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Financial Crime Time – Your Update from RPC: 2021 Q2

Published on 06 July 2021

Welcome to the latest edition of our round-up of news making the headlines in the world of financial crime and compliance. Our aim is to give you an easily digestible, bite-sized overview of issues that may affect your business.

To read more, please click on the headlines below.


1. Cum-Ex update

Recent legal developments have brought the CumEx trading scandal into sharp focus in the UK. 

In Financial Crime Time Q.1 2021, we reported on the Danish State's progress in charging those they allege to have been involved in causing a £1.5 billion loss to SKAT, the Danish tax authority, by exploiting certain 'loopholes' in the Danish withholding tax system. Under Danish law, a company that declares dividends is required to withhold a 27% dividend tax that it must then pay to SKAT. Non-Danish shareholders are exempt from this rule to avoid double taxation. Exempt shareholders must apply for repayment of tax already paid. SKAT allege that complex circular share trading schemes were entered into in order to conceal the true owner of the shares and enable multiple parties to claim withholding tax refund for a single deduction of withholding tax on the issue of dividends. 

SKAT allege that Mr Sanjay Shah, and his company Solo Capital Partners, masterminded this "fraudulent" scheme, while Mr Shah and his companies say that they simply exploited a legal loophole in the system. Mr Shah has been charged in Germany with 55 counts of money-laundering of profits from alleged tax fraud in Denmark.

In what is considered a novel approach by some, SKAT brought a civil claim in the English High Court for £1.5 billion which it alleged derived from Cum-Ex trading between August 2012 and July 2015, in particular by companies related to Mr Shah. 

In dismissing SKAT's claim, the High Court said that the claim was not for a civil debt owed by the various defendant companies, but an attempt to enforce the tax law of a foreign state and was therefore prevented by the principles of the rule of law set out in Dicey Rule 3. 

SKAT has been given permission to appeal to the Court of Appeal.
On 1 June 2021, a former executive at MM Warburg was sentenced by the Cologne regional courts to five and half years in prison on five counts of tax evasion and ordered to repay €100,000 of the proceeds of crime related to his involvement Cum-Ex trading, becoming the first individual to be jailed in relation to the Cum-ex scandal. Several other German banks linked to Cum-Ex trading have been raided in recent months by the German authorities.

2. UK's new anti-corruption sanctions regime

As part of its post-Brexit sanctions policy, the UK has implemented a new Global Anti-Corruption Sanctions Regime. Aimed at enhancing the powers of the UK to address individuals and companies alleged to be involved in corruption, the regime came into force on 26 April 2021, and expands on the Human Rights Sanctions Regime introduced in July 2020. 

These sanctions have the usual suite of powers, including travel bans and asset freezes. They target individuals suspected of being linked to serious corruption, including bribery or misappropriation of property by public officials, enabling national security threats or terrorism, and corruption that deprives citizens of "vital public resources", amongst other things. Whether corruption is 'serious' is determined by matters such as the value of bribes or assets involved, whether the corrupt conduct is systematic, and the duration of the activity. 

Twenty-two individuals have so far been designated, including 14 Russian nationals, accused of misappropriating $230 million of Russian state assets via a fraudulent tax scheme, three members of a South African family and an associate, a Sudanese business person and three South American public officials. 

This regime, as with other sanctions imposed by the UK under the Sanctions and Anti-Money Laundering Act 2018, contains powers under which designated persons may challenge the sanctions imposed and they may be varied or revoked, if appropriate. It comes after the Office for Financial Sanctions Implementation stated that it intends to embrace its role as a regulator, announcing in March 2021 that it had issued its first penalty for breach of sanctions to Standard Chartered Bank in relation to a loan to a Russian lender designated under the UK's post-Brexit retained EU sanctions. 

3. The Police, Crime, Sentencing and Courts Bill 2021

 Arising out of a perception of the challenges posed by the events of 2020, a number of unrelated proposed reforms have been included in the Police, Crime, Sentencing and Courts Bill. Many of the proposals contained in the Bill have been criticised and have led to petitions from a coalition of criminal justice organisations and a number of public protests.  

The Bill proposes wide-ranging new police powers, including the ability to impose “conditions” on any protest which is deemed to be disruptive to the local community and a sentence of up to 10 years in prison for damaging memorials, such as statues. 

The Bill also proposes to extend periods of bail. The Law Society has voiced concerns that "people accused of a crime could be kept on bail by the police with restrictions on their liberties for long periods while investigations proceed at a glacial pace".  Further, Equal, an independent advisory group which seeks to address racial bias in the criminal justice system, have said that the Bill may have serious implications for ethnic minority communities

Finally, as the Coronavirus Act 2020 is due to expire in March 2022, and with it the ability to conduct certain criminal court hearings remotely, the Bill proposes to introduce the power to conduct all hearings, including jury trials, remotely. This proposal follows the evaluation of virtual trials conducted by legal thinktank Justice. However, there has yet to be any extensive research on the impact of remote jury trials on, for example, the make-up of a jury and whether this proposal would lead to certain potential jurors being disproportionately excluded, resulting in racially imbalanced juries. 

