Financial Crime Time - Your update from RPC: 2023 Q4

On 26 October 2023, the Economic Crime and Corporate Transparency Act 2023 (the ECCTA) received royal assent.  The new provisions introduced by the ECCTA aim to combat economic crime and put the onus on the business sector to prevent fraud. 

The ECCTA will bring into force a new strict liability 'failure to prevent fraud' offence which seeks to hold companies to account for fraudulent activity.

Under this new criminal offence, 'large organisations' as defined in the ECCTA, will be held criminally liable if they do not prevent their employees or agents from committing fraudulent acts which benefit the company. To qualify as a large organisation, companies must meet at least two of the following criteria: 

• turnover of more than £36 million;
• balance sheet of more than £18 million; or
• more than 250 employees.

The ECCTA also amends the 'identification principle'. As a result, the ECCTA will hold businesses liable for economic crimes committed by senior managers. Fraudulent acts include bribery, fraud, money laundering, and tax evasion. Organisations found liable under the offence can receive an unlimited fine, although the defence of having reasonable fraud prevention procedures in place will be available. The government is currently preparing guidance for companies and the offence will come into force once the guidance has been published. A date is yet to be confirmed but the offence could be introduced as early as spring 2024.  

Further reforms and offences under the ECCTA include enhanced powers  for Companies House to verify the identities of all new and existing company directors, people with significant control and people filing information with Companies House. The ECCTA will enable Companies House to query, reject and request further evidence in relation to filings, and all information will be required to be filed electronically. It is likely that these reforms will be in place in early 2024. 

Given the changes that are soon to come into force under the ECCTA, it would be prudent for companies to review their internal policies and ensure that effective procedures are in place. These can then be reviewed in line with the government guidance when published. 

On 26 October 2023, the Online Safety Act 2023 (the OSA) received royal assent. The OSA aims to make the UK one of the safest places in the world to be online, through the introduction of world-first legal duties on social media platforms. 

Under the OSA, Ofcom has been appointed as the relevant regulator. Ofcom is currently preparing guidance and codes of practice to accompany the OSA. Secondary legislation will also be published in due course. 

The OSA will place legal responsibility on technology companies to protect children from accessing and viewing materials which although not illegal, are considered to be harmful. These materials include content relating to bullying, the promotion of self-harm, eating disorders and pornography. The OSA also requires technology companies to prevent and remove illegal content, for example, content relating to terrorism and revenge pornography. Social media platforms will also be required to publish risk assessments which provide information on the risks their respective site poses to children. Age limits and age-checking measures are also required to be implemented on platforms where harmful content may be accessible to children. 

The penalties for non-compliance include fines of up to £18 million or 10% of the company's global annual revenue, whichever is the larger, meaning that fines could potentially be substantial. 

Technology companies should therefore be mindful of the new obligations imposed on them by the OSA and implement effective policies to ensure compliance with the OSA. For more detail about criminal offences introduced by the OSA, see our previous commentary here.

On 14 November 2023, the Serious Fraud Office (SFO) carried out raids at nine sites and made seven arrests in relation to suspected fraud at Axiom Ince (Axiom). A criminal investigation into Axiom has now been launched by the SFO, following Axiom's collapse in September 2023.  

Axiom was founded in May 2023 when Axiom DWFM purchased Ince Group. Five months later, the Solicitors Regulation Authority closed the firm following allegations of misappropriation of client funds. It is thought that up to £66 million of client money is missing. It is alleged that funds were moved from the firm's client accounts to the State Bank of India to fund the purchase of Ince and another law firm, Plexus law. 

On 13 September 2023, the SFO charged four individuals with fraud in relation to the collapse of Patisserie Valerie (Patisserie) in 2018. 

In October 2018, Patisserie reported a black hole in its finances which was ultimately valued at £94 million. It shortly thereafter went into administration and the SFO then launched an investigation into the matter. 

It was alleged that Patisserie had failed to disclose £10 million of debts to its investors and creditors and had extensively misstated its accounts and manipulated the balance sheet and its profit and loss account. 

Following a five-year investigation, in September 2023, the SFO charged the former director and Chief Financial Officer of Patisserie Holdings, Christopher Marsh and his wife, Louise Marsh. Pritesh Mistry, the Financial Controller and Nileshkumar Lad, a financial consultant were also charged. 

