Financial Crime Time - Your update from RPC: 2023 Q3

The Online Safety Bill (OSB) is currently in the final reading stage in the House of Lords. It is anticipated that final considerations will take place in Autumn 2023 and the OSB will come into force shortly thereafter.

The OSB will create a host of new criminal offences. Currently, the UK has a two-tier liability regime for unlawful published content where publishers (Tier 1) have primary liability from the point of publication for unlawful published content using existing causes of action, both civil (e.g. defamation, misuse of private information) and criminal (e.g. sending communications with intent to cause distress or anxiety), and intermediaries (Tier 2) can be held liable only if they are on notice that the published content is unlawful and fail to remove it expeditiously. The range of criminal offences for publishers of unlawful content is limited and the relevant legislation is outdated. For example, the current system only criminalises publishing information and sending offensive communications, neither of which effectively addresses the harms which can be caused by content posted or reposted on social media platforms, which are an undeniable part of modern life.

The OSB will apply to platforms hosting user-generated content, for example, social media, and search engines.

In broad terms, the OSB applies varying duties depending on the risk posed by a platform having regard to the nature and volume of its content, the scope of its audience, and the extent to which it can be accessed by children. The duties can include assessing and removing illegal content, protecting children from encountering harmful or pornographic content, and requiring systems to prevent fraudulent adverts. Guidance will be produced by Ofcom once the OSB becomes law.

The OSB also proposes three new categories of criminal offence.

1. Corporate information offences

Companies or partnerships will be criminally liable if they inhibit Ofcom's ability to regulate by, for example:

• failing to provide information under an audit notice from Ofcom;
• obstructing or delaying Ofcom in taking copies of, or extracts from, a document produced in response to an information notice; or
• failing to attend interviews or providing false information at an interview.

Senior managers will also be criminally liable for a penalty of up to two years imprisonment if the entity commits an offence and the individual failed to take all reasonable steps to prevent that offence being committed.

2. Extension of criminal liability to corporate officers

Corporate officers can be criminally liable where specified offences are committed with their consent or connivance, or owing to their neglect. The specified offences include:

• sending false information with the intention to cause harm;
• sending communications which threaten death or serious harm;
• sending flashing images with the intention of causing the viewer to suffer harm; and
• encouraging or assisting serious self-harm.

3. Failure to keep children safe online

A company or partnership will be liable for failing to comply, without a reasonable excuse, with a confirmation decision issued by Ofcom in response to a failure to comply with a children's online safety duty such as age verification.

These offences are expected to come into force later this year and while there will be some delay before Ofcom are in a position to regulate social media platforms, relevant entities should begin to consider appropriate training for corporate officers and senior managers who may face liability under the proposed offences. Once Ofcom provide further guidance, this can be incorporated into policies and procedures.

The Economic Crime and Corporate Transparency Bill (ECCT) has been amended by the House of Lords to amend the 'identification doctrine', the legal test for deciding whether the actions and mind of a person can be regarded as those of a company.

The current test requires that the intention, or mens rea of an offence, must be held by the "directing mind and will" of a corporate in order for the corporate to have committed the offence. The increasing complexity of corporate governance structures has led to practical difficulties in applying this test. In reality, there is often no one directing mind, instead, decision making is dispersed across multiple directing minds who may not necessarily have sufficient control of the company to be considered its "directing mind and will".

The amendments made by the House of Lords offer a lower threshold when considering liability for a 'relevant offence', defined in a new schedule (see page 5) and including money laundering offences, fraud, tax evasion, bribery, and breaches of sanctions. The proposed test is whether the relevant offence was committed by a "senior manager" while acting within the actual or apparent scope of their authority.

A "senior manager" is defined as someone who plays a significant role in the making of decisions about how the whole, or a substantial part, of the activities of the body corporate or partnership are to be managed or organised. The explanatory note accompanying the amendments speculates that this will normally include a company's directors, as well as the CEO or CFO, but may also extend to other individuals who have significant roles in relation to a substantial part of the organisation's activity, such as Human Resources. The term "senior manager" is not limited by title, remuneration or status and can apply to anyone who meets the definition.

The House of Commons began considering the amendments on 4 September 2023.

Companies and partnerships should begin reviewing who in their organisations  could be considered a "senior manager". If these amendments become law, policies and procedures will need to be updated to minimise the risk of acts and/or omissions of senior managers leading to criminal liability for the corporate or partnership.

