UK Economic Crime Group: Enforcement Update

Executive Summary

In this edition of the UK Enforcement newsletter, we provide an update on recent economic crime matters in the UK. We consider anticipated legislative and regulatory updates, as well as recent actions from the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA), and the Financial Reporting Council (FRC).

With respect to legislative and regulatory reform and enforcement actions, we consider the following:

• An update on the evolving SFO under new Director Nick Ephgrave
• The FCA adding Metro Bank to its financial crime watchlist over online account concerns
• The first year of the Public Sector Fraud Authority (PSFA)
• Continuing uncertainty over the future of the FRC
• Recent regulatory developments within the UK sanctions regime
• The ownership and control test under UK sanctions’ legislation

As part of our social commentary, we consider a recent report from the charity Appeal on the darker subtext to the introduction of “majority verdicts” in UK criminal cases in 1967.

Update on the Evolving SFO Under New Director Nick Ephgrave

In his speech on February 13, recently appointed SFO Director, Nick Ephgrave, indicated that the SFO will be taking a bolder, more ambitious and pragmatic approach to enforcement. Throughout his speech, Ephgrave used emotive language to emphasize his “visceral reaction” to the “misdeeds of large corporations” and his determination to bring justice “securely and quickly.” This reoccurring theme of speed was at the heart of his speech, along with a drive to reset the SFO’s reputation and change the critical narrative which has surrounded the SFO in recent years.

Ephgrave made clear that he intends to focus on justice for ordinary hardworking UK people, not just “high-rolling” investors and blue chip companies. He also considers the UK itself as a victim of financial crime, with the SFO working to protect the UK’s economy and reputation.

This focus on the UK was echoed throughout Ephgrave’s speech and raised questions regarding whether the SFO will be prioritizing UK-based victims. For example, Ephgrave highlighted predominantly UK-centric success cases in his speech, such as the charges with respect to Patisserie Valerie, the prosecution of Glencore, and the Airbus deferred prosecution agreement.

While emphasizing the successes of the SFO, Ephgrave acknowledged there are also serious challenges, including the slowness of SFO investigations, “defendants with big pockets,” tracing of money moved all around the globe, and extracting data from “far-flung jurisdictions.” In particular, Ephgrave flagged the disclosure burden and how it “gobbles up around 25%” of the SFO operational budget. In this regard, Ephgrave has been advocating for greater investment in the SFO, highlighting that over the last five years the SFO generated £1.1 billion for HM Treasury, equating to a 317% return on investment.

In his speech, Ephgrave also reflected on the fact that time spent sifting through large amounts of disclosure data increases the time between investigation and prosecutions, resulting in evidence degrading, memories weakening, a reduction in willingness of individuals to cooperate and, ultimately, fewer successful prosecutions. While Ephgrave did note that the SFO is already piloting new disclosure AI to reduce these costs and speed-up data review, he is nevertheless striving for broader reform to the SFO’s practices in order to achieve timely prosecutions.

In practical terms, Ephgrave plans to overhaul the SFO’s shortcomings and repair its reputation by conducting more dawn raids and swifter action, with prosecutions under the new Economic Crime and Corporate Transparency Act and greater collaboration and resource sharing between the SFO and other agencies such as the National Crime Agency (NCA), the National Economic Crime Centre (NECC), and the police.

We are already seeing that Ephgrave’s rhetoric may have some substance behind it, with the SFO having carried out three dawn raids on February 21, 2024 alone. The SFO’s joint head of fraud, bribery, and corruption, Sara Chouraqui, explained that Ephgrave’s determination to rapidly pursue more cases has already led the agency to begin recruiting over 100-150 new investigators and prosecutors, as well as analysts, accountants, and other staff, which would increase its full-time staff by a third.

However, Ephgrave’s ambitions do not end there. Ephgrave is pushing for the UK to follow in the footsteps of the U.S., proposing key legislative developments, such as the incentivization of whistle blowing in order to facilitate prosecutions. Likewise, Ephgrave has suggested cultural changes to enforcement practices, including greater use of the Serious Organized Crime and Police Act, theorizing that if a reasonable reduction in a defendant’s sentence is offered in exchange for evidence, there will be greater witness cooperation, more key evidence obtained, and, consequently, faster prosecutions.

Whether Ephgrave will be successful in his attempt to usher in a new era for the SFO is yet to be seen, but without a doubt, Ephgrave’s tenure marks a strong desire to depart from the status quo of predecessor Lisa Osofsky. That said, while Ephgrave’s goals may be noble, unless there is significant legislative development, particularly in relation to prosecuting senior executives at large institutions, it seems unlikely that there will be any game-changing developments in the SFO’s ability to battle serious fraud and bribery in the short term, especially given the increasingly complex scenarios in which these offences occur.

