The British Parliament has recently published two important post-legislative assessments of the effectiveness of the UK's financial crime legislative framework, as well as an insight into future areas of focus.
On 14 March 2019, the House of Lords Select Committee on the Bribery Act 2010 published its report (the "Select Committee Bribery Act Report")1. It sets out the Lords' assessment of whether the Bribery Act 2010 (the "Act") is meeting its objectives and also assesses the effectiveness of Deferred Prosecution Agreements ("DPAs"), introduced pursuant to the Crime and Courts Act 2013. The Committee considered that the Act was successful, but set out some important recommendations for the future.
In a separate but complementary report published earlier in March 2019, the House of Commons Treasury Committee examined the UK's anti-money laundering ("AML") and sanctions regimes (the "Economic Crime Report")2. Their view was not as positive, but given the current reforms to the systems which are taking place, this is perhaps not surprising.
The Select Committee Bribery Act Report is positive in its assessment of the Act. The recommendations are largely focused on enforcement issues (e.g. the time taken for investigations) and clarifications of some issues (e.g. corporate hospitality) where there has been some confusion in light of the lack of judicial interpretation of the wording of the legislation. Despite recent criticisms, the introduction of DPAs is praised as a positive development, albeit that the Select Committee recommends providing greater incentives for self-reporting by only allowing the highest sentencing discounts (i.e. 50%) to be available to companies that have been proactively co-operative and self-reported to the relevant authorities.
The Economic Crime Report highlights that there are many aspects of the current AML regime which require improvement, including the "people with significant control" register (the "PSC Register") and the suspicious activity reporting ("SARs") regime (albeit it acknowledges that there is an ongoing SARs reform programme). The report notes that the sanctions regime should be more flexible post-Brexit as the UK will have an independent sanctioning capability not currently available as an EU Member State. In terms of sanctions enforcement, the report stresses that it is too early to assess the effectiveness of the Office of Financial Sanctions Implementation ("OFSI").
There are two key findings that are common to both Reports:
- Both encourage the UK Government to determine whether legislation should be introduced which extends the corporate offences of failure to prevent bribery (set out in section 7 of the Act) and failure to prevent the facilitation of tax evasion (set out in sections 45 and 46 of the Criminal Finances Act 2017 (the "Criminal Finances Act")) to other economic crimes. This is an area where the Government has stalled having issued a consultation in January 2017. It now seems likely that, in the near future, the Government will formulate concrete proposals on a potential corporate offence of failure to prevent economic crime.
- Both are clear that the UK's departure from the EU could restrict the ability of UK law enforcement to conduct investigations into economic crime. The Reports recommend that the Government should seek to replicate or maintain agreements with the EU with the equivalent effect to the European Arrest Warrant, the European Investigation Order and other similar mechanisms. At the time of writing, it is still unclear when the UK will leave the EU or whether a deal will be in place. It is likely that the various authorities and the Ministry of Justice has been working hard to put contingency plans in place advance of the original departure date of 29 March 2019. If not, it may now be too late for these mechanisms to be addressed adequately in the time available since the publication of these reports.
The Select Committee Bribery Act Report
The Select Committee Bribery Act Report focuses on whether the Bribery Act is achieving its intended purposes. The key points to note are:
- The Act is described as "an excellent piece of legislation which creates offences which are clear and all-embracing."
- A recommendation that the UK Government should reach a conclusion on whether to extend the "failure to prevent" offence beyond bribery and the facilitation of tax evasion to other economic crimes. In considering the extension of the "failure to prevent" offence, the report notes the difference between the wording used for the defence to the "failure to prevent" offence in the Act ("adequate procedures")3 and the equivalent wording in the Criminal Finances Act (the corporate "had in place such prevention procedures as it was reasonable in all the circumstances" to expect it to have in place).4 The report explains that "adequate procedures" and procedures that are "reasonable in all the circumstances" have the same practical meaning. However, the report prefers the formulation in the Criminal Finances Act and suggests that any extension of the "failure to prevent" offence to other economic crimes should adopt this formulation.
- The Committee also considered the replacement of the English law concept for corporate liability of the identification principle (i.e. a company will only be liable where individuals who are the controlling mind of the company have the necessary mens rea for the offence) with vicarious liability for companies similar to the position in the United States. While the report highlights that there is some support for a move in this direction – notably from Lisa Osofsky, the new Director of the UK Serious Fraud Office (the "SFO")5 – the Committee was of the view that corporate liability for the actions of servants or agents is adequately dealt with by "failure to prevent" type offences.