Coutts bank has recently closed Nigel Farage's account. In the absence of an explanation, the media initially reported that he had fallen below the bank's wealth requirement, while Mr Farage himself speculated that he was the victim of political persecution. The following week, a 40-page dossier was released which showed that Coutts had wanted to remove Mr Farage as a customer for some time because his politics were "at odds" with their "position as an inclusive organisation".  

This incident highlighted a number of issues, such as free speech, the treatment of politically-exposed-persons (PEPs) and a bank's right to manage its commercial risks. It also highlighted a tension caused by the UK's current anti-money laundering (AML) regulations. In some cases, a bank might consider that providing services to certain individuals, such as PEPs, who it is claimed have a higher risk of being connected with money-laundering or proceeds of crime, is not worth the risk of being fined.

This position was examined in July 2019, when the High Court found in N v The Royal Bank of Scotland Plc [2019] EWHC 1770 (Comm) that the Royal Bank of Scotland was entitled to de-bank a customer, without notice, on the basis that it had carried out a thorough risk assessment. It was held that expecting the bank to adopt a more nuanced approach such as ring-fencing funds was unreasonable in the circumstances.

The recent incident involving Mr Farage resulted increased the awareness of the impact of de-banking a customer can have on the individual concerned and on 20 July 2023, the government announced that new rules will require banks to explain and delay any decision to close an account. They will extend the notice period from 30 to 90 days, to give customers time to challenge a decision through the Financial Ombudsman Service or find a replacement bank.

However, under section 333A of the Proceeds of Crime Act 2002, it is a criminal offence to make someone aware that there is a money laundering concern with their account. This creates a tension with the government's requirement to provide an explanation. A bank may find itself in a position where it is not able to act on payment instructions from its customer due to AML concerns and yet it risks committing a criminal offence by 'tipping-off' its customer if it provides an explanation for its actions.

On 15 June 2023, the Insider Dealing (Securities and Regulated Markets) Order 2023 (the Order) was made.

The UK has both a criminal and civil regime for market abuse, of which insider dealing is one form of abuse. The civil regime is governed by the Retained EU Market Abuse Regulation (MAR) and the criminal regime is governed by the Financial Services Act 2012 (FSA) and Part 5 of the Criminal Justice Act 1993 (CJA).

Prior to the Order, the scope of the criminal offence was narrower than the civil prohibitions both in terms of which securities it applied to and what was considered a "regulated market".

The Order brought the CJA up to date by amending the securities list in Schedule 2 of the CJA to match the list found in Part 1 Schedule 2 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which includes the following additional securities:

• currency options;
• credit default swaps; and
• units in collective investment undertakings such as exchange traded funds.

The definition of the term "regulated market" has also been updated.

Whilst organisations should already be complying with the MAR, they should review their compliance manuals and policies to ensure that they reflect these changes.

In 2013 the Serious Fraud Office (SFO) began an investigation into Sarclad Ltd, a British technology company, which subsequently entered into the UK's second ever Deferred Prosecution Agreement. Admissions were made that the company had paid bribes to steel production companies in China in the period 2004 to 2012, in order to secure £17 million worth of contracts. The company paid £6.5 million in penalties for its actions.

Dr Jiang had acted as the company's agent in China and the SFO contended that his assets were the proceeds of crime. Dr Jiang fled to China in 2014, in breach of bail conditions. Since then, the SFO has been attempting to recover his criminal assets.

The SFO had previously been successful in forfeiting over £350,000 from Dr Jiang's personal and company bank accounts and on 14 July 2023, it announced that it had seized a flat in Sheffield worth £200,000 which it claimed Dr Jiang had attempted to conceal from it.

On 17 May 2023, the House of Commons Treasury Committee published a report entitled Regulating Crypto (the Report) which examined the problems currently facing consumers investing in cryptoassets and potential regulatory approaches the government could take.

Cryptoassets are not underpinned by tangible assets or guarantees and so have no intrinsic value. This leads to speculation and volatility which can result in consumers losing the entirety of their investment. Beyond this, due to their pseudo-anonymous and decentralised nature, cryptoassets are used by criminals to perpetrate scams, fraud and money laundering. The government's recently published second Economic Crime Plan (ECP2) has emphasised the growing criminal abuse of cryptoassets and the National Crime Agency estimated that "illicit cryptoasset transactions linked to the UK in 2021 likely equated to £1.24 billion".