Metro Bank Added to the FCA Watchlist

Metro Bank PLC has been added to the FCA’s financial crime watchlist (Watchlist) of regulated financial institutions, which pose the greatest risk to the FCA’s statutory objective of ensuring that the UK financial markets function well and with integrity in the interests of consumers.

The FCA’s Watchlist is not publicly available; Metro Bank’s inclusion was reported by the bank itself as part of a prospectus for a refinancing transaction in November 2023. Metro Bank explained that its inclusion on the Watchlist is in relation to financial crime compliance, with the FCA reviewing the ongoing management of financial crime risk at the bank, as well as specific concerns about the effectiveness of financial crime controls in relation to online accounts. The bank noted in the disclosure that some aspects of its anti-money laundering, anti-bribery and corruption, and sanctions policies did not fully eliminate the risks posed by third parties.

Being on the Watchlist will mean enhanced supervision from the FCA and reporting requirements, with the bank being required to address any specific concerns from the FCA. We can expect that this will mean review and strengthening of financial crime controls within Metro Bank.

This also serves as a timely reminder to other financial institutions of the necessity of keeping policies and procedures, as well as their implementation, under review and ensuring that evolving risks are identified, with systems and controls being enhanced as necessary. The FCA’s continued focus on policies and procedures intended to combat financial crime is unsurprising in light of the cost of such crime to consumers and to the integrity of the financial sector more widely.

The Results of the PSFA’s First Year in Operation

The Public Sector Fraud Authority has been in operation for over a year and a half, having been formed in August 2022 to manage and reduce fraud against the public sector, primarily against the context of the pandemic. The PSFA Annual Report for 2022-2023 (the Report) recorded that the PSFA prevented and recovered £311 million of taxpayer funds from fraud, significantly exceeding its target of £180 million, and can therefore claim to have successfully delivered on its objective. Notwithstanding its achievements in its first year, fraud remains an epidemic in the UK, and the PSFA will surely be aiming to continue with this momentum, in the hopes of achieving long-lasting and effective results.

The PSFA’s savings to the taxpayer, derived in part from its Covid-19 Loan Schemes Fraud Analytics Programme, along with the detection, prevention, and recovery of fraud within the Bounce Back Loan Scheme, alone saved taxpayers over £99 million. The Report highlighted that the “dissolution objections” process, which allowed the PSFA to prevent companies with outstanding Covid-19 debt from being removed or struck off the Companies House Register, saved taxpayers £40.5 million. The PSFA also attributed the taxpayer savings to the National Fraud Initiative, a data-based project which carries out data-matching exercises in collaboration with over 1,100 public bodies to identify potential fraud.

With a core component of the agency’s mission being the modernization of the public sector’s fraud and error response through the use of cutting-edge technology and data, earlier this year the PSFA formed a £4 million partnership with Quantexa Ltd, a British technology unicorn, to deliver the Single Network Analytics Platform (SNAP). SNAP will aim to reduce fraud involving UK-registered companies by consolidating and reviewing public sector data for suspicious activity. The PSFA announced that Companies House is SNAP’s first user, although the PSFA’s 2023-2024 Delivery Plan highlights that this year it intends to “create and deploy” SNAP, as well as “onboard three public bodies and create five test models.”

The Delivery Plan sets out 27 objectives for the coming year, many of which point toward data-led initiatives for the purposes of gathering and sharing intelligence between public bodies to counter fraud. Interestingly, the 2023-2024 Delivery Plan commits only to a slightly increased taxpayer savings target of £185 million, despite the PSFA’s substantially exceeded target in 2022-2023 and its own estimate that at least £33.2 billion of taxpayer funds are subject to fraud and error each year. Given the PSFA’s intended deployment of enhanced technological tools to modernize its approach to tackling fraud, it perhaps requires the time to develop its capabilities and ensure its measures are adequately sophisticated and responsive to the ever-evolving risks of fraud.

Continuing Uncertainty Over the Future of the FRC

We have written previously about potential delays with respect to the Financial Reporting Council’s proposed transition to becoming the Auditing, Reporting and Governance Authority (ARGA), and these delays have indeed made their way into 2024. As it stands, the timing of the proposed transition of the auditing body is entirely uncertain, as it relies upon the passing of new legislation that is yet to be announced. However, despite these delays, the FRC has continued to enhance and build upon its strategy to set high standards of corporate governance, reporting, and auditing in the UK, and to hold to account those responsible for delivering them.

