White-collar crime – surfing the rising tide of UK and international enforcement
July 2017 | SPECIAL REPORT: WHITE-COLLAR CRIME
Financier Worldwide Magazine
July 2017 Issue
Companies and their senior executives face regulatory burdens and the possibility of criminal sanctions as never before. Major jurisdictions, particularly the UK and the US, are becoming increasingly aggressive in pursuing corporates, as well as those board level individuals through whom it acts, and employees. Moreover, the penalties imposed for breaking the law have become ever steeper. This new enforcement drive is backed up by a raft of legal changes designed to give regulators and prosecutors even more teeth. Balanced against criminal offences are new approaches to enable prosecutors, companies and sometimes individuals too to avoid prosecution, even in the most serious of cases.
The past 12 months have seen governments and prosecutors continue their crack-down on corporate and white-collar crime. Following the 2016 anti-corruption summit, the UK committed itself to a number of anti-corruption initiatives designed to expose corruption, including the establishment of a register of beneficial ownership for companies, including foreign companies owning UK property, and greater transparency in commercial dealings. A pledge was made to deliver a UK anti-corruption strategy by the end of 2016, but this has now been delayed until June 2018.
Of immediate concern to corporates are key changes in the UK which encourage their own staff to report perceived wrongdoing. The UK senior managers and certification regime brought in new requirements for the UK regulated sector for most firms to have procedures in place to facilitate whistleblowing. In practice, such procedures make reporting of wrongdoing by staff (both to internal departments and external regulators) much more likely than it was previously. Regulators have made clear that they will support those who make reports to them. Regulated firms must ensure that they implement the new regime which now applies to large parts of the UK financial sector. This applies as much outside the financial sector where large multinationals and other companies are effectively required to establish proportionate anti-bribery procedures to ensure that they do not risk falling foul of the UK Bribery Act offence of failure to prevent bribery. These usually include some form of whistleblowing procedure for all staff.
Law enforcement investigators have gained a significant advantage in the area of legal privilege in internal investigations after court rulings during the last six months, culminating in the very recent case of Serious Fraud Office v. ENRC which built on the earlier case of RBS rights issue litigation. Both cases interpreted the law of legal privilege, as it applies to information gathered by companies in internal investigations, in a way that is favourable to investigator and future claimants in damages class actions. The effect of both cases is essentially that civil claimants, the SFO and other enforcement agencies may now require the production of documents created in the course of a company’s internal investigation. The previous assertion that such material was protected from production by privilege may well not avail corporates in the future. While there is almost certain to be an appeal in the ENRC case, the two High Court judgments are indicative of a new and more aggressive judicial approach to the interpretation of the law of privilege as it applies to documents created in the course of an internal investigation; notably witness interview notes.
In an increasingly global enforcement context, the consequences of divulging all this information to one agency or class of claimants could be extremely severe. Once documents are exposed in one country they can often be used in criminal and civil proceedings elsewhere. Moreover, the last 12 months has seen extensive cooperation between regulators and prosecutors from different jurisdictions. In December 2016, the UK’s Serious Fraud Office (SFO) announced that the criminal division of the US Department of Justice would be seconding a prosecutor to “further cooperation between the jurisdictions and share best practice”. The secondment will be split with the Financial Conduct Authority (FCA). A liaison between international prosecutors and regulators is nothing new, but these relationships have rarely been stronger than they are today and their importance is illustrated by this recent initiative.
The new fashion for enforcement is not just about information either; the teeth of regulators are growing ever sharper. In the UK, the perceived success of the Bribery Act 2010 has prompted the government to consult on radical extensions to the offences applicable to corporate criminal liability. In essence, while the government may not be ready to abolish the ‘identification principle’, which prevents a company being prosecuted unless an individual senior enough to be a “directing mind” possessed the intention to commit the offence; the new ‘failure to prevent’ style of criminal offence certainly neutralises it. Abolishing this principle (using any of the various alternative methods proposed) would open the way to a flood of cases against corporate entities. Which of the alternative models will be adopted by the government is currently unclear, but it seems certain that the identification principle will be marginalised by the new form of corporate criminal offence now being adopted, which does not require proof of corporate intent. The acid test will be whether prosecutors lose patience and decide to prosecute companies not willing to settle or whether companies choose to risk going to trial if prosecuted. Only by contested litigation will these new offences be properly assessed. There is a danger of a default to US style plea bargained justice where there are no trials of corporate wrongdoing.
