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Welcome to our round-up of the key commercial crime developments during 2023 and our predictions regarding risk areas and enforcement trends for 2024.
At the start of 2023, we wrote about the destabilising effects of global geopolitical issues on the business community and its impact on in-house teams dealing with economic crime compliance challenges. As predicted, this was not an aberration, but the reality businesses will face for many years to come.
Conflicts between neighbouring countries and their contagion effect across the business world far beyond their borders is our new reality. With in excess of 50 national elections expected this year, including in the UK, impacting over 40% of the world's population, 2024 is set to be a year of change that will shape the global economy for years to come.
A challenging business environment inevitably leads to a higher risk of economic crime offences being committed. Against this backdrop, we consider the key developments from H2 2023 and provide our views on what are likely to be the core economic crime concerns for 2024.
Fraud & Corruption
Arguably the buzz word for 2023, fraud and the fight against it was headline news for the government and enforcement agencies alike. The government's Economic Crime Plan, considered in our H1 update, for the first time made counter-fraud initiatives a strategic focus. This included a stated aim to reduce the incidence of fraud involving individuals and businesses.
The focus on fraud is not unexpected. From the traditional boiler-room frauds through to emerging issues involving ESG and crypto currencies, fraud remains one of the most pervasive crimes in the UK and internationally. While the impact on consumers may be self-explanatory, fraud on this scale increases the costs of conducting business and erodes public trust in sectors deemed high risk for fraud. This in turn increases pressure on businesses to reflect on their own risk profile, strengthen early detection systems and take preventative action to protect itself and connected third parties.
The introduction of new legislation on 26 October 2023, in the form of the Economic Crime and Corporate Transparency Act 2023 ("ECCTA"), further emphasises the need for businesses to prioritise updating their anti-fraud protocols. ECCTA introduced wholesale reform of the powers of Companies House, as well as introducing the most significant changes to corporate criminal liability in the last decade (see our update on ECCTA here).
For domestic companies and those with a presence in the UK, it is noteworthy that corporate transparency is at an all-time high in the UK at a time when other countries are retrenching. While Companies House have been afforded expanded powers for investigations and enforcement, as well as powers aimed at improving the accuracy and integrity of the information on the register, the changes to attribution of corporate criminal liability have been the focus of most debate in 2023.
The new identification doctrine for attributing corporate criminal liability came into effect on 26 December 2023 . The long-standing principle previously was that where a criminal offence required proof of a specific mental state (such as fraud), a company could only be found guilty if an individual who represented the 'directing mind and will' possessed the requisite state of mind. This proved a major stumbling block in practice for enforcement authorities. ECCTA aims to simplify the doctrine and the new version dictates that an organisation of any size will be criminally liable when part or all of a specified economic crime is committed in the UK by a senior manager of that company or partnership. The government, clearly buoyed by the reception this amendment received, are seeking to further expand the new identification doctrine to all crimes in the proposed Economic Crime Bill.
ECCTA also introduces a new failure to prevent fraud offence. The offence applies to large organisations who will be criminally liable where an associated person (including employees, agents, subsidiaries and others) commits a fraud for the organisation’s benefit and the organisation did not have reasonable fraud prevention procedures in place (or it was not reasonable for them to have such procedures). The new offence will not come into effect until the guidance on what constitutes reasonable procedures has been published. This is expected to be issued during 2024 in a similar form to the guidance published previously in respect of the Bribery Act 2010's 'adequate procedures'.
Our Prediction: Policies and procedures targeting the fraud risk within a business will become more commonplace, across a broader range of companies. Whilst the new failure to prevent fraud offence applies directly only to large companies, many SME’s will be indirectly affected as those large companies seek to use contractual provisions, commuting suppliers to equivalent procedures to their own with such businesses in their supply chains, in order to mitigate their own risk.
We have also witnessed an increasing trend for companies to put in place comprehensive anti-economic crime procedures, rather than continuing with the previously narrow emphasis on AML and ABC procedures. That reflects the exponential increase in risk over recent years associated both with the increasing prevalence of such offending, and the increased exposure to enforcement action, such as that brought about by the Criminal Finances Act 2017 criminalising failure to prevent tax evasion, the introduction of strict liability for sanctions breaches, and the lowering of the bar for corporate criminal liability for economic crime. ECCTA offers new routes to hold corporates accountable for fraud within the business or perpetrated by associated persons of the business.
At a minimum, we expect the risk of prosecution under ECCTA will encourage businesses to proactively manage their fraud risk in a similar manner to how the UKBA brought about a culture change regarding anti-corruption compliance.