- Various complaints had been received by the Committee regarding the impact of the Act on corporate hospitality, including that there is uncertainty as to how the Act applies to the provision of hospitality. Accordingly, the Committee suggests that the UK Ministry of Justice (the "MoJ") may want to consider supplementing its guidance (the "MoJ Guidance") with some clearer examples of what might be considered acceptable hospitality. However, the report also notes that some companies are subject to legislation or regulation which requires a much more restrictive approach to corporate hospitality than that set out in the Act. For example, the UK Financial Conduct Authority's expectation of firms performing certain types of regulated activities is that hospitality should ordinarily be provided or received only in circumstances where it is designed to enhance the quality of service for the ultimate client.6
- The Committee was clear that facilitation payments (i.e. payments to an official to speed up a routine governmental or administrative decision or process) should not be legalised. Although facilitation payments are not referenced specifically in the Act, the MoJ Guidance explains that they could be caught by the Act's general bribery offence (section 1 of the Act) or the offence of bribery of a foreign public official (section 6 of the Act) and, could constitute a bribe for the purposes of corporate liability under section 7 of the Act. The Committee notes that the international trend is to prohibit facilitation payments and so amending the Act to legalise them would be a "retrograde step".
- The Committee encouraged the Home Office's plan to consider options for a central reporting framework for bribery and corruption (in accordance with the UK Government's anti-corruption strategy document for 2017 to 2022).7
- There have been criticisms of the time taken for UK prosecutors to complete bribery investigations as well as the level of communication from prosecutors regarding the progress of investigations. The report highlights the significant burden an investigation places on a company "in terms of the co-operation required of them by the authorities, the amount of scarce senior management time consumed in handling the issue, and the anxiety and loss of reputation they suffer in the meantime." Accordingly, the Committee recommends that the Director of the SFO and the Director of Public Prosecutions should publish plans as to how they will speed up and improve communications with those being investigated as part of a bribery case.
- The Committee recommends that the Government take further steps to ensure that SMEs are made aware of the MoJ Guidance.
On the subject of DPAs - where three of the four DPA cases to date included offences under the Act - the committee found:
- DPAs have "proved to be an excellent way of handling corporate bribery, providing an incentive for self-reporting and for co-operating with the authorities."
- The three DPAs concerning offences under the Act have shown an inconsistent approach to discounting. The first DPA (for Standard Bank) involved a discount of one third where the company had self-reported almost immediately after becoming aware of the issue. The second DPA (where the company is known only as XYZ given individual prosecutions are ongoing) resulted in a 50% discount where the company had self-reported. The largest DPA to date (for Rolls Royce) granted a discount of 50% to recognise the extraordinary level of cooperation from the company even though it had not self-reported. The Committee recommends that the highest discounts should only be available to companies that proactively co-operate with the investigation and self-report.
- Dechert Partner Roger Burlingame gave evidence to the Committee on his experience of DPAs in the United States. The Committee highlights Mr Burlingame's explanation that obtaining a DPA in the United States now requires companies to provide individuals for prosecution. The Committee concludes that the introduction of DPAs in the UK emphasises the importance of culpable individuals being prosecuted. However, the report highlights that the prosecution of individuals is not straightforward and notes the difficulties the SFO faced in the cases of Tesco (a false accounting case where the prosecutions of individuals was unsuccessful) and Rolls Royce (where charges against individuals were not initiated).
The Select Committee confirmed that the Act and DPAs are here to stay and, in fact, the "failure to prevent" offence in the Act is likely to be a model for future UK legislation concerning corporate liability for failing to prevent other economic crimes. If the failure to prevent offence is extended to other economic crimes then this will require companies to revisit their financial crime compliance frameworks to ensure that they cover any new areas.
While supplementing the MoJ Guidance to show additional examples of acceptable corporate hospitality is to be welcomed, companies will still need to review events on a case-by-case basis and consider their appropriateness. Further certainty in this area will only arrive if and when corporate hospitality issues have been considered by the courts.
The criticism of the time taken for bribery investigations is unlikely to be new to the SFO but their ability to address the issue is likely to be reliant on the agreements negotiated by the Government regarding the UK's departure from the EU. If the current investigation mechanisms are no longer available to the SFO then this is likely to cause significant delays to pan-European bribery investigations.
