Fieldfisher's Financial Crime Summer 2020 Round Up
This issue focuses on bribery and anti-money laundering regulation in the wake of some record-breaking settlements and fines handed down over the last 12 months; ranging from the €991 million settlement the global aerospace giant, Airbus SE, agreed to pay the UK's Serious Fraud Office (SFO) for its failure to prevent bribery, to the £37 million fine the Financial Conduct Authority (FCA) handed down on Commerzbank London for its lax anti-money laundering controls.
Our law enforcement system faces ever-increasing challenges, and with turbulent economic times ahead in light of the Covid-19 outbreak (which criminals will attempt to turn to their advantage), the National Crime Agency (NCA) has warned in their 2020-2021 report that individuals and corporates must remain alert.
Throughout this article we provide links to other blogs we have posted over the last 12 months which relate to the decisions we discuss below, and which provide helpful guidelines to ensure that individuals and businesses are compliant with the legislation and regulatory framework in which they operate. The guidance in our blogs linked in this round up also discuss ways businesses and individuals can minimise the risk of being victim to financial crime offences and provide comments on the SFO's record in cracking down on such offences.
Another way to keep up to date with the latest bribery and corruption developments is through our SFO Investigations Tracker and Enforcement Trends Table.
Airbus: Record-breaking €3.6 billion global bribery resolution
This year the global aerospace giant, Airbus SE, entered into the world's largest corruption settlement; resolving investigations by authorities in the US, UK and France. On 31 January 2020, the respective courts in each jurisdiction approved agreements totalling €3.6 billion to resolve Airbus' alleged bribery offences and failure to prevent illicit payments.
Here in the UK, the Serious Fraud Office (SFO) entered into a Deferred Prosecution Agreement (DPA) with Airbus in relation to five counts of failure to prevent bribery. Under the terms of the DPA, Airbus agreed to pay a fine and costs amounting to a record-breaking €991 million. This is more than double the total amount paid in fines in respect of all criminal cases in England and Wales in 2018.
What is a DPA and is it effective?
Under a DPA a prosecutor charges a company with a criminal offence but proceedings are conditionally suspended while the defendant fulfils the requirements of the agreement, such as paying a significant financial penalty (Airbus' fine being particularly eye watering), disgorgement of profits, complying with arrangements for monitoring of compliance and agreeing to co-operate with future prosecutions. The effect of the Airbus DPA therefore means that Airbus will not be prosecuted if it complies with the terms of the agreement, but the SFO will still be able to prosecute individuals suspected of involvement with bribery. However, as discussed in our previous blogs, the SFO's failure to secure convictions against individuals involved in the criminal conduct at the heart of DPAs has been widely criticised.
Under the weight of SFO investigations large corporations are paying hundreds of millions of pounds and entering into DPA's to avoid prosecution for the criminal actions of their employees, but the SFO have subsequently failed to secure convictions against those employees, or have not even brought charges against them. See our blog posts which explore this issue further on the SFO's failure to prosecute individuals related to the Tesco DPA (here) Barclays DPA (here) and Rolls Royce DPA (here).
Key takeaways
The SFO found that Airbus' anti-bribery and corruption (ABC) policies and procedures were easily bypassed, so much so that Airbus was described as possessing a corporate culture that permitted bribery. (The bribery conduct covered by the Airbus DPA took place across five jurisdictions between 2011- 2015, and involved senior executives.) The Airbus DPA therefore highlights that it is essential for organisations to have ABC policies and procedures in place which are sufficiently robust to give effect to their intended purpose and withstand scrutiny from third parties.
Our previous blog found here provides further comment on the Airbus DPA and some helpful guidelines on what businesses need in ABC policies to combat bribery and corruption, such as the following:
- to conduct appropriate risk assessments on the nature and potential exposure to external and internal bribery;
- to have due diligence procedures which take a proportionate and risk based approach in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks;
- effective communication of bribery prevention policies to all personnel; and
- the commitment to prevent bribery and corruption to come from the top-down i.e. from senior management.
In January 2020 the SFO published new guidance about how it assesses the effectiveness of compliance programmes, titled 'Evaluating a Compliance Programme' (the Guidance). This is part of the SFO's Operational Handbook and should be read in conjunction with other guidance including the SFO's Corporate Co-operation Guidance, Guidance on Corporate Prosecutions and the Deferred Prosecution Agreements Code of Practice.
The Guidance only applies to assessments of corporate compliance programmes in the context of investigations carried out by the SFO, however it underlines the importance of effective due diligence processes and compliance procedures. Although the Guidance does not provide any definitive indications as to exactly what is required of corporate compliance programmes, it does provide some useful insight into requirements for evaluating the robustness of corporate compliance programmes.
Our Financial Corporate Crime and Investigations (FFCI) team have expertise in advising businesses on their ABC policies, and encourage a proactive rather than reactive approach in ensuring that corporates have adequate procedures in place.
Commerzbank controls failure results in £37 million fine
On 17 June 2020, the Financial Conduct Authority (FCA) announced that it has fined the London branch of Commerzbank AG (Commerzbank London) £37.8 million for failure to put adequate anti-money laundering (AML) controls in place for five years.