In December 2023, the FRC announced areas of supervisory focus for 2024-2025. The FRC details priority sectors for selection of company accounts and audits, which include construction, food production, gas, metals, and mining. With respect to these priority areas, the FRC stated its intention to gear its reviews and quality inspections towards, among other areas, climate and environmental risks. It will be interesting to see the outcome of this focus, particularly regarding how and whether the FRC takes enforcement action against climate and environmental failings, and whether it works alongside other regulatory bodies to do so.

In January 2024, the FRC published its Corporate Governance Code 2024 on which it originally consulted in May 2023. The response to the consultation was varied, with many concerned that initial proposals for a more robust governance framework would be overly burdensome for companies, such as widely drafted proposals with respect to a company’s internal controls. In November 2023, following various significant enforcement actions that we discussed in our previous newsletter, the UK’s Secretary of State for Business and Trade published a new remit letter for the FRC setting out its core responsibility to enhance public trust and confidence in the quality of auditing, corporate reporting, and governance while supporting the UK’s economic growth and international competitiveness.

The FRC embraced these views and has outlined targeted objectives in its code, with principles designed (among others) to promote greater individual responsibility for board members. While the FRC currently has no power to enforce against individuals, there is a clear shift in its approach to ensuring individuals continue to remain accountable, and this topic is due to be considered as part of ongoing discussions related to the direction in which the FRC continues to evolve and transition into ARGA.

Finally, the FRC has continued with enforcement actions, including the most recent with respect to the statutory audit of M&C Saatchi plc, for which KPMG was fined £1.5 million, along with a smaller fine for one of its audit partners. As has been a theme with recent fines, this investigation found that there was a failure to audit with sufficient professional skepticism.

It is clear that the FRC is continuing to focus on corporate governance, reporting, and auditing in the UK. Regardless of the uncertainty of its transition into ARGA, it seems that the FRC is striving forward.

Regulatory Developments Relating to the UK Sanctions Regime

In recent months, the UK has continued to push forward in collaboration with its allies, including the U.S. and EU, with the introduction of further sanctions by way of amendments to the Russia (Sanctions) (EU Exit) Regulations 2019. With no end to hostilities in sight and the recent two-year anniversary of the Ukraine invasion, it can only be expected that the evolution of the UK sanctions regime will continue in order to target other sectors and industries that are key to the Russian war effort.

We have seen further trade and financial sanctions, with amendments to the list of designated persons, as well as bans on the import of diamonds and certain metals and strengthening of other measures that were already in place. Further legislative amendments have also imposed additional reporting requirements on designated persons in the UK or who are UK nationals, requiring them to disclose details of their assets.

In order to enforce trade sanctions more effectively, the government has created the Office of Trade Sanctions Implementation (OTSI). This new regulator is already working alongside OFSI, conducting investigations into trade sanctions violations and issuing civil fines, with more serious, criminal matters still being referred to HM Revenue and Customs for prosecution. It is hoped that with a regulator purely focused on trade sanctions, OTSI can mirror the success of OFSI in enforcing the sanctions, as well as engaging with industry and providing guidance on trade sanctions.

We have also seen increased cooperation between regulators within the UK. The FCA and OFSI have published a revised Memorandum of Understanding, setting out their arrangements for cooperation and exchange of information in order to ensure effective enforcement, particularly with respect to financial sanctions that impact FCA-regulated financial institutions.

In December 2023, the NCA and NECC published a Red Alert on exporting high risk goods, in conjunction with the Joint Money Laundering Intelligence Taskforce and OFSI. The Red Alert highlights to UK businesses the common techniques that are being used to evade or circumvent sanctions, and details red flags that everyone should be vigilant for. This serves as a reminder of the broader elements of the sanctions regulations, covering circumvention and facilitation, which can be more difficult to detect than straightforward breaches of the prohibitions. This is an area of interest for enforcement and something that all companies need to be cognizant of preventing.

The Ownership and Control Test Under UK Sanctions’ Legislation

As we reported in our article in October 2023, in Mints and others v. PJSC National Bank Trust and another [2023] EWCA Civ. 1132, the Court of Appeal opined that Vladimir Putin, as President of Russia and the “apex of a command economy,” could be deemed to control everything in Russia. Adoption of this broad definition of ownership and control would significantly expand the scope of the UK’s Russia sanctions, making potentially every company in Russia a designated person under the UK regime as a result of Mr. Putin’s personal designation in the UK.
Since that time, we have had a binding court judgment and guidance from OFSI, which have negated this broad reading of the legislation and returned us to a narrower definition. Mr. Mints and his two sons have also now been granted leave to appeal the decision to the Supreme Court.

