Pointing the finger

A creaking court system, lack of police expertise and the dearth of resources afflicting enforcement agencies have contributed to an explosion of fraud, much of it cyber-related. According to a recent report from the Commons justice committee, fraud now accounts for 40% of all crimes. The proportion of fraud incidents that were cyber-related increased from 53% to 61% in the Office for National Statistics’ most recent published figures. Yet despite fraud’s grievous impact, its investigation accounts for just 2% of police funding. The committee is forecasting a 25% growth in fraud crimes – unless there is a volte-face in the approach to investigation, prosecution and prevention. (The government responded on 11 January, though only to draw attention to legislation in train – the Victims Bill and the Online Safety Bill – and promising more detail in its upcoming fraud strategy.)

Good in parts

For lawyers who advise directors and officers the status quo is a curate’s egg. Well-run corporates know that the best way to prevent misfeasance and curtail reputation-damaging regulatory probes is to make sure that their compliance procedures and policies, board-level commitments, risk assessments, due diligence, training and monitoring are top-notch across all global operations. These measures do not just make a business more efficient. In the face of a bribery claim they provide material for the ‘adequate procedures’ defence under the Bribery Act 2010.

This type of work is a fertile source of instruction for white-collar crime and compliance lawyers, as are internal investigations, demand for which has rocketed in recent years. But for those reacting to investigations or prosecutions, the situation can be frustrating. ‘Agencies are under-resourced, and even the simplest investigations can take years to resolve, creating a huge amount of stress for clients,’ says Rachel Adamson, founding partner at Adkirk Law, who has years of experience in both prosecuting and defending fraud. ‘And with the backlog of cases from the pandemic, if there is a window of, say, two or three weeks in the court schedule, a fraud case that may last two or three months does not get a look in.’

Courts have not functioned as they should in the years since the advent of austerity, Adamson says. There is also a feeling among some solicitors that responsibility for preventing economic crime is being pushed too hard in one direction – to clients and the solicitors who advise them, as a substitute for beefing up the resources of the policing agencies.

‘Take Suspicious Activity Reports [SARs] as an example,’ says Adamson. ‘Solicitors can find themselves in the position where, having assiduously filled them in and sent them to the National Crime Agency, [the agency does] not respond in the time window. Meanwhile they are constantly contacted by the client wanting to know why their transaction is not going ahead. And because of the risk of tipping off, it is impossible to tell them the source of the delay.’

The strain placed on the NCA is well recognised, including in a 2018 Law Commission report. Since then, the number of SARs and Defence Against Money Laundering (DAML) requests has increased year on year. Private prosecutions focused on fraud and crime are also becoming more common as state agencies toil.

Government response

Successive governments have repeatedly professed a commitment to tackling economic crime. A marker was set with the Bribery Act 2010, which made bribery a strict liability offence and created a new gold standard for corporate behaviour. This was followed by the passing of another ‘failure to prevent’ offence in the Criminal Finances Act 2017 – that of failing to prevent employees (or those associated with the business) from facilitating tax evasion. The 2017 act also introduced Unexplained Wealth Orders (UWOs), compelling disclosure by a recipient.

In 2022, Russia’s invasion of Ukraine propelled the long-awaited Economic Crime (Transparency and Enforcement) Act through parliament. This is aimed at regulating the ‘beneficial owners’ of land which contribute to London’s reputation as the money laundering capital of the world. This scrutiny rather runs counter to a landmark decision in November of the Court of Justice of the European Union, which ruled against access to beneficial ownership registers. Finding the EU anti-money laundering directive’s provisions on access ‘invalid’, the court decreed that this was an interference with the privacy and personal data protection rights of beneficial owners and so should not be made available to the wider public.

‘The ECJ’s decision indicates a move away from greater transparency in corporate ownership in the EU, at a time when the UK is moving closer to this goal,’ says Alun Milford, criminal litigation partner at Kingsley Napley. ‘It may signify structural problems between the EU and UK on this issue in the future.’

There is more. Currently at report stage in the Commons is the Economic Crime and Corporate Transparency Bill. Among other things, this hands Companies House more of a gatekeeper role to police companies, as well as register them. For the legal profession, section 185 of the bill, which proposes adding a new regulatory objective to the Legal Services Act 2007, is controversial. Subsection (i), if approved, would impose an obligation of ‘promoting the prevention and detection of economic crime’.

The Law Society has expressed reservations about the proposal in the bill to allow the Solicitors Regulation Authority to impose limitless financial penalties in this area. Chancery Lane states that it is ‘concerned’ about ‘what the proposed additional powers could mean for our members and how effective they will be in combating economic crime’.

The bill stops short of introducing another sought-after ‘failure to prevent’ offence – failing to prevent economic crime, although there is considerable pressure for this to hit the statute book in 2023. This would mean that a business that failed to put measures in place to prevent their own employees or agents committing fraud for the benefit of the business would be found liable.

Can the gatekeeper cope?

The government’s proposed strategies to combat economic crime are certainly no silver bullet. Although these strategies have been welcomed, questions have been raised by MPs over how Companies House will cope with a gatekeeper role, as this will require significant resources to expand its current remit of registering and recording company information. And in the post-austerity/Covid world, resources are scarce across all government departments.

