Rod Fletcher of Herbert Smith Freehills analyses the recent developments in UK business regulation and the consequences that follow for the business crime defence market.
“The cumulative effect of these developments is undoubtedly increased risk exposure on the part of both corporates and individuals. Key to proactively managing this risk is a good understanding of the potential liabilities which can arise.”
Recent developments in business crime defence in the UK confirm that the commercial environment continues to grow more perilous for companies, their officers and their employees. Who would have predicted that the editors and senior management of a national newspaper would stand trial at the Old Bailey for phone hacking? The year has seen strengthened agencies, with expanded powers, adopting bolder strategies to enforce ever more offences. In response, the banking sector has warned of an increasingly “risk-averse” staff culture. Will the increase in regulatory burden and enforcement action translate into increased deterrence – or simply increase the cost of doing business?
Under the directorship of David Green CB QC, the SFO is a force to be reckoned with. The quality of its people rivals that of the private sector, and it now boasts three in-house QCs. The succession of well-publicised shortcomings, some of which were inherited from the Alderman era – including National Audit Office scrutiny of salary payments made to senior SFO personnel, and loss of confidential material relating to the SFO’s historic investigation into BAE Systems – might finally have come to an end, following the settlement of civil claims brought by Robert and Vincent Tchenguiz for £1.5 million and £3 million respectively, after search and arrest warrants obtained by the SFO were quashed by the High Court.
The SFO’s current approach is to take on fewer but larger and more complex investigations. One of the first examples of this trend, the SFO’s LIBOR investigation, is slowly gathering momentum. To date 12 individuals are due to stand trial in the UK for conspiracy to defraud, with the most recent charges brought in July 2014. Across the Atlantic, the US Department of Justice (DOJ) has filed charges against more individuals, and has already settled criminal charges with a number of UK entities – most recently a US$86 million deferred prosecution agreement (DPA). In its press release the DOJ expressed its appreciation to the SFO “for its assistance and ongoing cooperation”, yet the much-rumoured prospect of a “turf war” between the two agencies cannot be ruled out. More generally, multi-jurisdiction investigations and global settlements seem certain to increase further.
Two years after announcing the LIBOR investigation, the SFO has opened a separate large-scale investigation into questionable practices in the foreign exchange market (announced on 21 July 2014). For these major cases, where the cost is expected to exceed a certain percentage of their annual budget, the SFO continues to request so-called “blockbuster” or emergency funding from the Treasury. Whilst this practice arguably undermines the SFO’s prosecutorial independence, it should assist in preventing investigations, once initiated, being abandoned or constrained on account of resource limitations.
The SFO’s first contested overseas corruption case culminated in June 2014 with the conviction of two former Innospec officers of conspiracy to corrupt overseas officials. The SFO also secured the conviction of an Australian national, Bruce Hall – the former CEO of Bahraini company Alba – for a conspiracy to commit corruption overseas. The SFO was, however, forced to abandon proceedings against Hall’s co-defendant, UK–Canadian national Victor Dahdaleh, as a result of difficulties in securing prosecution evidence (including a change in Hall’s evidence for the prosecution, as well as the refusal of two US-based prosecution witnesses to be cross-examined at trial). In this connection, the SFO were criticised for their apparent “outsourcing” of the investigation to the US lawyers representing the victim of the alleged criminal conduct, the US company Alcoa, in related civil proceedings in the US.
The SFO’s current workload runs counter to their historic trend of prosecuting individuals rather than companies. Cases under investigation which might result in corporate charges include capital-raising by Barclays in the Middle East (announced in August 2012), alleged bribery and corruption at Rolls-Royce (announced in December 2013) and commercial practices of GlaxoSmithKline plc and its subsidiaries (announced in May 2014). Criminal proceedings brought by the SFO against the Olympus Corporation and its UK subsidiary for offences under section 501 of the Companies Act 2006 remain ongoing in Southwark Crown Court, and further criminal charges were brought against Alstom Network UK Ltd in July 2014 for corruption and conspiracy to corrupt in connection with overseas projects. Public pronouncements by the SFO also suggest an increasingly confrontational stance on corporate privilege claims – David Green has criticised the practice of claiming privilege over internal interviews, and the SFO’s general counsel has made it clear that a company’s refusal to waive any privilege that exists in witness accounts would be regarded as a failure to cooperate.
The biggest obstacle to a successful corporate prosecution remains the need to establish the company’s “directing mind and will”, in accordance with the so-called “identification principle”. David Green has repeatedly called for a reform of the law of corporate liability by extending the corporate “failure to prevent” offence beyond section 7 of the Bribery Act 2010, to catch not only bribes paid for a corporation’s benefit by its “associated persons” but fraud offences more generally. Such a development might be premature, given the absence of any prosecutions of this offence to date. It is perhaps telling that the first charges brought by the SFO under the Bribery Act 2010, due for trial in October 2014, have been brought against individuals rather than the corporate entity.
Incentives for suspects to cooperate with enforcement agencies now extend far beyond the traditional one-third discount in sentence for an early guilty plea. Recent SFO prosecutions show the potential for the offender assistance provisions in sections 71-75 of the Serious Organised Crime and Police Act 2005 to operate as a significant incentive for individual defendants to cooperate with a prosecution. Bruce Hall was sentenced to 16 months’ imprisonment rather than the six years he would have faced but for his cooperation. One of the former Innospec executives, David Turner, succeeded in avoiding an immediate prison sentence on account of his cooperation as a key prosecution witness, receiving instead a 16-month suspended sentence with 300 hours unpaid community work.
