Financial Crime Time - Your update from RPC: 2021 Q3

In 2018, HM Inspectorate of Constabulary (HMIC) was commissioned by the Home Office to carry out a review of how police investigate fraud. Released in April 2019, the report made uncomfortable reading for police constabularies  (Fraud: Time to choose – An inspection of the police response to fraud). 

HMIC released its follow up report A Review of Fraud: Time to choose on 5 August 2021.  HMIC comment that "the detrimental effect of fraud is as great today as it has ever been", noting that the incidence of other crime has decreased 19%, but a rise in fraud and computer misuse has kept the overall levels of crime static. HMIC describe how the police are not prioritising fraud, with many victims receiving a "poor service" as the police may view fraud as a victimless crime. The rise in fraud reported by HMIC is consistent with figures released by Action Fraud, the City of London Police's fraud reporting service, that show instances of fraud to have increased by 28% during the pandemic as criminals take advantage of changes in consumer behaviour.

Despite the prevalence of fraud in the UK, HMIC estimates that less than 1% of police personnel were involved in fraud investigations. As a result, many cases of fraud are not investigated, and victims are "denied access to justice". 

The HMIC report coincided with an investigation conducted by The Times into Action Fraud which found "damning failings" in the manner in which fraud reports were taken and investigated. The Times announced that as a result of its investigation, there were plans to defund Action Fraud; an allegation denied by The City of London Police. According to the police, The Times had misinterpreted the Government's Beating Crime Plan, that planned to replace Action Fraud with an improved fraud and cybercrime reporting system and increase intelligence capabilities in the National Crime Agency. 

This bleak picture of investigations into fraud through official channels has contributed to a significant rise in private prosecutions for fraud as individuals and companies continue to turn away from traditional policing and investigate and prosecute suspected fraud themselves.

RPC investigates in its new podcast series Unspoken Giants: International Financial Institutions fighting the cancer of corruption

Coming SOON: RPC is launching a podcast series Unspoken Giants: International Financial Institutions Fighting the Cancer of Corruption, which brings together Multilateral Development Banks and International Financial Institutions and experts in the field to discuss the global fight against corruption.

Nine of the giants of international finance and experts in the field speak about their fight against corruption in the projects they fund and how this may impact on businesses and individuals who are working on these projects. From the individual mechanisms for investigating and sanctioning corruption and fraud and the interaction with national law enforcement agencies and investigators, to efforts by the international finance community to ensure due process and consistency, and the individual challenges and approaches taken by each of these supranational bodies. This series will give you an insight into Multilateral Development Banks and International Financial Institutions like never before and help businesses and individuals to navigate the complex web of international finance debarment regimes.

On 17 June 2021, the Organisation for Economic Cooperation and Development (OECD) published its second edition of Fighting Tax Crime: The Ten Global Principles, which measures the progress of 33 jurisdictions in tackling tax crime against its ten principles to help jurisdictions benchmark their frameworks for tackling tax and other financial fraud, against successful practices used worldwide. 

The principles focus on the criminalisation of tax offences, investigation of suspected offences and setting a standard for co-operation both between crime agencies on a national level, and between agencies in different jurisdictions to prevent hinderance to investigations. 

The OECD highlights the changing nature of tax and other financial crimes as an increased number of transactions operate across borders and the publication includes new sections on addressing professionals who enable tax fraud and other white-collar crimes, and the emerging risks posed by the misuse of cryptocurrency and the growth of cybercrime during the pandemic. These sections, contributed to by HMRC, reflect HMRC's new strategy for addressing the rise of the professional enabler, as discussed by HMRC's Fraud Investigation Service's Director, Simon York, on RPC's Taxing Matters podcast.  

This OECD report, and HMRC's heavy involvement in it, shows that HMRC is focusing on the potential for cross-border cooperation and information sharing in order to prosecute tax and economic crime and is a clear warning to enablers that a strong stance will be taken.