The field of tax enforcement (both corporate and individual) seems to be an area where prosecutors are being handed ever more weapons to their arsenal. This year the UK will introduce a corporate offence criminalising companies for failing to prevent the facilitation of tax evasion. This offence will have obvious implications for banks, accountants and some law firms. Separately, the government has consulted on introducing a tough new regime of civil penalties targeting independent financial advisers and others who market or facilitate tax schemes which are “defeated” by HMRC in court.
A large corporate entity will usually pay millions in fines if convicted of any serious offence or if a Deferred Prosecution Agreement (DPA) is entered, though this new procedure is not yet available to HMRC in tax cases. While it would be unduly cynical to equate the entire rise in enforcement action to financial motives, it would be equally naïve to think that politicians and civil servants had not considered this consequence of pursuing companies through the courts. Certainly the very large penalties and costs paid by Rolls Royce in this year’s DPA (nearly £500m and £13m in costs) are out of all proportion to the annual SFO annual budget of about £60m.
Where does all this leave companies and their officers? Doing nothing or covering up what may have occurred are both dangerous options. A major development in UK law has been the introduction of DPAs. These arrangements essentially offer a corporate the chance to avoid conviction in return for full cooperation, payment of a potentially very large fine and agreeing to other measures the prosecutor may deem necessary. While the terms of such agreements can be onerous, large companies (such as Rolls Royce and more recently Tesco) seem to think that it is worth it to avoid a conviction.
The UK version of the DPA is more judge led than its American counterpart. In the US, it is prosecutors who negotiate and settle DPAs for final judicial approval, often under conditions of strict confidentiality, whereas in the UK court involvement is a much more integral part of the process.
In all investigations of corporate wrongdoing, the risk for individuals is that DPA guidance and practice provides a clear incentive to ‘throw people under the bus’ in the race to secure a lenient and swift outcome to minimise the impact on shareholders.
One potential abatement to the rising tide of enforcement may be on its way. On 18 May, prime minister Theresa May committed to scrapping the SFO. The proposal is that the National Crime Agency (NCA) would take over the SFO’s work. The change would be of immense significance because the SFO is the only UK agency where prosecutors and investigators work alongside each other. By contrast, the NCA is a purely investigatory organisation and refers matters to the CPS for a decision of whether or not to prosecute.
In the short term, the dismantling of the SFO may lead to reluctance among its staff to take on new cases and a downgrading of its budget or resources. In the long term, however, splitting prosecutorial from investigatory functions is likely to lead to precisely the inefficiency and a lack of joined-up thinking the SFO was created to combat. On the other hand, since the large scale complex fraud work the SFO does would only form part of the workload of a new ‘beefed-up’ NCA, there is real potential for white-collar crime to slip down the list of priorities. Given the proactive approach of the SFO and the global reach of the companies it prosecutes, the development of this proposal will be watched with interest. It is sure to attract a wave of powerful criticism.
Overall, as the stakes continue to rise, corporates will have to be increasingly careful about how they approach interactions with law enforcement. More aggressive and internationally coordinated enforcement practices put a premium on reacting quickly and deciding on a flexible strategy that keeps firmly in mind that clear evidence of wrongdoing should be obtained before being pushed into an expensive settlement. In most cases, both sides need time to work out what has really happened and whether any crime has been committed.
Peter Binning is a partner and Ben Henriques is an associate at CorkerBinning. Mr Binning can be contacted on +44 (0)20 7353 6000 or by email: firstname.lastname@example.org. Mr Henriques can be contacted on +44 (0)20 7353 6000 or by email: email@example.com.
© Financier Worldwide
Peter Binning and Ben Henriques