The prospect of a strict liability ‘failure to prevent’ economic crime has, unsurprisingly, been pushed by the regulators, including the respective heads of the Serious Fraud Office and Crown Prosecution Service, Lisa Osofsky and Max Hill KC. Both Osofsky and her predecessor, David Green KC, have repeatedly highlighted the difficulties with the identification doctrine at the heart of corporate criminal liability – having to prove that senior officers and directors are the ‘directing mind and will’, and have the requisite criminal intent. They say this hinders attempts to hold corporates to account, especially in sprawling multinational organisations in which the accountability trail tends to stop at middle-management.

The government passed the decision-making buck on to the Law Commission, whose June 2022 report explored possible reforms of corporate criminal liability. It came out broadly in favour of the strict liability ‘failure to prevent economic crime’ offence, with the proviso that its introduction should be ‘limited to failure to prevent fraud by an associated person such as an employee or agent’, to avoid a broad list of offences and prevent overlap with strict liability for bribery or tax evasion.

Although such reform may improve the recent lacklustre record for the successful investigation and prosecution of economic crime, some lawyers express qualms.

Tom McNeill, a partner at BCL Solicitors, says: ‘It is a fundamental principle of criminal law that the people who should be prosecuted for wrongdoing are the people who commit the wrongdoing. The strict liability offence goes against this principle – it makes organisations criminally liable if someone else commits an offence.’ McNeill, who specialises in corporate and regulatory crime, adds: ‘It is one thing requiring businesses to take reasonable measures to prevent offending, quite another making them an easy target for prosecution if they do not succeed. It boils down to the government not having the resources to pursue the individuals who actually commit the wrongdoing, and passing the burden on to companies.’ 

‘Plea deals’

Deferred Prosecution Agreements (DPAs), a well-established enforcement tool in the US, were introduced in England and Wales through the Crime and Courts Act 2013. They changed the enforcement landscape, allowing regulators to gain ground in reaching closure and financial redress in a number of large-scale investigations. Twelve DPAs have been reached with the SFO since their introduction, including with Rolls-Royce, Tesco, Serco and Airbus.

Unlike in the US, UK DPAs are only available to corporates, not individuals, and separate prosecutions against individuals do not have a strong record of success. With Tesco and Serco, for instance, actions against individual directors were dropped. Another difference is that in the US there is far greater prosecutorial discretion. Both corporates and individuals can be encouraged to admit wrongdoing and assist with the investigation, confident that they will be given significant credit. In the UK, as the final decision is up to a judge there is limited scope for prosecutors to negotiate a deal.  

‘In the current climate there is little advantage to an individual making early admissions as commonly occurs in the US,’ McNeill says. ‘The rules make it very difficult to have a full and frank conversation with prosecutors and ultimately there is no guarantee of outcome. It is frustrating, because it is in the interests of all sides to have an effective investigation and prosecution system.’

When a business is investigated, there is a tension between the interests of the corporate and those of the individual. ‘The need to establish a “directing mind and will” means that individual officers and directors are vulnerable to being made a scapegoat for the wider corporate failings,’ says criminal litigator Ross Dixon, partner at Hickman & Rose. ‘Sometimes an individual does not realise that they need to take independent legal advice until an internal investigation has been conducted, they have given an account and the regulator’s probe is well advanced. My advice would be that directors and officers should seek their own legal advice as early as possible.’

More to come

At present, fraud and other economic crime cases can take years to resolve. ‘In the investigation into the FTX cryptocurrency collapse in the US, in just a matter of weeks it was reported that several parties had already accepted guilt and entered into agreements with the [Department of Justice],’ says Dixon. ‘The contrast with the time taken by investigation agencies in the UK is stark.’

So far there have been no criminal prosecutions in the largely unregulated sphere of crypto-assets, but this is not surprising given the low numbers of economic crime cases currently being investigated and prosecuted. With lengthy and uncertain outcomes, directors’ and officers’ (D&O) insurance is a must.

‘It is surprising how many businesses do not have D&O insurance, or hold a policy that is not sufficient to take those individuals all the way through any investigation or prosecution,’ says Adamson. ‘My advice to officer and director clients would be take out D&O insurance, and to check the small print thoroughly because the amount of cover offered varies dramatically.’

'In the US investigation into the FTX cryptocurrency collapse, in just a matter of weeks it was reported that parties had accepted guilt and entered into [Department of Justice] agreements'

Ross Dixon, Hickman & Rose

The flurry of legislation is likely to continue, focusing on measures aimed at curbing economic crime while reducing the burden on regulating agencies. New financial penalties and more reporting requirements for businesses are possible.

But critical to the success of tackling the economic crime epidemic is more money, including for agencies such as Companies House and the NCA, and of course the police. Thinktank the Royal United Services Institute published a report in December proposing a new policing model for tackling economic crime, stating: ‘If economic crime is to be accepted as a national security issue the government needs to police it like one.’ Looking at the spiralling fraud statistics, these are wise words.

 

Katharine Freeland is a freelance journalist