Business Crime Defence 2017: Discussion

Who’s Who Legal brings together Saverio Lembo at Bär & Karrer and Louise Hodges at Kingsley Napley to discuss some of the key issues facing business crime practitioners today, including the effects of the Panama Papers, the role of regulation authorities and the nature of the practice in developing economies. 









Have there been any significant developments in your jurisdiction that have presented new challenges for lawyers and their clients?

Saverio Lembo: Statistics for recent years show a steady number of convictions for embezzlement, fraud, criminal mismanagement and money laundering. On the other hand, the number of convictions for corruption of public officials has significantly increased. Against this background, one observes a trend consisting of prosecuting more and more corporate entities. While corporate criminal liability has existed since 2003, it has never been applied as often as today. In cases such as HSBC, Petrobras, 1MDB and more recently Addax, criminal authorities show a clear willingness to go after corporate entities, rather than individuals. This is understandable insofar as it is often difficult to establish the existence of an offence committed abroad. Under those circumstances, prosecutors understood that it might be more practical – and efficient – to prosecute corporate entities, which are much more sensitive to reputational risks.

Louise Hodges: There continues to be challenges by prosecutors and regulators, in particular the Serious Fraud Office (SFO) on claims to legal professional privilege (LPP) coupled with a depressingly negative view held by some agencies that lawyers in private practice are incapable of independence and have an innate bias in favour of their clients. The Law Society of England and Wales (LSEW) is so concerned about the attack on LPP that in February it issued a Practice Note to the profession clarifying the status of LPP and summarising practitioners’ duties.

In the case of SFO v Eurasian Natural Resources Corporation (ENRC) the SFO challenged assertions of legal advice and litigation privilege made on the company’s behalf. The judgment was published in May 2017 and many of the issues appear fact-specific, including that the company investigation covered a period when the SFO’s policy on self-reporting changed significantly, and leaves many questions unanswered. A key area of concern is whether the effect of this decision is that it is harder to claim litigation privilege in a criminal context than a civil one – a position that not only appears illogical but may have the consequence of dissuading companies to conduct internal investigations and self-report. ENRC is seeking leave to appeal the decision but anecdotally it appears that in the meantime the SFO is using the decision to draw general principles over the scope of LPP and in particular its availability in the context of criminal investigations. 

The LSEW also published a practice note on the SFO’s Operational Guidance entitled “Presence of interviewee’s legal adviser at a section 2 interview” (ie, being conducted under the SFO’s compelled powers), which reminds lawyers that they do not have to accept unnecessary and inappropriate restrictions on their ability to represent clients.

In the race to be the most effective enforcer of business crime investigations, is it fair to say that the DOJ is now pre-eminent in this field?

Saverio Lembo: I believe so. Various countries inspire themselves from the DOJ’s practice. As indicated above, Swiss prosecutors (cantonal and federal) increasingly prosecute companies. Even though our country does not have DPAs or NPAs as in the US, prosecuted companies can put an end to prosecution by reaching an agreement with criminal authorities. Such an agreement can be formalised in different ways (for example, in a dropping off order, a simplified prosecution or a penalty order). These agreements often imply the payment of tens of millions of Swiss francs to settle charges of suspected criminal offences such as money laundering or bribery of foreign officials. This is what happened in 2015 with HSBC and in 2016 with Odebrecht, which both accepted to pay tens of millions of Swiss francs to the criminal authorities to put an end to the proceedings.

Louise Hodges: The DOJ’s reputation for taking large cases – both in terms of value of fines and the size of the entities – continues, although there has been uncertainty about whether this will continue at the same pace under the Trump administration. In the meantime, the SFO now has four deferred prosecution agreements (DPAs) under its belt and promises others in the pipeline. The tone of the SFO’s Annual Report published in July, was one of confidence and success, even though only a month earlier the Conservative Party manifesto pledged to fold it into the National Crime Agency (NCA). 

Despite winning, the poor standing of the Conservative Party in the election appears to have given the SFO a reprieve, although the power struggle may continue with the NCA hosting the International Anti-Corruption Coordination Centre (IACCC), which brings together specialist law enforcement officers from multiple jurisdictions to tackle allegations of grand corruption, including the US FBI.

What challenges do developing economies face in combating fraud and money laundering by corporate entities?

Saverio Lembo: The traditional response is for governments to combat those crimes by making new laws, putting in place new agencies and imposing self-reporting obligations on companies. The problem is that, in some countries, society has learned to live with corruption and consider it as an integral part of its culture. Inadequate education and low wages for public servants obviously encourage corruption. In certain countries, access to political power even ensures access to economic privileges. The real challenge for those developing economies is to find the willingness and the courage to change the situation. Brazil, where the Lava Jato operation created a real political earthquake, is a good example of such willingness.

