UK Economic Crime Group: Enforcement Update

Executive Summary

In this edition of the UK Enforcement newsletter we provide an update on recent anti-corruption, fraud and bribery developments in the UK. We focus on enforcement actions by the Serious Fraud Office (SFO), National Crime Agency (NCA) and the Financial Conduct Authority (FCA). We also look at government policy issues including documents published by the SFO and the National Audit Office (NAO).

In terms of enforcement, we consider:

• The prosecution of a director of ALM Services UK Ltd for failure to produce documents required by a Section 2 Notice;
• Three former Barclays' executives facing a retrial, including new charges, in relation to the 2008 financial crisis;
• Court approval of the deferred prosecution agreement between the SFO and Serco Geographix Ltd;
• Former Deutsche Bank trader acquitted over rigging of Euribor;
• NCA secures £100 million Account Freezing Order and an Unexplained Wealth Order covering £10 million of property;
• Updates related to the SFO's investigation into Unaoil;
• Reporting restrictions lifted in relation to 2016 deferred prosecution agreement, as XYZ Ltd is revealed to be Sarclad Ltd;
• SFO opens investigation into De La Rue plc; and
• Richard Baldwin's conviction for money laundering revealed after reporting restrictions lifted, following the FCA's Operation Tabernula.

In relation to government policy:

• NAO issues its report on tackling serious and organised crime;
• Prime Minister orders a sentencing review to consider automatic release for longer sentences, while UK criminal prosecutions are at an all-time low; and
• The SFO publishes guidance on corporate cooperation.

Enforcement Actions

Prosecution of director of ALM Services UK Ltd for failure to produce documents

On 14 June 2019, Anna Machkevitch was charged with failure to comply with a notice issued under Section 2 of the Criminal Justice Act 1987 (a Section 2 Notice) in relation to the SFO's investigation of Eurasian Natural Resource Cooperation (ENRC). A Section 2 Notice compels the person it is addressed to, to produce documents or other information to the SFO. The offence of failure to comply with a Section 2 Notice is punishable by a maximum six-month prison term and an unlimited fine.

Ms Machkevitch is the director of London-based ALM Services and the Machkevitch Foundation, as well as being the daughter of Alexander Machkevitch, one of the three founders of ENRC. Ms Machkevitch had been provided with a Section 2 Notice in connection with the current SFO investigation into ENRC. The SFO alleges that in January 2019 she failed to supply documents required by the SFO, contrary to a Section 2 Notice. On 5 July 2019, appearing at Westminster Magistrates' Court, she pleaded not guilty to the offence. A date has not yet been set for her full trial.

Barclays' executives facing re-trial of fraud charges and new charges

As we reported previously, the trial of four senior Barclays' executives was stopped when the jury was discharged in April 2019, following a decision by Mr Justice Robert Jay that there was insufficient evidence against the defendants. Reporting restrictions remain in place in respect of this case.

On 21 June 2019, the Court of Appeal declined an application by the SFO to overturn the decision by Mr Justice Jay that there was insufficient evidence against the former CEO of Barclays, John Varley. However, the application was approved in relation to the three other defendants, Richard Boath, Roger Jenkins and Tom Kalaris, and they will face a retrial scheduled to commence on 7 October 2019 at the Crown Court at Southwark.

In addition, on 1 August 2019, the SFO was given permission to amend its indictment against the three defendants, so that at their retrial they will now face substantive fraud charges, in addition to those of conspiracy to commit fraud by false representations.

SFO announces DPA reached with Serco

On 4 July 2019, Mr Justice William Davis approved a Deferred Prosecution Agreement (DPA) between the SFO and Serco Geographix Ltd (Serco). Under the DPA, Serco has taken responsibility for three offences of fraud and two of false accounting arising from a scheme to dishonestly mislead the Ministry of Justice about the extent of profits being made by Serco's parent company from its contract for the provision of electronic monitoring services. According to the DPA, as a result of this deception, the Ministry of Justice was prevented from attempting to limit the company's future profits, recover any previous profits, seek more favourable terms during renegotiations of contracts or otherwise threaten contract revenues.

Under the terms of the DPA, Serco will pay a financial penalty of £19.2 million as well as the SFO's costs for the investigation. This is in addition to £12.8 million that Serco has already paid to the Ministry of Justice by way of compensation.

As with previous DPAs, Serco and its parent company have agreed to provide ongoing cooperation to the SFO, including reporting evidence of fraud by itself and any associated persons, as well as strengthening its internal policies and procedures and reporting annually to the SFO on its group-wide assurance programme.

The DPA concludes the SFO's investigation into Serco and its group companies, but the investigation into individuals associated with this matter remains active. Reporting restrictions are in place.

Former Deutsche Bank trader acquitted over rigging of Euribor

On 4 July 2019, Andreas Hauschild, a former Managing Director at Deutsche Bank was found not guilty of conspiracy to defraud in respect of manipulating the Euro Interbank Offered Rate (Euribor) between January 2005 and December 2009.