Christopher Marsh, Pritesh Mistry and Nileshkumar Lad were charged with conspiracy to defraud, making an article for use in fraud and five counts of fraud by false representation. Christopher Marsh also faces a charge of publishing misleading financial information between 2015 and 2018. Louise Marsh faces a single count of conspiracy to defraud.

The four individuals appeared in court on 10 October 2023 and were granted conditional bail. A trial date has been set for spring 2026.

Bernie Ecclestone, the former owner of Formula One, has received a 17 month suspended sentence after pleading guilty to fraud in relation to an investigation carried out by HMRC. Mr Ecclestone failed to declare more than £400m of overseas assets. 

In 2015 he had the opportunity to accept HMRC's contractual disclosure facility as part of a COP 9 HMRC investigation. This requires full, open and honest disclosure of deliberate behaviour that has brought about loss of tax or duty. The COP 9 process would have enabled Mr Ecclestone to correct any mistakes in his tax and pay the amount he owed, in addition to  penalties. Mr Ecclestone entered into the COP9 process and made disclosures in relation to a limited interest in a single property, he confirmed there were no other tax errors to disclose.

When Mr Ecclestone met with HMRC in 2015 for settlement discussions, he denied that he was a beneficiary to trusts outside of the UK. However, information that HMRC received from authorities in Singapore showed this to be incorrect.  

Mr Ecclestone has also paid £652 million in a civil settlement. This includes a record £330 million failure to correct penalty for offshore non-compliance. This penalty has been charged at the maximum rate of 200%.

From 1 February 2023 until 30 April 2023, the government held a consultation and call for evidence on the future financial services regulatory regime for cryptoassets. This follows the government's commitment made in April 2022 to introduce a new regulatory regime to reflect the risks and opportunities presented by cryptoassets. 

Following the consultation, the government has published its response on 30 October 2023 (the Response) which sets out its proposals for the regulation of cryptoassets in the UK. 

The Response confirms that the financial services regulation of cryptoassets will be brought within the Financial Services and Markets Act 2000 (FSMA) regulatory framework. The government will expand the list of specified investments under FSMA and firms carrying out relevant activities with cryptoassets will need authorisation from the Financial Conduct Authority. Firms that are already authorised under Part 4A of FSMA, which relates to permission to carry on regulated activities, will need to apply for a Variation of Permission as opposed to being granted automatic permissions or exemptions to carry out newly regulated cryptoasset activities.  

This increased regulation aims to boost investors' confidence in cryptoassets given the higher risk associated with these types of investments. 

In November 2019, Entain Holdings (UK) Limited, a subsidiary of Entain plc (Entain), one of the world's largest sports betting and gaming groups, 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 included tax-related offences and the corporate offence of failing to prevent bribery (contained in section 7 of the Bribery Act 2010).

On 5 December 2023, the Crown Prosecution Service (CPS) published details of a Deferred Prosecution Agreement (DPA) entered into by Entain. The DPA suspends prosecution for four years provided Entain meets certain conditions. Entain must:

1. pay a penalty of £585 million;
2. pay £10 million to the CPS and HMRC's costs of the investigation; and
3. make a £20 million charitable donation.

In XTX Markets Technologies Limited v Mazars, the County Court denied XTX's application for summary judgment. 

The dispute involves XTX, a financial technology business, and Mazars, the professional services firm. XTX was founded by Dr Gerko, who is the co-CEO and ultimate beneficial owner of XTX. Dr Gerko permanently resides in the UK and has worked in the UK since 2006. He was granted British citizenship in 2016. Dr Gerko also held Russian citizenship which he has since renounced. 

In 2022, XTX made enquiries in relation to Mazars carrying out payroll services for the company. When carrying out due diligence, Mazars had to ensure compliance with anti-money laundering regulations including The Russia (Sanctions) (EU Exit) Regulations 2019 (the 2019 Regulations) which had been brought to the fore by the Russian invasion of Ukraine.

Dr Gerko held Russian citizenship but importantly he was not, and never was, a designated person under the 2019 Regulations and was not subject to sanctions. However, in May 2022 Mazars informed XTX that they had decided not to accept any new clients with Russian ownership and so declined to provide the requested services to XTX. 