Louise Hodges: Even in those jurisdictions which have developed anti-fraud and money laundering legislation, actually stopping such illegal activity by corporate entities is often down to enforcement. As jurisdictions with stronger controls use their powers and impose increasingly greater penalties, those companies with suspect practices will locate in jurisdictions with weaker controls. This has a knock-on effect to the legitimate economy and tarnishes the nation‘s reputation on the world stage. 

As the developed world takes on the role of global policemen, there is often a rhetoric of global settlement, but in practice the main beneficiaries of such settlements are predominantly the jurisdictions with the major prosecuting powers. Although there may be some compensation paid to the developing countries, this has a negligible impact on developing and improving their enforcement capabilities or creating a culture of corporate governance. 

Did the Panama Papers “change the game” for lawyers and their clients in the area of tax efficiency and avoidance? If so, how?

Saverio Lembo: We still see a rising number of voluntary disclosure procedures, mainly by individuals. The number of voluntary disclosure requests doubled for example, in Geneva in 2016. Clients are more receptive to making use of such voluntary disclosure possibilities, not only because they fear unexpected leaks and negative publicity, like with the Panama Papers, but also because tax authorities will soon receive tax relevant information due to the automatic exchange of information on financial accounts: more than 100 states, including Jersey, Guernsey, Bermuda, British Virgin Islands and Cayman Islands, have committed to adopting these rules and exchanging information with Switzerland beginning in 2018. Tax efficiency nowadays aims at robust, sustainable structures, avoiding double taxation on the basis of the existing tax laws, where possible, but with nothing to hide towards the tax authorities. This may be a shift in the mind set for certain clients, but also for lawyers who had advised on such structures. The fact that tax fraud is a serious crime has been underpinned by the recent changes in the Swiss criminal law where money laundering now also applies to money arising from qualified tax fraud. Not only the fear of potentially (penal) consequences for lawyers, but also rules on disclosure of tax avoidance schemes as already in place in the UK and intended by the EU, will impact their tax advice going forward.

Louise Hodges: The Panama Papers generated a lot of initial publicity and were a key focus/facilitator of the Anti-Corruption Summit in London 2016. The founding partners of Mossack Fonseca, the law firm at the centre of the scandal, have since been arrested on allegations of money laundering linked to corruption in Brazil. In the UK a joint task force led by the UK tax authority HM Revenue and Customs (HMRC) has been investigating potential tax evasion by UK-based companies and individuals as a result of the disclosures, although there have been no reported raids or arrests by HMRC at this stage.

The scandal also highlighted the broader reputational risks for those who partake in “offshore” avoidance and efficiency schemes, which although strictly legal may be considered morally questionable. There is no doubt that such risks now receive greater consideration by tax advisers and their clients. It also gave fresh impetus to push through legislation in the UK which clamps down on the enablers and promoters of tax avoidance schemes. Chief among these are civil penalties for enablers who assist, encourage or facilitate someone else’s offshore tax evasion or careless non-compliance (as per the Finance Act 2016) and the new corporate criminal offence of failure to prevent the facilitation of tax evasion in the UK and abroad (as contained in the Criminal Finance Act 2017). 

The scandal has also acted as a catalyst for the global implementation of the OECD’s Common Reporting Standards (CRS), which require financial institutions to automatically exchange information regarding their clients to their clients’ local tax authorities. The CRS is seen as central to global tax transparency and cooperation and key to the fight against evasion and avoidance. In September this year, 52 countries (including the UK) will be commencing the automatic exchange of information with other jurisdictions.

What does the Criminal Finances Act 2017 mean for white-collar crime and fraud lawyers practising in the area?

Saverio Lembo: In Switzerland this act has no real impact.

Louise Hodges: This UK Act encompasses a range of provisions covering money laundering, civil recovery, information sharing and new criminal offences - all aimed at taking the profit out of crime. Of particular note for practitioners is the new corporate offence of failure to prevent the facilitation of tax evasion and unexplained wealth orders. 

The corporate tax offence covers UK and foreign tax evasion and is due to come into force on 30 September 2017. This is part of a wider trend of seeking to hold corporates to account and going after the “enablers” of tax evasion. 

The Act makes corporates liable for those acting on its behalf who criminally facilitate a tax evasion offence committed by another person. There is a defence of having “reasonable” prevention procedures, and HMRC published Guidelines in relation to the offence and defence on 7 September 2017. In addition, it is anticipated that guidelines will be published by professional and industry bodies.

Unexplained Wealth Orders introduce a reverse burden of proof where a person who is suspected of involvement in or association with serious criminality has to explain the origin of assets that appear to be disproportionate to their known income. These will take effect when commencement regulations are announced. Failure to provide a response would give rise to a presumption that the property was recoverable, in order to assist any subsequent civil recovery action. It is a criminal offence to make false or misleading statements.

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