The Report criticised the government's piecemeal approach to regulation and described the cryptoasset industry as a "wild west". Some of the specific criticisms included:

• the government has been too slow to implement a regulatory framework which has led to investment and development moving to other jurisdictions;
• the FCA lacks sufficient resources to enforce such regulation of cryptoassets as has, to date, been imposed;
• the government's focus has been on welcoming and encouraging the crypto industry rather than protecting consumers; and
• the proposed approach to regulate cryptoassets as a financial service will confer a 'halo' on the activities and risks making them appear safer than they are.

The Report proposed that the government should adopt a wholesale regulatory framework that treats speculative investment in cryptoassets as gambling due to the volatility and lack of intrinsic value. It also recommended that the government refrain from expending public resources on supporting cryptoasset activities without a clear beneficial use case.

On 20 July 2023, the Treasury Committee published the government's response to the Report and clarified the approach that the UK will take to regulation.

The government firmly rejected the Report's suggestion that investment activity in cryptoassets should be regulated as gambling noting that cryptoassets perform a similar function to, and pose similar risks as, services in the traditional financial system. Treating cryptoassets differently from comparable financial services would also misalign the UK with the EU and other major jurisdictions resulting in the UK risking ostracism from the global crypto market. There are also concerns that a change of approach would confuse the Gambling Commission's role and the FCA's role.

The government reiterated that its approach is to extend the financial services regulatory framework to cryptoassets to both create conditions for safe innovation and mitigate consumer risks. The response points to the dedicated cryptoasset financial promotion regime and further consultation which considers the need for companies wishing to make cryptoassets available to the public to provide a minimum amount of information, such as trading history, to ensure consumers have access to accurate information when making investment decisions.

Bernie Ecclestone was the Chief Executive of Formula 1 for 40 years before he retired in 2017. In that time, he transformed Formula 1 and expanded into new markets in Bahrain and Singapore.

Mr Ecclestone allegedly represented to HMRC that he was not the settlor or beneficiary of any trust in or outside the UK.

On 11 July 2022, the Crown Prosecution Service (CPS) announced that it had authorised the charging of Mr Ecclestone with fraud by false representation in relation to that statement, following an investigation by HMRC.

On 6 June 2023, Mr Ecclestone appeared before Southwark Crown Court and entered a not guilty plea to the single fraud count. Mr Ecclestone's trial is expected to take place later this year or in the first half of 2024.

On 30 June 2023, The Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2023 (the Amendments) created a new prohibition on the direct or indirect provision of broadly defined 'legal advisory services' to any person who is not a UK person in relation to, or in connection with, any activity which is prohibited under the Russia finance or trade sanctions (Parts 3 and 5 of The Russia (Sanctions) (EU Exit) Regulations 2019) (the Regulation). This prohibition applies irrespective of whether the services are provided to a person in the UK. It also applies to any legal advisory services that would assist someone to contravene such prohibitions.

As the amendments were deemed urgent, they were introduced under the 'made affirmative' procedure requiring only that the House of Commons gives approval within 28 days, failing which the change to the law would be reversed.

The Law Society made submissions regarding the Amendments and highlighted several concerns it had with the legal advisory services prohibitions in its existing form. The Law Society's principle objection was with the narrowness of the exceptions. Absent from the exceptions list was an exception for providing advice to clients who are seeking to comply with the sanction regimes of the UK's international partners or for providing assistance in seeking a licence to carry out a prohibited activity/transaction.

This issue was summarised by Sir Robert Neil in the House of Commons as follows: "British companies cannot get advice from English and Welsh lawyers on whether their activity will comply with international sanctions regimes… [lawyers] have to say, “Okay, it is illegal in the UK, but I cannot tell you whether it is illegal in the EU or the US.” That is clearly not a situation that anybody wants to see."

The Law Society proposed that a solution would be to introduce a general licence  to permit advice to be provided given in relation to other legal obligations, including other relevant UK restrictions, the sanctions laws of other countries and to permit legal assistance in obtaining any required permissions. The House of Commons endorsed this approach and the Department for Business & Trade issued a General Trade Licence on 11 August 2023, which authorises, among other things, legal advisory services relating to whether an act or proposed act complies with all UK laws and restrictive measures, including sanctions, export and import controls on or concerning Russia or the non-government controlled Ukrainian territory, imposed by any jurisdiction.

