What Other Enforcement Actions Can We Expect in the UK For the Rest of 2021 and Beyond? (Part 3)

This Advisory is the third and final in a series on the enforcement landscape in the UK, looking at expected and potential actions across various enforcement agencies. Following on from our reviews of the Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA) respectively, this Advisory considers some wider proposals and trends that may inform the broader enforcement horizon in the UK over the coming months and years. In particular, we focus on the ongoing rise of pandemic-related fraud, increased risks of money laundering across the UK, and proposals to hold directors personally responsible for promoting good corporate governance.

*          *          *          *          * 

In our earlier advisories, we discussed the steep rise in pandemic-related fraud. Whilst tackling this will be on the agenda for several enforcement agencies, it has presented a particular concern for Her Majesty’s Revenue and Customs (HMRC). Areas that continue to be vulnerable to fraud include companies fraudulently overstating furlough claims and those fraudulently misrepresenting their position in order to access business loan schemes. Given the pace at which some of this relief was claimed and duly granted, HMRC was quick to demonstrate its vigilance and made its first arrests over the summer of 2020. It has continued to police fraudulent claims, and in March 2021, the government announced an HMRC Taskforce staffed with more than 1,250 individuals and an investment of £100 million to bring to justice those seeking to exploit the financial support available to individuals and businesses affected by the pandemic. Whilst we anticipate that the work to bring individuals to justice for tax offences will continue, it remains to be seen whether HMRC will prosecute corporate bodies for the strict liability offence of failing to prevent tax evasion by an “associated person”. With HMRC enforcement on the rise, companies should ensure that their response to risk has remained fit for purpose throughout the pandemic.

In addition to combatting pandemic-related fraud, we expect a strong focus to continue on ensuring that the UK is a hostile environment for money laundering, as set out in the government’s Integrated Review 2021. There are several enforcement agencies tasked with driving illicit wealth out of the country, including the FCA in respect of regulated entities and the National Crime Agency (NCA) whose efforts are targeted at serious organised crime. However, it is important to bear in mind that these efforts to ramp up anti-money laundering policing comes at a time when the UK government is also concerned with protecting the UK’s commercial interests in a post-Brexit environment, and as such, a risk-based approach is likely to be adopted. For example, as discussed in our earlier Advisory, the UK is introducing freeports around the UK with the aim of promoting trade and investment globally, with this being weighed against the risks presented by freeports, which are inherently fraught with money laundering risks due to the privacy and security they offer. While the UK has demonstrated the potency of some of the tools it deploys to target illicit funds, such as unexplained wealth orders, suspicious activity reports, and a new sanctions regime, it is also the case that investigating the flow of proceeds of crime has proven to be lengthy and increasingly complex. In addition, there are separate risks that come with the expansion of “Global Britain” including the role played by professional “enablers” of money laundering. We will follow with interest how the authorities navigate the evolving threats whilst recovering and maintaining economic growth.

Finally, one of the emerging themes we have seen across the board is that of holding senior individuals of companies to account for misconduct. In support of this trend, the Department of Business, Energy and Industrial Strategy (BEIS) has published proposals aimed at restoring trust in audit and corporate governance in response to “sudden and major corporate collapses which have caused serious economic and social damage,” overarchingly aimed at holding directors personally to account. The proposals acknowledge the existing legislative framework which holds directors to account but also identify weaknesses. For example, it was noted that the Insolvency Service (IS) has powers to investigate and bring proceedings against directors who fail to exercise their duties, either resulting in disqualification or in some cases, criminal proceedings. However, BEIS noted that prosecutions are rarely brought against directors of solvent companies and the IS instead focusses its efforts on ensuring fair competition in the marketplace as a whole. The FCA, on the other hand, does have wide powers to criminally sanction individuals, and in this past year alone, has demonstrated its willingness to deploy these to their full extent. However, its powers are restricted to the companies it regulates and so the FCA’s jurisdiction does not extend to directors of companies outside of the financial sector. Finally, the Financial Reporting Council can only enforce against the misconduct of accountants and auditors, and not the directors of the companies those accountants and auditors have as clients.

In order to bridge these gaps, BEIS has proposed the creation of a new regulator, the Audit, Reporting and Governance Authority (ARGA), equipped with enforcement powers to investigate and sanction breaches of corporate reporting and audit-related responsibilities by all directors of public-interest entities. Whilst these sanctions will remain civil in nature, the proposals envisage ARGA working in tandem with existing enforcement authorities including the SFO where the director’s conduct is particularly egregious. Additionally, directors will be required to report on the steps they have taken to prevent and detect material fraud within their companies. The consultation on these proposals is open until July 2021, and it remains to be seen the extent to which they are adopted into law. In our view, they are likely to be implemented, and the implications for those sitting on the board of a company will be significant and far-reaching.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.