First, the judgment in Litasco SA v. Der Mond Oil and another [2023] EWHC 2866 (Comm) considered the judicial commentary in Mints. An issue in this case related to whether Der Mond Oil was prohibited under the sanctions regulations from paying Litasco. Litasco (a Swiss company) is not on the designated persons list, and neither is its parent company, Lukoil PJSC (a Russian oil company). However, the founder and former CEO of Lukoil, Mr. Alekperov, is a designated person, although he resigned from Lukoil PJSC shortly after his designation. Der Mond Oil also sought to rely upon the judicial commentary in Mints and identified Mr. Putin’s designation as a further reason for Litasco to be designated by virtue of being owned or controlled by a designated person.

Mr. Justice Foxton found that Litasco is not a designated person by virtue of the ownership or control asserted by either Mr. Alekperov or Mr. Putin. With respect to Mr. Alexperov, the fact that he had resigned from the board shortly after being designated and only held an 8.5% shareholding in Lukoil meant that he did not own or control the business within the sanctions regulations. With respect to Mr. Putin, Mr. Justice Foxton was able to distinguish the judicial commentary in Mints, considering the particular circumstances of each relevant entity. Because Lukoil is not a state-owned body and there was no evidence to suggest that it functioned as such, the judge was able to conclude that there was no arguable case that Mr. Putin controlled Litasco.

This is the first binding decision of a UK court on the issue of ownership and control under the UK sanctions regulations (as the points raised in Mints were merely judicial commentary). The decision emphasizes that the question of ownership and control should be considered by way of a fact-specific approach.

Several days after the issuance of this judgment, OFSI and the Foreign, Commonwealth & Development Office (FCDO) issued joint guidance looking at the same issue of ownership and control under the sanctions legislation. OFSI and the FCDO similarly emphasized that ownership and control needed a fact-specific consideration. They also emphasized that there needed to be further evidence of control, over and above a company merely being incorporated in a jurisdiction where a designated person is a public official who has “a leading role in economic policy or decision making.”

While the judgment in Litasco and the guidance from OFSI and the FCDO provide some comfort to companies seeking to identify whether counterparties are designated persons, this has not resolved many of the points raised in Mints. We will wait to see whether the government decides to amend the sanctions legislation itself to provide further clarity on the ownership and control test.

Social Commentary

The Darker Subtext to the Introduction of “Majority Verdicts” in UK Criminal Cases in 1967

In January 2024, the charity Appeal published a report into the motivations behind the introduction of majority jury verdicts in the UK by the Criminal Justice Act 1967. The abolishment of the requirement for a unanimous jury verdict in criminal cases was a radical departure from a long-standing tenet of the justice system, and the report is the first to assess the reasons for this shift. The report concluded that the shift, in part, was motivated by a desire to dilute the influence of minority ethnic people and laboring classes serving on a jury.

At the time of its introduction, it was widely perceived that the “majority verdict” direction would help to eliminate potential individual jury bias and subsequent “nobbling” (corruption). However, a review of governmental files and other archival materials contextualized the decision against the socio-political climate of the time, revealing public anxieties about immigration and white disenfranchisement. As such, there was a widely held perception that an enlarged pool of eligible jurors would lead to a decline in the “caliber” of jurors.

Today, approximately 15% of all convictions are the result of a majority verdict, which means that at least one, and up to two, individuals on the jury maintained reasonable doubt as to the defendant’s guilt. This differs from the U.S., where majority verdicts were only permitted in two states (Louisiana and Oregon) until the U.S. Supreme Court decision of Ramas v. Louisiana (2020) which outlawed majority verdicts for serious crimes amid evidence of their racist origins. Although the UK introduced the safeguard of minimum deliberation times against swift majority verdicts being reached, no research has been carried out to explore whether a hung jury is more likely to be racially mixed, and whether racially diverse juries have in fact made reaching majority verdicts more difficult.

The study is hopeful that the questions it has raised will instigate better data gathering and analysis with respect to majority verdicts in England and Wales. However, it is clear that there is currently a deep lack of understanding as to the reasons behind the abolishment of a law that was deeply entrenched in the justice system for centuries, and there remains much room for further research, critical analysis, and scrutiny of the system.

© Arnold & Porter Kaye Scholer LLP 2024 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.