The Bill is currently being considered by the House of Commons following the Committee stage and is scheduled to be debated further on 5 July 2021.

4. Coronavirus Government Support Schemes – a "magnet for fraudsters"?

The government's various support schemes during the global coronavirus pandemic, such as the Coronavirus Job Retention Scheme (CJRS) and the Bounce Back Loan Scheme (BBLS), have become, according HMRC's Chief Executive Jim Harra, a "magnet for fraudsters". It is perhaps not surprising therefore that the government announced in March 2021 that it would invest £100m in a Taxpayer Protection Taskforce to combat fraud linked to Covid-19 support measures, with a view to recouping around £1bn.

The City of London Police have investigated 71 possible frauds connected to the BBLS since January 2021, with the National Audit Office estimating that the scheme could cost the taxpayer as much as £26bn.   

On 7 May 2021, two people were arrested in a suspected £3.4m CJRS fraud. They were apprehended on suspicion of cheating the public revenue, VAT evasion and money laundering. 

With over £6.1bn claimed under the CJRS to date and the scheme targeted by fraudsters, the following four  protections have been introduced to assist in preventing abuse of the scheme: 

  • employees have to be on a payroll by a particular date, to prevent the use of fake employees;
  • claims are only accepted from employers authenticated by HMRC; 
  • all claims are assessed by a specialist team within a 72-hour window, which has resulted in HMRC denying over 30,000 claims with a value of over £300m to the end of March 2021; and
  • proportionate and reasonable interventions are made by HMRC after the money has been paid.

HMRC has issued a number of 'nudge' letters to users of the various schemes who it has assessed are a fraud or error risk, in order to prompt those users to check that their use of the scheme has been correct.

5. Increase in online fraud and cyber attacks

In May, the Telegraph reported  that online fraud has risen in the UK by up to 70% during the COVID-19 pandemic. Action Fraud, the UK's national reporting centre for fraud, report that more than £34.5m has been stolen since 1 March 2020. Cyber-attacks have also seen a significant rise, with the country's pandemic response infrastructure, such as the NHS and vaccine producers, being  frequent targets. The National Cyber Security Centre declared that it has been tackling about 30 "significant attacks" per month. 

The UK's ability to counter the increasing and ever-evolving threat of online fraud and cyber-crime has recently been bolstered by the government's recent publication, on 12 May 2021, of the "Draft Online Safety Bill", which is intended to provide a new legal framework for identifying and removing illegal and harmful content from the internet. The new Bill will include measures to tackle user-generated fraud and will force online companies take responsibility for tackling fraudulent user-generated content for the first time. 

Further, on 11 May 2021, the government called for information on the Computer Misuse Act 1990 (CMA). The CMA is the primary UK legislation relating to cyber-dependent crime. The purpose of the call is to identify whether there is any online activity causing harm in an area covered by the CMA that is not adequately covered by existing offences, including whether law enforcement agencies have the necessary powers to investigate and take action against those attacking computer systems, and whether the legislation remains fit for purpose following the technological advances since the CMA was introduced.

6. More tools in investigators' armoury - Account Freezing Orders and External Request Orders

Account Freezing Orders (AFOs) and Unexplained Wealth Orders (UWOs), introduced by the Criminal Finances Act 2017 in a bid to improve the UK's ability to tackle corruption, money laundering, tax evasion and terrorist financing, were designed to allow investigators the time to properly examine the origin and use of funds suspected of representing the proceeds of crime, whilst also preventing the suspected perpetrators from using the funds. 

External Request Orders (EROs) allow other countries to apply for financial crime-linked court orders in the UK.  With similar powers to that of an AFO, EROs fulfil the Financial Action Task Force's long proposed harmonisation of domestic and international measures for freezing and forfeiting assets suspected of representing the proceeds of crime. 

On 12 November 2019, Magistrates' Court Rules were introduced to provide a similar level of international co-operation in respect of the freezing and forfeiting the proceeds of crime as is available in domestic cases. 

On the domestic front, the figures continue to show that AFOs are popular with UK regulators. The City of London Police having had a 3,500% increase in the use of these powers in 2020 and HMRC having frozen and forfeited over £29m in the first 10 months of 2020/21.  The SFO recently used an AFO to recover £247,000, some 13 years after the individual was convicted of conspiracy to defraud, demonstrating that the UK authorities will use new powers to track down the proceeds of historic crimes. 

Whilst the use of EROs in a foreign context are yet to be tested in the courts, the updating of the Magistrates' Court Rules has streamlined the procedure for foreign governments to apply to the UK courts to freeze and subsequently forfeit criminal assets. 

7. European Public Prosecutor's Office appoints its first anti-fraud prosecutor

Laura Codruta Kovesi has been appointed as the EU's first anti-fraud prosecutor. The European Public Prosecutor's Office (EPPO), which is tasked with investigating and prosecuting fraud and financial crimes involving EU financial interests, launched on 1 June 2021 in response to criticism of the bloc's ineffective handling of fraud. Previously, the European Anti-Fraud Office (OLAF) was the only EU anti-fraud body, and it was considered by many to be ineffective in addressing fraud due to its lack of power to prosecute cases. Whereas OLAF is only able to make recommendations to member states, EPPO prosecutors will be able to bring cases before national courts. The EPPO is based in Luxembourg, and Ms Kovesi will be supported by a team of Prosecutors comprising one European Prosecutor for each member state, and further European Delegated Prosecutors (EDPs) who operate within member states. 

