past few years, challenging claims to privilege over internal investigation materials and demanding that firms allow the SFO to shape investigations rather than have the company “trample the crime scene”. This means that early decisions on the approach to, and location for, a self-report of wrongdoing are now critical.

In terms of the growing requirements for compliance programmes, firms will want to minimise differing compliance requirements in different jurisdictions. The more prescriptive approach of France and Spain may set the framework for some, though lessons from cases in other jurisdictions will need to be incorporated. As the focus on financial crime broadens from bribery and money laundering to encompass offences such as facilitation of tax evasion, FIs will increasingly need to adopt “connected compliance”, addressing multiple risks through their policies and procedures.

Exactly what will constitute a compliance programme sufficient to provide a defence to these recently introduced offences is likely to require time and enforcement actions to establish, though in France a process of auditing by the national anti-corruption agency, the AFA, may provide more detail. The publication of agreed facts as part of the DPA regime in the UK provides a useful source of information on where compliance failures occur (see our DPA Tracker). In February 2018, for the first time, a UK company accused of failing to prevent bribery defended the case on the basis of having “adequate procedures” to prevent bribery. Its argument that the required standard should be very low for a small company was rejected and it was convicted. See here for more. It is reported that a second company has pleaded Not Guilty to a section 7 Bribery Act offence on the grounds that it had adequate procedures, so 2018 may see more on this.

What’s next?

Economic crime is still high on the global political agenda and there is no sign of a decline in enforcement activity globally. In China, for example, we have seen an increase of 32% in prosecution of corruption cases over the past five years; and Hong Kong has recently witnessed the city’s largest corruption crackdown in a decade, brought together by different regulators joining forces and leveraging their respective investigation powers. Conviction rates by Hong Kong’s anti-corruption watchdog also rose by 7% compared to last year.

Prosecutors will be keen to use new powers granted under recent legislation and in many jurisdictions DPAs will become the new norm. Levels of fines show no signs of falling, with recent proposals from the German government being the latest to signal greater penalties for companies, rising from a maximum of €10m to 10% of global turnover.

Financial services will continue to be in the spotlight. In a speech in March 2018, Camilla de Silva, Joint Head of Bribery and Corruption at the SFO, said that the agency would not “move on” from the financial services sector to focus on other industries, but would continue to use the knowledge it had built up to identify further misconduct. However, it is likely that attention will shift towards forms of economic crime that are making headlines, in particular tax evasion, money laundering and cyber-crime.

In terms of compliance programmes, the outcome of the AFA’s first audits in France is likely to lead to reviews by firms to ensure any identified shortcomings are remedied. In the UK, the government has yet to publish its response to the Call for Evidence it published on whether the “failure to prevent” corporate criminal liability model should be extended to all forms of economic crime. After months of silence, however, the Solicitor General has voiced his support for a new law along these lines, while David Green QC, in a speech marking the end of his tenure as Director of the SFO, reiterated his call for this to be the basis of all corporate criminal liability. Should the government proceed along these lines, firms will need to consider a wider range of risks within their compliance programmes.

Finally, it has been announced that Lisa Osofsky, formerly of the FBI, will be the new Director of the SFO from 03 September 2018. This follows the recent boost in SFO funding from £34.3m to £52.7m, taking it back to 2008 levels and making it less reliant on one-off “blockbuster funding”. The SFO is generally seen as having performed well in recent years and no radical change of direction is expected, but the new director will be closely watched in her early days. In particular, it has been reported that Osofsky may support the British Prime Minister’s long stated preference to merge the SFO into the National Crime Agency. This controversial idea was raised again at the last election, but dropped following the Conservative Party only achieving a narrow majority. If the new Director does support this, structural changes to the SFO may yet happen.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.