Commerzbank London qualified for a 30% discount on the fine because it agreed to cooperate (the full fine would have been a staggering £54 million), but it is still one of the largest fines that has ever been handed out by the FCA in relation to anti money-laundering failures.
Comment
Commerzbank London was found to have breached Principle 3 of the FCA’s Principles for Businesses, which requires firms to have adequate risk management systems in place, but they were afforded a 30% reduction as a result of their good cooperation with the FCA and they have since undertaken a significant remediation exercise to bring its AML controls into compliance. This demonstrates the benefits of cooperating with regulators if AML breaches do occur, as significant reductions in fines may be given to those who do comply.
Businesses need to ensure their AML policies are robust and are always compliant with legislation and the applicable regulatory framework. Our FCCI team are specialists in this field and are here to assist you to ensure you have in place effective AML policies and procedures.
SFO Success Tainted by Controversy: Convictions secured in the world's biggest bribe scandal against former Unaoil executives
On 13 July 2020, the SFO announced that it has secured convictions against two (out of three) former executives it was prosecuting from Monaco-based oil and gas firm, Unaoil. Those convicted were found to have conspired to give corrupt payments to secure contracts in Iraq. A link to the SFO's press release can be found here.
The recent convictions are a much-needed win for the SFO as they are landmark verdict in the UK's part in a global corruption inquiry into Unaoil. The SFO began its criminal investigation into Unaoil, alongside its officers, employees and agents in connection with suspected offences of bribery, corruption and money laundering in 2016. And the recent convictions of its two former executives (namely, Ziad Arkle and Stephen Whiteley) follow from the first guilty plea to result from the SFO's investigation after co-conspirator, Basil Al Jarah, admitted five offences of conspiracy to give corrupt payments in July 2019. (The co-conspirator is due to be sentenced on 8 October 2020, and it is worth noting that the circumstances of his guilty plea were not admitted in evidence in the proceedings against the former Unaoil executives.)
As discussed in the SFO's press release on their recent success, "Basil Al Jarah admitted to paying bribes totalling over $6million to secure contracts worth $800m for the supply of oil pipelines and offshore mooring buoys. Ziad Akle and Stephen Whiteley were found guilty of paying over $500,000 in bribes to secure the $55m contract for the offshore mooring buoys."
Coronavirus interruption and sentencing
The criminal proceedings against the former Unaoil executives form the UK's biggest ongoing corruption trial. Commencing on 23 January 2020, the trial was one of the first jury trials to be suspended due to Covid-19 pandemic. The suspension was in place for 2 months and then resumed as a socially distant trial across three courtrooms in May 2020 (with some of the defendants attending remotely).
On 23 July 2020, Ziad Akle was sentenced to five years’ imprisonment for paying over $500,000 in bribes to ensure Unaoil benefitted from state-run projects run by the post-occupation Iraqi government. In his sentencing, His Honour Judge Beddoe said:
“The offences were committed across borders at a time of serious need for the government of Iraq to rebuild after years of sanctions and the devastation of war. They were utterly exploitative at a time when the economic and political situation in Iraq was extremely fragile.”
Stephen Whiteley was convicted alongside Ziad Arkle, but sentenced later due to health reasons. He was sentenced on 30 July 2020 by Honour Judge Beddoe to 3 years' imprisonment. A link to the SFO's press release on the sentence can be found here.
Controversy
Unfortunately, the SFO's much needed victory was marred by controversy after its head, Lisa Osofsky, was condemned by the trial judge for being vulnerable to flattery from a freelance agent during the bribery investigation into Unaoil. It was revealed during the trial that Ms Osofsky and other senior SFO staff had entered into dialogue with David Tinsley, a retired US investigator who acted for the Ahsani family, which founded Unaoil. As part of the discussions Mr Tinsley offered to secure guilty pleas from two former Unaoil executives, despite not being instructed on their behalf and having no official role in the case. In return Mr Tinsley sought to persuade the SFO to withdraw the arrest warrants for the Ahsani family members.
His Honour Judge Beddoe, who presided over the Unaoil trial, criticised Ms Osofsky for "taking the bait" and said the events should be "comprehensively reviewed". The SFO accepted the criticism and confirmed that it will be conducting an investigation in relation to its conduct, however Ziad Arkle's lawyer has already said he will appeal against Arkle's conviction because of concerns the SFO’s conduct during the investigation amounted to an abuse of process.
Money laundering through crypocurrencies: Joint Money Laundering Steering Group guidance on cryptoassets
In March 2020, the UK’s Joint Money Laundering Steering Group (JMLSG) published proposed new guidance on money laundering regulations for crypto-asset exchange providers (CEPs) and custodian wallet providers (CWPs). The guidance takes into account of The Money Laundering and Terrorist Financing (Amendment) Regulations 2019, which brought CEPs and CWPs into the scope of the UK's Money Laundering Regulations.
