Brexit: the implications for financial crime and investigations

​What are the implications for financial crime and investigations arising from Brexit?

The European Arrest Warrant

The UK is currently a member of the European Arrest Warrant (EAW) scheme.  This enables an arrest warrant issued in one member state to be executed in any other member state in order to secure a person’s rapid removal to the requesting state. It replaced the separate extradition arrangements in place between each EU member state.

There has been controversy regarding the scheme in the past, and in particular the accusation that it was being used regarding very minor crimes and to surrender UK citizens to jurisdictions such as Greece where standards of trial process have been criticised. In November 2013, the UK Parliament’s Home Affairs Committee concluded that the EAW was “fundamentally flawed”, but parliament voted to stay in the scheme anyway.

According to the National Crime Agency, the annual level of requests from the UK for extradition of an individual from an EU member state has stayed relatively constant, ranging from 219 to 271, between 2010 and 2015. In 2015 150 people were arrested and 121 of those were sent to the UK as a result of EAWs issued by the UK.

Pro-Brexit politicians have stressed their desire to maintain cooperation with European authorities in combating crime.  Norway, Iceland, Switzerland and Croatia are all members of the EAW scheme, despite not being members of the EU, and it is likely that, whatever model of relationship the UK attempts to secure with the EU, the UK will wish to retain some form of arrangement for mutual deportation procedures between states.

It is perhaps likely that, rather than remaining part of the EAW scheme, in which the UK will now have no say in any future changes, EU Member States will be designated “Category 2, Type A” states under the Extradition Act 2003 and therefore enjoy the same status as countries such as America. Requests for extradition from these territories need decisions by both the Secretary of State and the courts, so present a slower route to extradition than under the EAW, but still represent an enhanced level of cooperation between states.

International cooperation

Broadly, the pan-European targeting of complex cross-border criminal activity is founded upon inter-governmental cooperation as much as it is upon specific EU law frameworks. Where this legal foundation remains unchanged, most importantly the European Court of Human Rights and the Council of Europe, cooperation and participation in these cross-border endeavours will continue.

EU crime agencies

There are two EU agencies that explicitly require membership of the European Union for participation: Europol, the EU police intelligence agency, and Eurojust, the coordinating network of EU prosecution agencies.  A negotiation will be required to establish a new legal foundation for the UK’s membership of, or cooperation with, these bodies. Issues of data protection in the sharing of intelligence information will also require resolution, as the UK will be outside the EU regime following Brexit. But it is unlikely that either the UK or the EU will want to see any reduction in cooperation in investigating criminal activity and it can be expected that a relatively early resolution of these issues will be found. Other non-EU states, such as the USA, Canada, Australia and Norway, have developed relationships with Europol and, with its geographical proximity, it seems very likely that the UK will too.

Mutual legal assistance

The United Kingdom can offer judicial assistance to any country or territory in the world, regardless of the existence of an agreement providing a framework for such assistance. The only stipulation is that if there is such an agreement, any request be made within the framework provided.

The European Union based its framework of cooperation on a protocol negotiated by the Council of Europe. Consequently, the UK will be able to rely upon this pre-existing agreement, as the UK’s membership of the Council of Europe remains unchanged. However, this protocol does not provide the specific mechanisms or detail that was created under the European Union framework. For example, the European Investigation Order (to be implemented in 2017), seeks to allow the transfer of evidence through a single instrument prescribing detailed methods for gathering evidence.

Whilst some detail for the process of mutual assistance is provided under the 1978 protocol, the impact of Brexit will be for subsequent requests from, and of, EU members to become ad hoc and the outcomes less predictable. This may lead to delays and potentially inconsistent treatment of requests for mutual legal assistance. The ultimate solution is likely to be a bi-lateral treaty between the UK and the EU, as the UK has had with China since the beginning of 2016.

Money laundering

EU Member States are required to implement the provisions of the Fourth Money Laundering Directive by June 2017 following adoption of the Directive by the EU last year, and there are moves afoot to bring forward this implementation date to January 2017. It was anticipated that HM Treasury would issue a consultation earlier this year on any proposed changes that would need to be made in order to bring our current regulations in to line with the new EU provisions. No doubt this was put on hold pending the outcome of the referendum.

Following Brexit, the UK will be under no obligation to implement the Directive’s provisions. Having said that, we expect that the UK will still make changes to our current regime.  This is because the provisions of the Directive flow from recommendations made by the Financial Action Task Force, a global inter-governmental body. Given the UK’s strong position on money laundering regulation in the past and in particular the UK’s approach to gold plating of EU requirements, it is unlikely that the UK will want to fall behind international standards (albeit that any changes that will need to be made in the UK are likely to be minimal).

At the same time, the Government will be forging ahead with proposals set out in the AML Action Plan issued earlier this year by the Home Office and HM Treasury. This includes the proposal to make significant changes to the suspicious activity reporting regime by October 2018.  

Financial sanctions

Brexit will have no impact on UN Security Council sanctions measures, which will continue to be adopted in the UK and within the EU Member States. However, the EU often introduces measures that are broader in scope than those adopted by the UN. The EU also introduces sanctions where the UN does not - the measures introduced in respect of Russia and Ukraine are a recent example of this. Post-Brexit, those additional EU measures will no longer automatically apply in the UK.