The Economic Crime Report
The Treasury Committee considered the current legislative regime for AML, terrorist financing and sanctions and how individuals and firms have been impacted. The key findings are:
- That the Government's review of a
potential extension of the "failure to prevent" offences
to other economic crimes has stalled. The report recommends that
the Government sets out a timetable for bringing forward new
legislation in this area and that, as part of the process, two
proposals made by the SFO should be considered. These are:
- Replacing the identification principle with a new principle which would set out the circumstances in which a company would be liable for any criminal offence. The SFO's recommendation is that a company would be liable if a person associated with the company commits the offence to obtain or retain business or otherwise to benefit the company
- Extension of the failure to prevent offences to other economic crimes.8
- That enforcement agencies will face difficulties in investigating economic crime if the existing arrangements with the EU are not maintained post-Brexit. The report highlights the balancing act facing the UK post-Brexit in that it needs to encourage relationships with new trading partners outside of the EU while maintaining the City of London's as a "clean" City. The Committee urges the Government to ensure that the UK still leads in the fight against economic crime and that is not compromised in order to enter into new trading relationships quickly.
- The Committee highlighted the fragmented approach to AML supervision in the UK given HM Treasury has "identified 13 Accountancy Professional body AML supervisors, nine Legal Professional body supervisors, and three Statutory AML supervisors." The dangers in this are emphasised by the first report of the Office for Professional Body AML Supervision (the "OPBAS Report") published at the start of March 2019 and covering AML supervision by the legal and accountancy professional body supervisors.9 The OPBAS Report highlights a number of issues with AML supervision, including that "80% of [Professional Body Supervisors] lacked appropriate governance arrangements."
- The report criticised the PSC Register and the general role of Companies House in combatting economic crime. It refers to issues with the PSC Register, particularly the lack of proactive checks by Companies House of the data provided to it for inclusion in the PSC Register. The report notes that the "UK cannot extol the virtue of a public register of beneficial ownership and yet not carry out the necessary rigorous checks of the information on that register" and urges the Government to "urgently consider reform of Companies House."
- The evidence given to the Committee stressed the appetite for measures allowing increased information sharing between banks in the context of SARs. The evidence highlighted that, although there has been some success with initiatives such as the Joint Money Laundering Intelligence Taskforce, further steps are required. Financial institutions are reluctant to take steps without legislative protection given the "tipping off" and data protection risks in sharing information. The Committee recommends that "the Government reviews the scope to increase information flows at the bank level and report back" within six months.
- The Committee was supportive of the ongoing SARs reform programme being led by the Home Office which is likely to involve an overhaul of the IT systems that are the foundation of the current regime. The evidence provided to the Committee highlights that the objective should be to produce better quality SARs rather than a higher volume. However, the Committee highlights that modern data analytics mean that lower quality SARs may ultimately be useful in the long run (e.g. as part of a trend analysis or mapping patterns of behaviour).
- The Committee notes that identifying Politically Exposed Persons ("PEPs") (who are higher risk individuals from an AML perspective given their potential power and influence) is a difficult task and, accordingly, the report recommends that the Government should create a central database of PEPs which should be easily accessible by those subject to AML supervision.
- The Committee highlights that the UK leaving the EU should allow Parliament more flexibility in the implementation of sanctions given the UK will have an independent sanctioning capability not currently available as an EU Member State. The report also notes that OFSI has only been in operation since April 2017 and, therefore, it is difficult to assess its effectiveness. Since OFSI became operational, it has only concluded enforcement action against one company and this was a fine of £5,000 issued on 21 January 2019 for breach of the Egypt (Asset-Freezing) Regulations 2011.10
The Treasury Committee highlights well known deficiencies in the UK's AML regime and there are projects underway to address some of these issues. The recommendations in the report will assist in remedying the deficiencies.
It is clear that despite uncertainty around Brexit, economic and corporate crime legislation and enforcement mechanisms will continue to be at the forefront of the Government's agenda. There will likely be more DPAs and quicker routes to resolution of corruption cases. AML and sanctions enforcement will be an area of focus for UK regulators and enforcement agencies in the future. If the "failure to prevent" model is extended beyond bribery and facilitation of tax evasion, England and Wales is likely to have one of the most stringent legal environments for corporates in the world. The value of a clean environment for business is not to be underestimated.
- The Bribery Act 2010: post-legislative scrutiny
- Economic Crime – Anti-money laundering supervision and sanctions implementation
- Section 7(2) of the Bribery Act4)
- Sections 45(2) and 46(3) of the Criminal Finances Act5)
- See paragraph 106 of the Bribery
- See: https://www.fca.org.uk/publications/thematic-reviews/inducements-and-conflicts-interest-thematic-review-key-findings
- See page 66 of United Kingdom Anti-Corruption Strategy 2017-2022
- See paragraph 188 of the Economic Crime Report
- Themes from the 2018 OPBAS anti-money laundering supervisory assessments
- Penalty for Breach of Financial Sanctions, Office of Financial Sanctions Implementation HM Treasury
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