The EPPO is not without its own teething problems, the first being its budget which, at €44.9 million, is relatively low compared with those available within individual member states. The second issue for the EPPO is that several key countries, including Sweden, Denmark and Ireland, have either opted out or decided not to join the EPPO and Finland and Slovenia have failed to appoint prosecutors to the organisation. However, other countries have fully committed to the EPPO, with Italy appointing 22 EDPs. 

8. NCA reports on the rise of cryptocurrency crime

The National Crime Agency (NCA) recently published its annual National Strategic Assessment of Serious Organised Crime report highlighting the increased bribery and corruption risks that UK companies may face as a result of Brexit and the COVID-19 pandemic. The report contains a list of factors which may contribute to increased risks, including the turbulence of the UK market driving businesses to seek deals in new jurisdictions, and the difficulty monitoring home-working staff, who may be more likely to engage in corruption. 

The rise in popularity of cryptocurrency during the pandemic is also of concern to the NCA. The report suggests that while some criminals have been struggling to move their money using more traditional methods under lockdown restrictions, the use of cryptocurrency as a means to launder money and fund organised crime has accelerated. The NCA report notes that revenue on the dark web was up 14% in 2020, compared to 2019. Wider use of cryptoasset technology by legitimate businesses, including financial services companies, may also result in a rise in criminal exploitation where appropriate anti-money laundering measures are not in place. 

Cryptoasset businesses, such as Bitcoin, operating in the UK have been required to comply with money laundering regulations since January 2020, and must be registered with the FCA before conducting business in the UK. On 16 December 2020, the FCA announced that any cryptoasset business failing to register could operate under a temporary licencing regime for 6 months so that it could deal with a backlog of applications. This has been extended to 31 March 2022, because the FCA is concerned that many businesses cannot meet the required standards under the UK's money laundering regulations.

While the fraud and corruption risks posed by the pandemic may be temporary, the risk of abuse of cryptocurrency is perhaps more long term. The US counterpart of the FCA, the Securities and Exchange Commission, recognising this, has taken a strong stance in this area by proactively challenging the behaviours of unregistered crypto-businesses. The National Crime Agency considers that the UK's current measures should be adequate to mitigate risk although to date only 5 cryptoasset companies have successfully registered with the FCA. Unregistered businesses pose a higher risk, which the FCA has clearly recognised. In August 2020, it proposed that cryptocurrency exchanges should disclose the high-risk jurisdictions in which they operate and politically exposed persons they work with, although no such measures have been implemented. 

9. Economic crime plan update

On 4 May 2021, the UK government published an update on its progress on the Economic Crime Plan, which seeks to tackle fraud and money laundering with a view to making the UK a safe place for global business. The programme, which launched in 2019, sets out seven priority areas to combat economic crime, including better data sharing between public and private sectors, and improving law enforcement and the justice system in relation to financial crime. 

The update, released in May, looks at how the government has responded to the additional challenges it has had to face in its fight against crime during the pandemic, and discusses how the government has improved its understanding of the threat posed by economic crime. This includes actions taken by the government to close perceived loopholes that might facilitate money laundering by updating AML requirements, and the provision of an additional £63 million of funding for the Home Office to tackle fraud. The update also includes a forward delivery plan which looks at potential measures to combat cash-based money laundering. 

10. Corporate crime liability extension

The Law Commission is considering the law surrounding corporate criminal liability with a view to improving how the law punishes crimes committed by corporations, their directors, and senior management. The Commission is, amongst other things, consulting with the public on how current difficulties relating to the establishment of corporate mens rea might be overcome. 

Under the current system, if an offence requires proof of a mental element only, the acts of a senior person who represents the company's "controlling mind or will" can be attributed to the company itself. There is concern that this narrow definition is incapable of covering a sufficient number of individuals in large companies with complex decision-making structures. This can make it difficult to prosecute large companies suspected of criminal wrongdoing, leading to an erosion of public trust in the criminal law.  

The Law Commission has produced a paper which poses a number of questions, including whether an extension of corporate criminal liability would act as a deterrent to companies, and what the appropriate penalties for a non-natural person might be. Views are being sought from the public through a number of consultation events. You can also respond to the discussion paper using this form. The deadline for responding is 31 August 2021.  

The Director of the SFO, Lisa Osofsky, suggested during the Law Commission's launch event for the consultation on 9 June 2021, that failure to prevent style offences, that make companies liable for failing to stop the defalcation of their employees or agents unless the company can show they had adequate measures in place to prevent such defalcations, could be extended to cover corporate criminal offences, such as fraud, which currently require proof of mens rea.  Ms Osofsky has previously mooted the possibility of creating a failure to prevent economic crime offence in order to close the lacuna that she considers exists in relation to holding corporates accountable for fraud and economic crime more generally.