The guidance describes the types of services captured by the Money Laundering Regulations and gives an overview of likely money laundering and terrorist financing risks in the sector, which include:
- the ability for some unregulated crypto-asset systems and providers to allow transactions without fully identifying the parties;
- the cross-border nature of many crypto-asset systems, which may reduce the ability for oversight and the application of effective money laundering/terrorist financing controls; and
- where crypto-asset systems are decentralised, the lack of a central server or service provider with overall responsibility for identifying users, monitoring transactions and reporting suspicious activity.
The guidance lists specific high-risk factors associated with cryptocurrencies including customers who use encrypted/anonymous email, those who send crypto-assets to newly created addresses, or avoid ‘know your client’ thresholds through making smaller transactions. The guidance also offers advice on how to manage such risks, for example the need to conduct risk assessments on customers, products and transactions.
Other News – Round up
In addition to the record breaking fines handed down in relation to bribery and AML over the last 12 months discussed above, there have also been some landmark judgments in the wider financial crime sphere which we explore below.
AA v Persons Unknown & Bitfinex [2019] EWHC 3556
In the first reported decision of its kind, the Commercial Court granted a freezing injunction against persons unknown holding Bitcoin, whilst also breaking new ground in determining that Bitcoin is property. This case demonstrates the Commercial Court's willingness to push the boundaries and deliver innovative decisions in order to allow victims of fraud to trace and recover monies. Cyber criminals are increasingly using more sophisticated techniques to steal or extort monies from victims and the Commercial Court should be lauded for keeping pace.
Crypto currencies may no longer become a secure and untraceable place for fraudsters to place their ill-gotten gains, given the services offered by blockchain analysis companies which can trace the transfer of such assets coupled with the English court's willingness to enforce against them. Our blog post found here provides further analysis of this landmark judgment.
In this case, the High Court made the first compensation order against a defendant director under the new section 15A of the Company Directors Disqualification Act 1986. The court ordered the defendant director to pay a compensation order in the sum of £559,484 for monies he had misappropriated so that the sum could be paid back to the insolvent company for distribution amongst its creditors. The decision provides useful guidance on the new regime as to how director misconduct is identified, how compensation is quantified and to whom compensation is payable. It will be interesting to see how widely the new regime is applied, and will be welcomed by those who consider our insolvency rules do not hold directors culpable of misconduct to account.
Bilta (UK) Ltd (in liquidation) & ors v NatWest Markets plc & anr co [2020] EWHC 546 (Ch)
These proceedings concerned a claim with a total value of over £83 million for dishonest assistance and knowing participation in fraudulent trading. The Royal Bank of Scotland (RBS), now NatWest Markets plc, and a subsidiary of RBS were the defendants in the case and were found vicariously liable of the claims against them as a result of their employee's actions in assisting a fraudulent scheme. The judgment provides useful analysis on the concept of "dishonest assistance" as it discusses at length the evidence submitted by the defendants as to how their employees who were said to have "assisted" the fraud were at the end of a chain of large transactions and lacked proper knowledge of the fraud, and the reasons why the trial judge did not find such evidence to be persuasive. This case is therefore a great reminder of employer liability within a chain of commercial transactions and demonstrates the importance of having the proper compliance checks in place.
National Crime Agency v Baker and ors [2020] EWHC 822 (Admin)
On 8 April 2020, two prominent Kazakhstan citizens successfully persuaded the High Court to discharge three unexplained wealth orders (UWOs) - dubbed "McMafia orders" – which give authorities such as the police, HMRC, the FCA, the SFO and the NCA, the power to seize assets suspected of being acquired with the proceeds of crime.
The case demonstrates that owing to the significant power of UWOs and their extremely restrictive effect on the respondents to which they are subject, the Court is being careful to intensely scrutinise their use. This case may provide a salutary lesson to prosecuting authorities to ensure that their evidence is completely watertight before applying for UWOs in the future. See our blog post found here for a full analysis of the judgment.
SFO receives approval for DPA with G4S
On 17 July 2020, the SFO received final approval to enter into a Deferred Prosecution Agreement (DPA) with G4S Care and Justice Services (UK) Ltd (G4S). (See our discussion above on the Airbus settlement for a full explanation on "What is a DPA and is it effective?") The G4S DPA relates to a fraudulent scheme in connection with contracts G4S entered into with the Ministry of Justice (MoJ) for the provision of electronic monitoring services (tagging services) of offenders. By entering into a DPA, G4S accepted responsibility for three offences of fraud against the MoJ in relation to its tagging contract and related reporting of accounts.
Under the terms of the DPA, G4S are required to pay a financial penalty of £38.5m, which was discounted by 40% because of G4S's "substantial cooperation" with the SFO's investigation. G4S are also required to agree to wide-ranging compliance obligations and improvements, including periodic review, assessment, and reporting of their internal controls, policies and procedures by a third-party reviewer. The investigation into the relevant individuals at G4S remains open. As with the other DPAs previously agreed by the SFO (and discussed above in our comment on the Airbus DPA), it will be interesting to see whether the company's admission of guilt and co-operation with the SFO's ongoing investigation will be enough for the SFO to secure convictions of the individuals who caused the company to commit the fraud.