Serious Fraud Office ("SFO")
The last six months of 2023 saw a flurry of activity at the SFO. August signalled the end of Lisa Osofsky's term as director of the SFO, coinciding with the SFO's decision to drop high profile investigations into Rio Tinto, Eurasian Natural Resources Corporation, and a further case against a director of Balli Steel on grounds of ill-health. Nick Ephgrave, a former assistant commissioner of the Metropolitan Police, stepped into the role in September 2023 and has moved quickly to make it his own.
Ephgrave took immediate steps to address resourcing issues within the SFO, recognising the issues associated with over reliance on temporary staff. With more than 100 jobs offered so far and further recruitment ongoing, he is taking significant steps to build the team that will support his tenure as director.
Ephgrave has also shown decisiveness and calculated efficiencies in how he and his team have executed new investigations since he has taken over. An investigation into a collapsed funeral plan scheme in October was quickly followed in November by a dawn raid linked to the investigation into the collapsed law firm Axiom Ince and £66m of missing client funds. Conducted across nine sites and leading to the arrest of seven individuals, Ephgrave's confidence in his operation was evident from the invitations extended to a Financial Times reporter and the solicitor-general to join him in the control room to watch it unfold.
Ephgrave finished his 2023 hat-trick of investigations in December with a further dawn raid, conducted with the assistance from the National Crime Agency, into aircraft parts supplier AOG Technics Ltd.
Each investigation aligns neatly with his stated ambition to conduct investigations efficiently and prioritise cases with large numbers of victims. In addition, it is notable that there is a strong domestic element to these investigations which is a marked departure from his predecessors focus on corruption internationally.
Ephgrave will be looking to build on his strong start at the SFO and the new tools available to the SFO under ECCTA will undoubtedly be put to work over the coming months and years. The introduction of the new failure to prevent offence, alongside the wholesale amendments to the identification doctrine, significantly expands the SFO's armoury when tackling economic crime and, in the case of the failure to prevent offence, opens a new door through which non-court resolutions can be obtained.
In addition, ECCTA has extended the SFO’s powers of compulsion pursuant to section 2 to the Criminal Justice Act 1987 beyond overseas bribery cases to cover cases of suspected fraud and domestic bribery. Noteworthy developments which we expect will make it easier for the SFO to investigate and prosecute companies suspected of wrongdoing.
Our Prediction: While Ephgrave has had the opportunity to demonstrate his investigation skills in 2023, 2024 will be the first test of his ability to secure individual convictions which have proven so elusive for the SFO. Ephgrave is also going to have to grapple with the SFO's other nemesis – disclosure. With AI tools available which are more than capable of assisting the SFO with their disclosure burden, we expect constructive steps to be taken by the SFO in this direction, taking lessons from its civil litigation counterparts where AI-assisted reviews are fully endorsed by courts and clients alike.
The SFO – not the only (fraud enforcement) show in town
Where previously it was presumed that high value fraud investigations and any subsequent DPAs would inevitably be led by the SFO in the UK, we received a timely reminder in December 2023 that there are others who will not shy away from the opportunity.
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 in November 2019 requiring it to provide information relating to the group's former Turkish-facing online betting and gaming business. The investigation revealed potential corporate offending by entities within the Entain plc group encompassing tax-related offences and the corporate offence of failing to prevent bribery.
On 5 December 2023, some four years later, the Crown Prosecution Service ("CPS") published details of the deferred prosecution agreement entered into by Entain. Representing the second largest dpa entered into to date, Entain agreed to pay £615 million, comprising a penalty, costs and a charitable donation.
Priorities for 2024
A hostile business environment, combined with active and ambitious enforcement agencies, supported by a government agenda targeting fraud is a potentially lethal combination for the unwary.
To safeguard against future criminal enforcement, we recommend prioritising the following three steps:
- Consider your business' economic crime risk exposure and run tailored fraud audits across the business footprint. This should include an assessment of any allegations previously made either internally or externally against the company or any associated persons.
- With guidance on the failure to prevent fraud expected to be published this year, large organisations ought to have advanced plans in place for how they are going to adopt the necessary changes within their businesses. Risk assessments should be conducted, and the outcomes tabled for discussion at board meetings. Demonstrating top-level commitment to the prevention of economic crimes to benefit the business remains a fundamental requirement for compliance. Engaging now will ease the burden when the offence comes into effect later this year.
- For businesses of all sizes, understanding who is considered to be a senior manager is a paramount concern. This will become even more acute if the tabled Criminal Justice Bill receives Royal Assent this year, further expanding the attribution of criminal liability of senior managers to corporates beyond economic crime to all crime. Understanding employee risks particular to your business and how that might change depending on the different risk factors they are exposed to will be key.
For further information please contact the authors or any member of our Commercial Crime Team.
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