This focus on the global nature of the fight against tax crimes can also be seen in the increasing prominence of the J5, the Joint Chiefs of Global Tax Enforcement, an alliance between the UK, Australia, Canada, the Netherlands and the United States, formed to combat transnational tax crime through increased enforcement collaboration and by working together to "gather information, share intelligence, conduct operations and build the capacity of tax crime enforcement officials". 

On 19 July 2021, the Serious Fraud Office (SFO) received approval from Mrs Justice May to enter into the UK's eleventh and twelfth Deferred Prosecution Agreements (DPAs) with two UK-based companies. In a legal first, two DPAs were agreed simultaneously, with RPC acting for both companies. These two DPAs follow closely on the heels of the SFO's tenth DPA, entered into with Amex Foster Wheeler Energy Limited on 2 July 2021.

While reporting restrictions cover much of the content of these two most recent DPAs, under the public terms of the DPAs, the companies will together pay £2.5m comprising disgorgement of profits and a financial penalty, along with an undertaking by a parent company to support a comprehensive compliance programme, with obligations to report to the SFO on compliance at regular intervals during the term of the DPA.

The Financial Conduct Authority (FCA) has stepped up its criminal investigations after a period of relative inactivity with the announcement in May 2021, that it was commencing an investigation into the digital bank Monzo, in relation to potential anti-money laundering (AML) breaches. The announcement follows the commencement of a criminal prosecution of NatWest in March 2021, in relation to allegations that it accepted £264 million of cash deposits from an individual accused of being at the centre of a money laundering operation.

The investigation was revealed by Monzo in its annual report, alongside a statement that it has recently invested heavily in its AML compliance and is fully cooperating with the FCA.

Meanwhile, NatWest pleaded guilty, on 7 October 2021, to three counts under the Money Laundering Regulations 2007, for failing to ensure it had in place adequate anti-money laundering systems and controls to prevent money laundering. The plea comes in the first prosecution of a bank brought by the FCA under the Money Laundering Regulations.

NatWest faces a potentially significant fine when the case comes before the Southwark Crown Court for sentencing.

In May 2021, the FCA sent letters to the chief executives of all FCA registered UK retail banks highlighting its concern about potential weaknesses in their money laundering checks and procedures.

These actions form part of the FCA's recent crackdown on perceived AML related weaknesses in the banking sector.

The Law Commission's consultation forms part of a review of the law on criminal liability for corporations, their directors and senior management (see Financial Crime Time (Q2 2021)). The Law Commission aims to improve the current legal framework to achieve appropriate justice when the perpetrator of a crime is a company, as well as looking at appropriate punishment for directors and senior management for criminal offences committed.

The consultation paper considers several options for reforming the law, including bringing current corporate criminal liability in line with the system in the US (which enables companies to be found vicariously liable for the criminal acts of their employees if they were motivated by an intention to benefit the corporation), extending the 'directing mind and will' of a corporation to include senior managers, and expanding the existing 'failure to prevent' offences, such as those contained in section 7 of the Bribery Act 2010, to include an offence of failure to prevent fraud. This last option would mean that if an employee committed a fraud in the course of their employment, the company could be criminally liable for failing to prevent it, unless the company was able to demonstrate that it had relevant preventative procedures in place. 

The Law Commission will now produce an options paper to be delivered to the government by the end of the year, setting out its recommendations on reforms to the current law. Watch this space!

The 1st of July 2021, marked the 10th anniversary of the coming into force of the Bribery Act 2010. Ten years on from its introduction, the Act, intended to represent "the forefront of the battle against bribery", has faced criticism from some owing to the relatively low number of prosecutions brought under it. In March 2020, the SFO confirmed it had taken only five cases to court (defined as 'to trial' or 'sentenced following a guilty plea') since the Act was introduced. 