In response to global sanctions, the government of Russia has implemented laws in relation to foreign investors' ability to sell shares in Russian companies, the ability of foreign shareholders to receive dividends, the right of the government to seize assets, and, most recently, the ability of foreign investors to hold stakes in major Russian companies. These measures create a tension where companies can no longer continue to operate in Russia due to Western sanctions but cannot sell their assets without breaching Russian sanctions.

Sale of Shares

The Russian Governmental Commission for Control over Foreign Investments (Governmental Commission) has imposed conditions on the sale of interests in Russian companies by parties from "unfriendly" jurisdictions (jurisdictions which have imposed sanctions on Russia). These conditions are intended to limit the ability of foreign investors to exit investments and ensure that if they do exit, the money remains in Russian hands. Some of the conditions imposed include:

• if the sale terms include a call option allowing a seller to buy back the shares in the future, this option shall only be exercisable at fair market value with economic benefit to the Russian buyer;
• if an "unfriendly" seller sells their shares, the purchase price can only be paid into either: (i) special restricted accounts, (ii) Russian bank accounts, or (iii) foreign bank accounts (on the condition that payment is deferred);
• the value of the shares must be determined by a government-approved appraiser;
• the purchase price must be 50% of the market value.

Dividends

The Governmental Commission has imposed similar restrictions on the payment of dividends to foreign investors from "unfriendly" jurisdictions:

• the amount of a distribution cannot exceed 50% of the net profit for the previous year;
• the foreign shareholders must commit to continuing business in Russia;
• the shareholders must prove that any key performance indicators  undertaken have been met.

Asset seizure

On 25 April 2023, Decree No. 302 was enacted which allows the Russian state to seize Russian property which is owned or controlled by foreign investors associated with an "unfriendly" jurisdiction.

Foreign owned property can be seized where there is a threat to Russia's national security or Russia or Russian persons are deprived of the right to ownership of property abroad by way of "actions contrary to international law".

Asset seizure was initially limited to the energy industry but such seizures have since been applied to companies attempting to sell their assets. Large companies who attempted to sell their Russian operations in order to comply with Western sanctions have had their assets seized by the Russian state.

Stakes in major companies and banks

On 4 August 2023, Russia implemented a new law called the Corporate Relations Law, which enables foreign investors from "unfriendly" jurisdictions to be barred from holding stakes in major Russian companies and banks. It applies where a foreign investor owns more than 50% of the voting rights in a Russian "economically significant organisation" and allows Russian owners to apply to have shares held by foreign investors reallocated to them.

Entain plc (Entain) announced on 31 May 2023 that it is in deferred prosecution agreement (DPA) negotiations with the CPS.

In November 2019, Entain Holdings (UK) Limited, a subsidiary of Entain, received a production order from HMRC requiring it to provide information relating to the group's former Turkish-facing online betting and gaming business.

Initially, HMRC's investigation was thought to be in respect of former third-party suppliers, however, in July 2020 it was announced that HMRC had widened its  investigation to potential corporate offending by entities within the group. The offences under investigation include tax-related offences and the corporate offence of failing to prevent bribery (contained in section 7 of the Bribery Act 2010).

Understandably, HMRC has been criticised for the relatively small number of prosecutions resulting from criminal investigations compared with pre-pandemic levels, but this announcement indicates a growing willingness on its part to explore all investigative and resolution options.

On 24 August 2023, the SFO announced the closure of a decade long corruption investigation into former FTSE 100 Kazakh mining company, Eurasian Natural Resources Corporation Ltd (ENRC).

The investigation began in 2013 and related to the suspected payment of bribes by the company, and people connected to it, to secure access to lucrative mining contracts in the Democratic Republic of Congo. The investigation has resulted in a multitude of litigation including by ENRC against both the SFO and its previous law firm, Dechert LLP. ENRC claimed over £21 million to cover its legal costs on the basis that the SFO would not have opened a criminal investigation if its former lawyer, Neil Gerrard, had not provided the SFO with privileged information, against the company's interests and in breach of his professional obligations.

Following a review, the SFO determined that, pursuant to the Code for Crown Prosecutors, the investigation should be discontinued due to there being "insufficient admissible evidence to prosecute".

The SFO has also discontinued an unrelated bribery investigation into Rio Tinto (another mining company operating in the Republic of Guinea) on the basis that it was no longer in the public interest to continue the investigation.