As a result, XTX brought a claim for direct discrimination under the Equality Act 2010. Mazars denied that any discrimination had taken place. Mazars asserted that XTX was not treated less favourably than a real or hypothetical comparator and Mazars was acting in the reasonable belief that they were complying with the 2019 Regulations.  

XTX applied for summary judgment, but this was refused on the basis that there were compelling reasons for the matter to proceed to trial. In coming to this conclusion, the judge noted a crucial distinction in this case was that Mazars were not contracting with Dr Gerko as an individual but with global company XTX. The judge also highlighted that Mazars had taken a broad-brush approach by implementing a policy of not taking on new clients with Russian ownership. Therefore, Mazars sought to treat all potential Russian-owned clients in the same way, it had not singled out XTX. 

This case highlights key considerations to bear in mind when carrying out due diligence. The substantive trial is yet to take place, but it is likely that it  will provide some useful guidance and considerations for companies to ensure compliance with both with the 2019 Regulations and the Equality Act 2010.

In Mints v National Bank Trust and Bank Okritie the Court of Appeal (CoA) has dismissed the appellants' appeal against a decision of the High Court (HC) refusing, amongst other things, a stay of proceedings brought against them by two Russian banks: National Bank Trust (NBT) and Bank Okritie. The banks alleged that the appellants had conspired to enter into uncommercial transactions. 

The appellants argued before the HC that a stay was necessary in light of the UK's sanctions regime. That was because Bank Okritie had been sanctioned and was a "designated person" under the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations), while the appellants argued that NBT was controlled by designated persons, namely Vladimir Putin and the Governor of the Central Bank of Russia, Elvira Nabiullina. The key issues before the HC were: (1) whether judgment could be lawfully entered for a designated person by an English court; (2) whether the Office of Financial Sanctions Implementation (OFSI) could license certain litigation-related activities; and (3) whether NBT was "controlled" by a designated person for the purposes of the Regulations. The HC answered issues 1 and 2 in the affirmative, and therefore dismissed the appellants' application. 

The CoA agreed with the HC on issues 1 and 2. While that effectively disposed of the appeal, given issue 3 had been fully argued and was considered to be of some general significance, the CoA addressed it, albeit  on an obiter basis. 

Disagreeing with the HC, the CoA determined that NBT was controlled by Mr Putin and/or Ms Nabiullina. The CoA observed that the HC's treatment of the second condition in Regulation 7(4) of the Regulations, as an adjunct or backstop to the first condition in Regulation 7(2) and its conclusion that there was a carve-out from the concept of control for political office, was not borne out by the clear and plain language of the Regulation. The CoA considered that the HC had put an impermissible gloss on the language of the Regulation because of a concern that, if the appellants were correct about the construction of the Regulation, the consequence might well be that every company in Russia was “controlled” by Mr Putin and hence subject to sanctions. The CoA's view was that if that was a consequence of giving Regulation 7 its correct meaning, then the remedy was for Parliament to amend the wording of the Regulations to avoid such a consequence. 

The CoA further observed that, although the first condition was primarily concerned with ownership, it also dealt with holding a right through control rather than or irrespective of ownership. The CoA noted that was "scarcely surprising" since the whole Regulation was concerned with the meaning of “owned or controlled directly or indirectly” and Regulation 7(1) made clear that a company was owned or controlled directly or indirectly by another if either of the two conditions was met. In other words, both conditions related to ownership or control, and it was not the case that the first condition was concerned with ownership and the second with control. The CoA also  noted that the second condition was expressed in wide terms and its language made clear that the provision did not have any limit as to the means or mechanism by which a designated person was able to achieve the result of control, and that the second condition covered situations where the designated person "called the shots". Finally, the CoA agreed with the appellants that there was no justification for any political or corporate carve-out in the wording of the Regulation, which did not distinguish between different forms of non-ownership control or calling the shots.

The UK sanctions regime is still relatively new and, in light of the ongoing situation in Ukraine, this area of law is likely to continue to develop for the foreseeable future. Given the concerns raised by the HC as to the potential consequences of the interpretation of the Regulations ultimately adopted by the CoA, it will be interesting to see whether Parliament seeks to make changes to the relevant provisions. In the meantime, it would be prudent for all businesses dealing with Russian entities to reassess the control of those entities in light of the CoA's observations.