Having been charged in November 2015, Mr Hauschild declined to appear at hearing at Westminster Magistrates' Court in January 2016, along with three other former Deutsche Bank employees and a trader from Société Générale. Following that hearing, the SFO secured European Arrest Warrants against these five individuals and Mr Hauschild was arrested in Italy and subsequently extradited back to the UK.

During his three week trial in June 2019, it was alleged that Mr Hauschild was part of an elite group manipulating Euribor, using his responsibility for the team that provided rate submissions to rig the benchmark. He was accused of conspiring with others at Deutsche Bank, Barclays, Société Générale and other banks, with the jury's attention being drawn to the convictions of Christian Bittar (formerly of Deutsche Bank), and Philippe Moroyoussef, Carlo Palombo and Colin Bermingham (all three formerly of Barclays). On 4 July 2019, the jury acquitted Mr Hauschild of conspiracy to defraud over the rigging of Euribor.

NCA secures £100 million Account Freezing Order and an Unexplained Wealth Order covering £10 million of property

Continuing the trend of increasing the use of freezing and forfeiture powers by the NCA, the agency has, in the past few months, secured its largest ever set of Account Freezing Orders (AFOs) and obtained another Unexplained Wealth Order (UWO).

On 12 July 2019, the NCA obtained a UWO in relation to property worth £10 million against a businessman from the north of England with suspected links to serious organised criminals. The UWO requires the individual to reveal the source of funds used to start and develop his £10 million property empire. The NCA believes that eight properties he has purchased were funded by a number of criminal associates involved in drug trafficking, armed robberies and supplying firearms. While the NCA has previously obtained UWOs, this is the first instance of one being obtained solely based upon a suspicion of involvement in serious organised crime, rather than being based on underlying criminal convictions. In addition to the UWO, interim freezing orders have been granted over the properties, preventing their sale, transfer or other dissipation while the investigation continues.

On 12 August 2019, the NCA was granted freezing orders over eight bank accounts containing a total of more than £100 million. The AFOs were granted on the basis that it is suspected that these funds have been derived from bribery and corruption in an overseas nation. This is the largest amount of money frozen using AFOs since their introduction. These AFOs are also related to an earlier AWO granted in December 2018 against a linked individual, which froze £20 million.

The NCA's continuing efforts in freezing funds suspected of being involved or originating from criminal conduct show the NCA's commitment to recovering funds and tracing the proceeds of crime.

Updates on the Unaoil investigation

On 15 July 2019, Basil Al Jarah, Unaoil's former partner in Iraq, pleaded guilty to five offences of conspiracy to give corrupt payments. The offences related to the award of contracts to supply and install single point moorings and pipelines in southern Iraq. As part of the same investigation, Ziad Akle, Paul Bond and Stephen Whiteley have been charged with conspiracy to make corrupt payments. The trial of these three individuals is due to begin on 13 January 2020 at the Crown Court at Southwark.

It has also been reported that Unaoil believes that the SFO has ended its investigation into Unaoil chairman Ata Ahsani and his sons who are the company's chief executive and chief operating officer. The SFO has not commented on this development.

Separately, the SFO has handed over control to Scottish prosecutors of the investigation into oil company the Wood Group in relation to alleged payments made by Wood Group to Unaoil.

Reporting restrictions lifted in relation to 2016 DPA as XYZ Ltd is revealed to be Sarclad Ltd

On 16 July 2019, Michael Sorby, Adrian Leek and David Justice were acquitted of conspiracy to corrupt and conspiracy to bribe in relation to allegations of conspiring with various agents to agree bribes in respect of 27 separate overseas contracts for their company, Sarclad Ltd.

Following these acquittals, reporting restrictions were removed in respect of the DPA agreed between the SFO and Sarclad Ltd in July 2016, which had been previously reported anonymously as XYZ Ltd. Sarclad accepted charges of corruption and failure to prevent bribery in relation to the systematic use of bribes to secure contracts for the company between June 2004 and June 2012. Under the terms of the DPA, Sarclad paid a penalty of £352,000 and disgorgement of £6.2 million, with a portion of the payments being made by Sarclad's US parent company.

SFO opens investigation into De La Rue plc

In July the SFO confirmed that it had opened an investigation into the activities of the De La Rue group and its associated persons in respect of suspected corruption in South Sudan. When the country formed in 2011, De La Rue secured the contract to print South Sudan's bank notes. The company's statement to the London Stock Exchange confirmed that the SFO's investigation had been opened and that the company would cooperate with the SFO.

Richard Baldwin's conviction for money laundering revealed after reporting restrictions lifted

In one of its largest and most complex investigations (Operation Tabernula), the FCA has secured the conviction (in his absence) of Richard Baldwin for offences arising from his laundering the proceeds of crime generated by insider dealers, Martyn Dodgson and Andrew Hind. Mr Dodgson, who worked as an investment banker, supplied insider information to Mr Hind who used this to effect secret deals for their benefit. They were convicted in May 2016 and were sentenced to four-and-a-half years and three-and-a-half years respectively for conduct spanning 2006 to 2010.

