Trends in white-collar crime enforcement – will the UK always be chasing the US?
July 2019 | SPECIAL REPORT: WHITE-COLLAR CRIME
Financier Worldwide Magazine
July 2019 Issue
Economic crime remains high on the public agenda as well as that of regulators. However, the key UK regulators, the Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA), have faced criticism over the last year, and beyond, over the slow pace of their investigations. This was acknowledged by Lisa Osofsky, director of the SFO, in her speech at the Royal United Services Institute in London in April 2019.
With the appointment of Ms Osofsky, a former FBI-lawyer, as the SFO’s director, in place of Sir David Green QC in August 2018, practitioners were keen to see whether she would look to move toward the US model of enforcement. The US system allows the Department of Justice’s (DOJ’s) prosecutors far more flexibility in their interactions with firms and individuals, and is often seen as having more ‘teeth’ than the powers utilised by the SFO and FCA, as well as other regulators such as HMRC, the Office of Fair Trading (OFT) and the Information Commissioner’s Office (ICO). But would a move toward the US model work in the UK?
DPAs – four in five years
It is five years since deferred prosecution agreements (DPAs) were first introduced in the UK by the Crime and Courts Act 2013. Since their introduction, the SFO has concluded only four DPAs. However, the SFO has made it clear that it intends to continue to utilise these agreements. Though these DPAs have earned the UK Treasury £670m in financial penalties, many people have reservations as to whether DPAs actually encourage businesses to behave ethically, whether they are transparent enough and whether they negatively impact concurrent action against individuals. Indeed, of the four DPAs concluded so far, individual action is only ongoing in respect of XYZ Limited. The SFO’s case against two former Tesco executives was dramatically thrown out of court in December 2018 as it was found that the defendants had no case to answer. By contrast, the DOJ prosecuted a record number of individuals in 2018 – 406 with 268 convicted by plea deal or trial.
One must question the validity of a DPA being put in place when there is no case to answer on behalf of the key senior individuals. How can the ‘directing mind’ of a corporate be considered to have acted unlawfully in order to take action against the corporate when the prosecuting agency cannot prove unlawful behaviour by the individuals who make up the ‘directing mind’?
It is worth noting that UK DPA agreements differ from US-style plea deals. UK DPAs are concluded under the supervision of a judge, who must be convinced that the DPA is ‘in the interests of justice’ and that the terms are ‘fair, reasonable and proportionate’. The lack of judiciary control within US-style plea deals are one of the major reservations held about the UK moving closer toward that model.
It will be interesting to see whether there is a push from the SFO to introduce DPAs for individuals in the future. What is clear from speeches made by the director is that we will see the SFO seeking to persuade insiders to cooperate with investigators to speed up criminal investigations – a practice the UK is more familiar with in the sphere of organised crime, rather than financial crime. It is unclear what inducement could be made for this cooperation under the current framework. Under common law, the judge can consider any assistance provided by the individual and whether to reflect that in sentencing. There is no current mechanism to offer concrete specific inducements to individuals, as occurs in the US.
New offences and areas of focus
There is continuing talk – most recently by the House of Lords Select Committee, which published its post-legislative scrutiny report on the UK Bribery Act 2010, and a recommendation from the Treasury Committee – that a new corporate offence of failure to prevent ‘economic crime’ be introduced. This would supplement existing criminal offences in the Criminal Finances Act 2017 for failing to prevent the facilitation of UK and foreign tax evasion and in the UK Bribery Act 2010.
This strict liability corporate offence model would create a strict liability regime with the likely only defence available that the corporate had put in place sufficient procedures to prevent economic crime. It would circumvent the significant difficulties in establishing corporate criminal liability, which, in turn, would provide a strong deterrent to firms. At common law, a corporate can only be found guilty of a criminal offence by satisfying the ‘directing mind’ test. That is, directors or senior managers must be actively involved in the criminal activity in order to ascribe liability to the corporate. Secondly, it also shifts the burden and cost of policing corporates onto them as they will need to establish procedures designed to prevent economic crime.
Interactions with and between regulators
The SFO and FCA continue to emphasise the need and obligation on firms to self-report and cooperate with their investigations. In order to qualify for a DPA, or the up to 30 percent discount on FCA financial penalties, firms must provide full cooperation at every stage of the investigation. In recent years, the SFO has also encouraged firms to allow them access to all documentation and engaged in arguments over the privileged nature of internal investigation documents. Firms are asked, for example when providing disclosure, to highlight key documents to regulators rather than them being hidden ‘in the weeds’ so to speak.
The continuing move to a cooperative approach, rather than the traditional adversarial regime, is mirrored in the US. In late 2017, the DOJ published a new policy on the enforcement of the Foreign Corrupt Practices Act (FCPA). This introduced the presumption that it would not prosecute companies that voluntarily disclose an FCPA violation, took subsequent remedial action and relinquished the profits flowing from that conduct. The DOJ’s new policy of ‘no piling on’ also assures cross-border cooperation. This policy refers to the move away from firms being subject to multiple penalties for the same conduct. This policy is aimed at ensuring certainty and fairness for firms.
We can expect to see the transfer of the investigation burden from regulators directly to firms or individuals to continue. The FCA’s Senior Managers and Certification Regime (SM&CR) places the burden on corporates to certify that various of their employees are fit and proper in circumstances where previously this responsibility fell on the FCA.
The SFO launched a dedicated website for whistleblowers last year in an attempt to obtain intelligence on financial crime. It has been reported that 50 percent of the US Securities and Exchange Commission's (SEC’s) investigations have come through people contacting their dedicated hotline and this is obviously seen as an important source of information by regulators in the UK.
Responding to digital change and the dual pressure to speed up investigations and cut costs, regulators in the UK have promised to utilise digital investigative capabilities to examine evidence in a more targeted way. It is unclear what practical impact this will have on firms responding to investigations and information requests, however.
The FCA and SFO have both emphasised their push to cooperate closely with each other, as well as with other international regulators to share information and improve efficiencies. Taking a new approach, the FCA and SFO announced a joint investigation into London Capital & Finance earlier this year and indicated this would be an ongoing trend.
The UK has a fundamentally different approach and legislative framework to the US model. This means that even if the UK were to adopt many of the same procedures, as it clearly continues to do, there will need to be a dramatic legislative change in order for the enforcement regimes to be truly aligned. While the UK will continue to chase the US, similar rhetoric from regulators in both territories illustrates that they will continue to work together against the ever growing global pressure of financial crime.
Michael Ruck is a partner and Jemma Shanks is a solicitor at TLT. Mr Ruck can be contacted on +44 (0)333 006 0221 or by email: firstname.lastname@example.org. Ms Shanks can be contacted on +44 (0)333 006 1420 or by email: email@example.com.
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Michael Ruck and Jemma Shanks