For companies, however, it remains to be seen whether the long-awaited power for prosecutors to enter into DPAs with companies charged with economic offences will provide an incentive to cooperate. DPA powers are currently confined to the Director of the SFO and the Director of Public Prosecutions and are yet to be exercised by either agency. Companies and their advisers may struggle to see the advantages of a DPA over a contested prosecution, at least pending more clarity on how the DPA process will operate in practice, but the stakes have unquestionably been raised. New sentencing guidelines for corporates convicted of fraud, bribery or money laundering offences come into force on 1 October 2014, and are widely expected to result in a general increase in sentencing levels. Separate sentencing guidelines for environmental offences that came into force on 1 July 2014 increase the fines for corporate offenders committing serious offences.
The main attraction of early engagement with enforcement bodies is likely to remain the prospect of a resolution by way of civil recovery proceedings rather than prosecution. It has been clear for some time that the SFO no longer welcomes informal “chats” about enforcement options, and that self-reporting will not necessarily avoid prosecution; in his public pronouncements David Green has stressed the dangers of not reporting, pointing to the many different ways in which information about wrongdoing might come to the SFO’s attention (through whistle-blowers, disgruntled counterparties, cheated competitors, other agencies both in the UK and overseas, as well as the SFO’s own intelligence capability). The SFO has not, however, gone so far as to support the introduction of “bounty” payments (as currently offered to whistle-blowers on a discretionary basis by HM Revenue and Customs), which the SFO regards as having the potential to undermine the credibility of witnesses. The UK financial services regulators have been equally reticent, pointing to research findings that financial incentives would be unlikely to increase either the number or quality of disclosures.
The decision to cooperate is likely to be more complex where multiple agencies are investigating. Fines levied by the UK financial services regulators – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) – are not discounted to take account of criminal penalties in respect of the same conduct, and may in any event dwarf such fines. Individual penalties levied by the FCA over the last year in respect of LIBOR manipulation have reached £105 million. Penalties imposed by the FCA for financial crime compliance failings have been comparably substantial over the same period – including a £7.6 million civil penalty imposed on a bank in respect of failures to properly manage the risk posed by politically exposed persons and similar high risk customers imposed under the Money Laundering Regulations 2007. Most recently, Besso Limited was fined £315,000 for failing to take reasonable care to establish and maintain effective systems and controls for countering the risk of bribery and corruption associated with making payments to third parties. A maximum 30 per cent discount is available under the settlement procedures currently operated by both the FCA and the PRA.
Asset recovery remains a significant focus for both prosecutors and legislators. The Crown Prosecution Service published a new asset recovery strategy in June 2014, to be delivered by a new Proceeds of Crime service – three central units based in the CPS headquarters and nine regional teams. Proposals in the Serious Crime Bill, currently before Parliament, seek to strengthen both confiscation and civil recovery powers in the Proceeds of Crime Act 2002. Greater use is expected to be made of civil recovery proceedings as a supplement rather than as an alternative to criminal proceedings, following the SFO’s successful reliance on this strategy against Bruce Hall. Hall’s agreement to settle civil recovery proceedings was considered as a mitigating factor in the subsequent sentencing hearing in parallel criminal proceedings against him. The consent order, in the amount of US$900,000, was in due course supplemented by a £3 million confiscation order, a £500,000 compensation order and a £100,000 costs order.
Senior management responsibility is a key emerging theme in financial services regulation, as demonstrated by joint FCA/PRA consultations on proposals to improve individual accountability. Consistent with the recommendations of the Independent Commission on Banking and the Parliamentary Committee on Banking Standards, the Financial Services (Banking Reform) Act 2013 in section 36 introduced a new offence of making a decision which causes a financial institution to fail (not yet in force) – although this has already been dismissed by some commentators as unlikely to result in prosecutions. David Green has denied the suggestion that his agency has shied away from prosecuting senior bankers in the wake of the financial crisis; the new offence means there will be further pressure for action to be taken in the event of future bank collapses.
Further new offences targeting market behaviour are on the horizon as a result of the Chancellor’s review of the regulation of the wholesale financial markets, including strengthened market abuse offences. The Department of Energy and Climate Change has proposed additional insider dealing and market manipulation offences specific to the wholesale energy markets. Substantial amendments to existing offences have, in effect, created new areas of liability – for individuals, the removal of the dishonesty requirement for the cartel offence under section 188 of the Enterprise Act 2002 (effective from 1 April 2014), and for corporates and individuals alike, the pending addition of further benchmarks (foreign exchange, commodity, fixed income and other market benchmarks) to the benchmark offence in section 91 of the Financial Services Act 2012.
The cumulative effect of these developments is undoubtedly increased risk exposure on the part of both corporates and individuals. Key to proactively managing this risk is a good understanding of the potential liabilities which can arise. Once an investigation is under way, it is essential that corporates and their officers ensure that a clear defence strategy is in place across all relevant jurisdictions, from the outset.