The SFO and FCA
On 4 June 2018, the Attorney General’s Office announced the appointment of Lisa Osofsky as the new Director of the SFO from September 2018.
With a five-year term ahead for Lisa Osofsky - and with the SFO’s future secured and the potential for it to become part of the National Crime Agency seemingly now ended following David Green’s tenure - the question remains as to whether there will be any change in its focus and approach in the future. With a strong US law background and past statements stressing the seriousness of money laundering issues, commentators have speculated that the appointment of Lisa Osofsky will lead to a significant US influence, including a greater willingness to strike deals, greater emphasis on DPAs (a long-standing and common feature of the US criminal justice system) and improved SFO-DOJ cooperation.
There remains a long list of extant inquiries, many of which have yet to reach the point of a charging decision. The new director will have to deal with both the inquiries and the likely referral of many more cases, given the seeming attraction of the DPA and early resolution of corporate wrongdoing (and the likely advice of law firms in this field).
It would be wrong to view the SFO as the only active player. Notably, a reinvigorated FCA has made clear its intention to adopt a more aggressive approach to enforcement, with enhanced alignment between that and its role as a financial supervisor. Those advising corporates need to watch and consider the likely actions of the FCA, as much as they do the SFO.
SFO v ENRC
On 3 July 2018, the Court of Appeal began hearing the case of SFO v ENRC. The legal community awaits the latest twist in this high-profile case concerning the SFO’s challenge to claims of legal professional privilege (LLP) when dealing with purported cooperating corporates, as well as the scope of LLP more generally in respect of records of work created as part of an internal investigation.
The case arose out of a dispute between the SFO and Eurasian Natural Resources Company after ENRC refused the SFO’s request for the surrender of internal investigation records from fact-finding interviews in circumstances where legal proceedings were not (it is said by the SFO) in reasonable contemplation.
Permission has been given to appeal to the Court of Appeal, on the basis that there is a real prospect of success, despite the rejection by the High Court of ENRC’s claim that documents created as part of an internal company investigation were covered by litigation privilege. Such is the importance of the matters at issue that the Law Society - the professional body representing solicitors in England and Wales - is intervening in the appeal.
It is anticipated that the appeal will address and provide greater clarity on:
- the extent to which lawyers can claim legal advice privilege in respect of ‘working papers’;
- the point at which adversarial proceedings are reasonably in contemplation so as to trigger litigation privilege in the context of internal investigations;
- the definition of ‘client’ in the context of legal advice privilege; and
- the application of the approach adopted by the Court of Appeal in Three Rivers District Councilv The Governor and Company of the Bank of England (No. 5).
The outcome will define the approach that corporates take when dealing with regulators and prosecutors, with an overly restrictive Court of Appeal judgment potentially discouraging the self-reporting of corporate crime.
Corporate liability - lowering the threshold?
In order to convict a corporate,prosecutors are required to prove that those who are the ‘directing mind and will’ of the company knew, actively condoned or participated in the alleged offence. This is commonly referred to as the ‘identification principle’ and imposes a high threshold of attribution for any prosecution to succeed.
The Bribery Act 2010 introduced the offence of ‘failure to prevent bribery’ pursuant to section 7, an exception to the identification principle under which corporates can be prosecuted for failing to have adequate procedures in place to prevent bribery without the need to identify the directing mind and will.
Building on that, the UK government is considering whether to lower the threshold required to prove criminal corporate wrongdoing more generally in relation to economic crime, removing the identification principle as the key test of corporate culpability and extending the scope of the state’s ability to pursue corporates for acts committed by their directors, employees and agents more widely.
The SFO is a long-standing proponent of this reform. Its rationale is that the identification principle, as currently applied, inappropriately incentivises companies to devise complicated corporate structures so as to distance the directing mind and will from operational duties, creating anunfair imbalance between companies based on the size of the entity, with it being easier to attribute liability to smaller companies as compared to a large multinational corporate. The underlying philosophy is that a greater ability to hold companies to account in respect of their commercial policies and governance strategies can only be a good thing.
Those opposed to the proposition consider that such changes would impose an undue burden on corporates, exposing them to criminal liability in circumstances where the acts of their employees are often unforeseen and uncontrollable, especially when the directing mind and will are, in fact, at a significant remove from the acts of the employees.
In January 2017, the Ministry of Justice called for evidence on this issue. That consultation having finished some time ago, at the time of writing, the Ministry continues to analyse the feedback received and has not yet brought forward any proposal for reform. This is an issue, however, that is not going away.
Unexplained wealth orders
As of 31 January 2018, unexplained wealth orders (UWOs) came into force. The Criminal Finances Act 2017, amending the Proceeds of Crime Act 2002 (POCA), enables the state to deprive an individualor corporate body of property and demand information in order to avoid such deprivation happening in what is, in effect, a new civil investigative tool designed to assist law enforcement to crack down on corruption and recover assets.
The High Court may grant a UWO in circumstances where a person who holds property worth over £50,000 is reasonably suspected of involvement in, or of being connected to a person involved in, serious crime, to require that person to explain the nature and extent of his or her interest in that property, and to explain how the property was obtained where there are reasonable grounds to suspect that the respondent’s known sources of lawfully obtained income would be insufficient to allow the respondent to obtain the property.
A UWO can also be applied to politicians or officials from outside the European Economic Area (EEA), or those associated with them, known as politically exposed persons (PEPs). A UWO made in relation to a non-EEA PEP does not require suspicion of serious criminality.
The ability to apply for a UWO is limited to those agencies that fall within the definition of an ‘enforcement authority’ in England and Wales - namely HMRC, the FCA, the SFO and the CPS (although there are means by which other public authorities can refer cases to those bodies).
In effect, the burden of proof is placed on the respondent - the UWO is a civil and not criminal investigative tool - to justify the wealth, including, but not limited to, details of lawful ownership of the property and how it was obtained. A failure to provide a response, or adequate response, to a UWO in time or at all may give rise to a presumption that the property is recoverable under any subsequent civil recovery action taken under the POCA.
Proponents of the regime are hopeful that it will assist in overcoming the United Kingdom’s reputation of being a haven for illegitimately acquired assets. By reason of its low threshold (the requirement for only £50,000 monetary value and reasonable grounds to suspect for non-PEPs), it is anticipated that in time UWOs will be strictly applied by the courts. Given that UWOs are applicable to property irrespective of when the property was acquired (even property acquired before the existence of the regime, property held by more than one person or propertylocatedoutside the jurisdiction) it could have a far-reaching effect and will surely affect corporate fund managers, property holding companies and professional advisers.
Opponents have referred to a potential breach of human rights by reason of the reverse burden of proof and the lack of government best practice guidance for individuals and corporates outlining the extent of information that should be provided in response to a UWO (assuming that there is information in existence to provide at all, considering that property can be lawfully obtained as a gift without a formal will, trust, deed or contract). The possibility that agencies could use information provided to investigate or create new lines of enquiry for their investigations will require individuals and corporates to strike a careful and tactical balance regarding any response they give to a UWO.
However the scheme will operate - and there is a real debate about whether this is ‘tokenism’ or a measure with real effect - all will likely agree that the introduction of the UWO regime represents something of a shift for the United Kingdom in its focus on the recovery of assets instead of prosecution, although evidence of criminal conduct should sensibly lead to the latter if it emerges in the course of a UWO. Although directed at individuals, there is a plain impact on corporates too.
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