Notwithstanding that, it is likely that the UK will seek to follow the approach taken by Switzerland and introduce measures that reflect the EU position. This will ensure that transactions and funds are not routed through the UK by persons seeking to circumvent or evade EU sanctions. That being the case, the sanctions in force within the EU and the UK would be largely the same. However, the way that such measures could be challenged would differ - a person seeking to challenge a designation in the UK would be required to do so by means of a judicial review. Where such person is also designated by the EU, a parallel challenge would need to be made in the ECJ.

Brexit’s impact is likely to be felt most in relation to policy. Post-Brexit, the UK will have no formal input into the designation of EU sanctions targets or the formulation of EU sanctions policy. In the past, securing the required unanimity from the Member States has often depended on strong support from the UK. Its absence from discussions may result in weaker measures being introduced by the EU.

Weaknesses in EU sanctions could prompt the UK to introduce more stringent measures of its own. However, the impact of any such measures is likely to be limited without wider support from the EU, or perhaps the US. The newly established Office of Financial Sanctions Implementation (OFSI) has recently been armed with greater powers of enforcement, including the power to impose civil fines for financial sanctions breaches and increases to maximum prison sentences from two to seven years. This has been interpreted by some as a step towards the tougher US model. However, it seems more likely, given their close trade, political and geographic ties, that the UK will continue to push for the use of robust restrictive measures within the EU, albeit now from the side-lines.

Competition investigations

The European Commission has responsibility for ensuring that competition in the EU internal market is not distorted.

The Commission has wide ranging powers to detect, investigate and sanction community-wide infringements of competition law. Further to its investigative powers, the Commission can dawn raid UK companies. It can also raid the homes of staff members where it suspects a serious breach of EU law. Although the Commission is empowered to conduct raids without reference to the UK Competition and Markets Authority, in practice raids are always conducted in cooperation with the Competition and Markets Authority (CMA).

The future relationship between the CMA and the Commission will depend on the settlement that is eventually reached more generally. If the UK leaves the EU single market, the creation of separate jurisdictions may lead to a situation where companies find they are subject to parallel investigations by the CMA and the Commission (as is the case now in relation to investigations conducted concurrently by the Commission and national competition authorities outside of the EU).

However, if the UK remains a member of the EU single market or adopts the EEA Treaty model, which we anticipate is more likely, we would expect there to be a special arrangement for cooperation between the CMA and the Commission (as is already in place for Norway) for the investigation of cartel activity which effects the single market.

One important point to note in respect of EU Competition Investigations is the limits to legal privilege that will be recognised by the Commission. Privilege only applies to communications with external, not in-house, lawyers.  But, more importantly, privilege only applies to communications with lawyers entitled to practice within an EU Member State. The Commission has at times indicated that it would be prepared to extend this to lawyers practicing outside the EU, but this has not happened. Once the UK leaves the EU, communications from UK lawyers will be susceptible to seizure and review by the Commission, unless some form of arrangement is expressly agreed. There would seem to be few reasons why the Commission would favour such an arrangement, meaning that dual-qualification, such as by obtaining the right to practice in the Republic of Ireland, may become common amongst competition lawyers.

Data protection

Companies conducting cross-border investigations inevitably face issues relating to the movement, storage and processing of data, and in particular personal sensitive data. The UK’s Data Protection Act implements the EU Data Protection Directive (95/46/EC), but is unlikely to be repealed following Brexit. However, the EU is in the process of finalising the General Data Protection Regulation (GDPR), which will replace the Directive. There is therefore a question as to whether the UK will replace the Data Protection Act with new legislation to keep in step with the EU, or apply to the EU to have the existing Act recognised as offering an “adequate level of protection” for personal data to achieve the same status as Switzerland and Canada (amongst others). If the UK were to be given that status (and it seems very likely if the UK continued to apply the DPA or enhanced laws based on GDPR requirements), transfers of personal data from the EU to the UK could continue to flow as they do now.

It is possible that processing data within corporate groups to meet a UK legal obligation, such as a section 2 notice, may cease to be considered fair and lawful after Brexit. The EU view is that only legal obligations applicable in the EU are valid justification for processing data. This may mean that the processing of data originating in the EU in response to a legal requirement in the UK is no longer permitted under the EU regime, meaning that objections could be raised by the subject of the data in the EU. Similarly, the collection and use of data by UK authorities post-Brexit may generate some additional concern than is currently the case, as EU bodies and countries have shown heightened concern over acquisition of data by non-EU authorities.

Finally, companies with operations in the UK and the EU may, post-Brexit, be subject to a new Data Protection Authority. This is determined by where a company has its “main establishment” in the EU. Previously this could be the UK, but will now have to be an EU Member State, meaning that the nature of the regulatory landscape for companies may change, given the differing approach of the UK ICO to a number of other Data Protection Authorities.

In our view the UK government will seek recognition that the existing Data Protection Act offers an “adequate level of protection” for processing data originating in the EU. This will enable data to be moved between the EU and the UK without difficulty. We also expect the UK government to seek assurances that complying with a legal requirement in the UK should be a valid reason for processing data.

See our article for more detail on how data protection will be affected by Brexit.

Read our article on "The Sanctions and Anti-Money Laundering Bill" for further information on this topic.

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.