At the time of introduction of the UK's first strict liability 'failure to prevent' offence (section 7 of the Act), which criminalises commercial organisations which fail to prevent bribery committed by associated persons, there was concern amongst businesses that section 7 was unduly onerous and would prejudice business. However, the SFO considers the offence, combined with the SFOs power to enter DPAs, has encouraged companies to improve their compliance procedures. All six of the bribery related DPAs agreed by the SFO have included a section 7 offence.  This style of offence was replicated in the 'failure to prevent tax evasion offences' in sections 45 and 46 of the Criminal Finances Act 2017, and is a frontrunner in the proposed revamp of the law of corporate criminal liability (see above).  

The low prosecution rate, along with the SFO's preference to resolve corporate failure to prevent allegations using DPAs, means that few significant cases involving an offence under the Bribery Act have come before the courts. A decade on from the Act's introduction, there is limited case law on the meaning of many of its provisions.  

This may however change with the recent announcement that the SFO has charged five individuals with bribery and money laundering arising out of suspected payments to secure contracts within the UK construction sector.

The Financial Action Task Force (FATF) is of the view that the Money Laundering Regulations 2017 (MLRs) require member countries to ensure that financial institutions record information on the originator and beneficiaries of transfers of cryptoassets. In a consultation paper released in July 2021, HM Treasury sets out requirements which would require cryptocurrency exchanges and digital wallet providers to record this information. These proposals would bring crypto businesses within the regulated sector and would apply AML legislation to cryptoassets transactions involving £1,000 (or equivalent cryptocurrency value).

This consultation is being run in parallel with a call for evidence on the review of the UK’s AML/CTF regulatory and supervisory regime which will focus on the overall effectiveness of the regimes and their extent (i.e. the sectors in scope as relevant entities); whether key elements of the current regulations are operating as intended; and the structure of the supervisory regime. The consultation will run until 14 October 2021.

The increasing regulation of cryptoassets and the complexities surrounding fraud, cryptoassets tracing (see Financial Crime Time 2021 Q1) and concerns over the use of cryptoassets in crime (see Financial Crime Time 2021 Q2) are the main reasons why RPC, as a founding member, is promoting the Crypto Fraud and Asset Recovery (CFAAR) network. CFAAR is a global network comprising leading industry professionals across law, forensic accountancy, corporate intelligence and asset recovery, working together to share knowledge and experiences in this increasingly important area. The network will develop and share best practice in crypto disputes and pioneer approaches to global crypto fraud investigations, forensics, advocacy and the tracing and recovery of cryptoassets.

On 5 August 2021, the Economic Secretary to the Treasury upheld the decision of the Office of Financial Sanctions Implementation (OFSI) to issue a £50,000 fine to TransferGo Limited for breaches of The Ukraine (European Union Financial Sanctions) (No. 2) Regulations 2014 (the Regulations). 

The original penalty was imposed by the OFSI on the UK-based payment transfer company, for 16 payments made between 2018 and 2019, to accounts of non-designated persons held at the designated Russian National Commercial Bank in breach of the Regulations. TransferGo did not report the breaches to the OFSI as required, on the basis that it had not made financial resources available to a "designated person" as the account holders were not themselves designated persons, although the bank was. The OFSI disagreed with this restrictive interpretation as it considers that funds held in bank accounts ultimately belong to the banks where the accounts are held. 

The OFSI decided that TransferGo had not reported dealing in funds of a designated person as required by the Regulations, but as TransferGo cooperated fully with the investigation and provided information when requested, the £50,000 penalty imposed took this cooperation into account in mitigation, although the precise discount of the mitigation is unclear. 

TransferGo exercised its right of review by the Minister under section 147 of the Policing and Crime Act 2017. The Economic Secretary to the Treasury upheld the penalty and the amount of £50,000, noting that the decision of the OFSI met the legal tests for imposing a penalty and its assessment of the facts was reasonable. In addition, the OFSI followed its own processes correctly and consistently and the amount of the penalty was within the range of reasonable and proportionate penalties open to the OFSI.

The decision confirms that the OFSI's interpretation of making economic resources available to a designated person should be given a very wide interpretation and provides a timely reminder to the Regulated Sector that they are obliged to report any dealing in the economic resources of a designated person to the OFSI.