It was a facet of the conspiracy between the two men that they would not receive directly the profits from the insider dealing they commissioned. Mr Baldwin, Mr Hind's partner in a West-End luxury watch business, was responsible for moving the £1.5 million proceeds of the criminal enterprise, which he did by setting up companies in Panama and via a Swiss bank which he defrauded by providing false documentation attesting to the origin of the funds.

Upon Mr Dodgson and Mr Hind's arrests in 2010, Mr Baldwin closed the relevant company accounts. In 2011, aware that there was a restraint order imposed in respect of the proceeds of the conspiracy, Mr Baldwin travelled to Geneva and withdrew cash or liquidated assets to the combined value of nearly £200,000. As a result of this conduct, and his subsequent disposal of the money withdrawn, Mr Baldwin was further charged with contempt of court, an offence to which he pleaded guilty in November 2015.

Despite Mr Baldwin absconding during the trial process and remaining on the run, he was sentenced on 3 September 2019 in his absence to five years and eight months. The sentence was five years for the money laundering offences and a further eight months for contempt of court.

In an FCA press release, Mark Steward, the FCA's Director of Enforcement, highlighted the case as an example of the FCA's determination to ensure that criminals operating within its purview are brought to justice and are deprived of the proceeds of their criminal conduct, however complex their offending. He noted that this case in particular shows that the FCA will pursue not only principal offenders but also those who facilitate the laundering of the proceeds of their crimes.

Government Policy

NAO issues its report on tackling serious and organised crime

On 28 June 2019, the NAO issued its report into tackling serious and organised crime. The report was focused on all types of serious and organised crime, from money laundering, fraud, and bribery and corruption to modern slavery, illegal firearms and drugs. It was noted that serious and organised crime is evolving at a rapid rate.

The report reviewed the government's strategy and framework for dealing with serious and organised crime which was first issued in 2013 and then revised in 2018. The report identified that the government's 2018 strategy has tried to address shortcomings in the earlier strategy but to date the strategy has not been successfully implemented. The strategy operates on the four "P" work strands:

• Prevent people from getting involved in organised crime;
• Pursue and disrupt serious and organised criminals;
• Protect individuals, organisations and communities against serious and organised crime; and
• Prepare for when serious and organised crime occurs and mitigate its impact.

However, the NAO considers that the government has prioritised the "pursue" workstream over the other three strands.

The report also identified issues with the disparate way in which funding is provided for tackling serious and organised crime, with funds coming from HM Treasury, the Home Office and various other sources to the NCA, regional organised crime units and individual police forces. This makes funding both uncertain and inefficient, with resources varying by region.

Prime Minister orders a sentencing review to consider automatic release for longer sentences, while UK criminal prosecutions are at an all-time low

Statistics released in August 2019 by the Ministry of Justice showed that the number of people prosecuted, convicted and jailed all fell in the first quarter of 2019 and the number of people prosecuted or handed penalties for crimes has fallen to a record low. This is despite an increase in the number of crimes recorded by the police in the same period.

Separately, the Prime Minister has ordered a review of sentencing legislation, to look at whether there should be reform of the current legislation which automatically requires offenders to be freed on licence at the half-way point of any determinate sentence. The focus of the review will be on sentences for the most serious crimes, particularly violent and sexual offenders. In addition the government announced funding of up to £2.5 billion to create 10,000 more places in prison and build new jails.

SFO issues guidance on corporate cooperation

On 16 August 2019 the SFO published the updated Corporate Cooperation Guidance chapter from its Operational Handbook (the Guidance). Whilst this document is explicitly intended "for guidance only" (as opposed to having statutory authority), it is expressed as being for use "in assessing the cooperation from business entities". The document is therefore essential reading for those engaged in investigations which could come to be investigated by the SFO.

The Guidance reiterates that cooperation is a public interest factor to be taken into account when the SFO determines what course of action to take against a company where there is sufficient evidence to provide a realistic prospect of conviction (for example whether to prosecute, to enter into DPA negotiations, or whether to take no further action).

Much of the content of the Guidance confirms concepts which have long been understood from the SFO's public statements on cooperation and from practitioner experience of dealing with SFO investigations. Issues such as preservation of evidence, presenting evidence to the SFO in a structured manner (not data-dumping), consulting the SFO prior to interviewing key witnesses, making witnesses available to the SFO, not protecting certain executives or blaming others, and considerations around legal professional privilege, are all already familiar features of corporate criminal investigations.

The SFO has also clarified its previous position of a company needing to self-report as soon as the company realises it has a problem, with the SFO now preferring to require approaches to it within a reasonable time of the suspicions coming to light, with relevant evidence preserved and made available to the SFO. It is clear that the SFO expects that a company should have carried out a reasonable assessment of whether it has a problem or not before bringing its concerns to the SFO's attention and requiring it to investigate them.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This newsletter 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.