Welcome to the latest edition of our round-up of news making the
headlines in the world of financial crime and compliance. Our aim
is to give you an easily digestible, bite-sized overview of issues
that may affect your business.
1. Cum-Ex update
Recent legal developments have brought the CumEx trading scandal
into sharp focus in the UK.
In Financial Crime Time Q.1 2021, we reported on
the Danish State’s progress in charging those they allege to
have been involved in causing a £1.5 billion loss to SKAT,
the Danish tax authority, by exploiting certain ‘loopholes’
in the Danish withholding tax system. Under Danish law, a company
that declares dividends is required to withhold a 27% dividend tax
that it must then pay to SKAT. Non-Danish shareholders are exempt
from this rule to avoid double taxation. Exempt shareholders must
apply for repayment of tax already paid. SKAT allege that complex
circular share trading schemes were entered into in order to
conceal the true owner of the shares and enable multiple parties to
claim withholding tax refund for a single deduction of withholding
tax on the issue of dividends.
SKAT allege that Mr Sanjay Shah, and his company Solo Capital
Partners, masterminded this “fraudulent” scheme, while Mr
Shah and his companies say that they simply exploited a legal
loophole in the system. Mr Shah has been charged in Germany with 55
counts of money-laundering of profits from alleged tax fraud in
Denmark.
In what is considered a novel approach by some, SKAT brought a
civil claim in the English High Court for £1.5 billion which
it alleged derived from Cum-Ex trading between August 2012 and July
2015, in particular by companies related to Mr Shah.
In dismissing SKAT’s claim, the High Court said that the
claim was not for a civil debt owed by the various defendant
companies, but an attempt to enforce the tax law of a foreign state
and was therefore prevented by the principles of the rule of law
set out in Dicey Rule 3.
SKAT has been given permission to appeal to the Court of
Appeal.
On 1 June 2021, a former executive at MM Warburg was sentenced
by the Cologne regional courts to five and half years in prison on
five counts of tax evasion and ordered to repay €100,000 of
the proceeds of crime related to his involvement Cum-Ex trading,
becoming the first individual to be jailed in relation to the
Cum-ex scandal. Several other German banks linked to Cum-Ex trading
have been raided in recent months by the German authorities.
2. UK’s new anti-corruption sanctions regime
As part of its post-Brexit sanctions policy, the UK has
implemented a new Global Anti-Corruption Sanctions Regime. Aimed at
enhancing the powers of the UK to address individuals and companies
alleged to be involved in corruption, the regime came into force on
26 April 2021, and expands on the Human Rights Sanctions Regime
introduced in July 2020.
These sanctions have the usual suite of powers, including travel
bans and asset freezes. They target individuals suspected of being
linked to serious corruption, including bribery or misappropriation
of property by public officials, enabling national security threats
or terrorism, and corruption that deprives citizens of “vital
public resources”, amongst other things. Whether corruption is
‘serious’ is determined by matters such as the value of
bribes or assets involved, whether the corrupt conduct is
systematic, and the duration of the activity.
Twenty-two individuals have so far been designated, including 14
Russian nationals, accused of misappropriating $230 million of
Russian state assets via a fraudulent tax scheme, three members of
a South African family and an associate, a Sudanese business person
and three South American public officials.
This regime, as with other sanctions imposed by the UK under the
Sanctions and Anti-Money Laundering Act 2018, contains powers under
which designated persons may challenge the sanctions imposed and
they may be varied or revoked, if appropriate. It comes after the
Office for Financial Sanctions Implementation stated that it
intends to embrace its role as a regulator, announcing in March
2021 that it had issued its first penalty for breach of sanctions
to Standard Chartered Bank in relation to a loan to a Russian
lender designated under the UK’s post-Brexit retained EU
sanctions.
3. The Police, Crime, Sentencing and Courts Bill 2021
Arising out of a perception of the challenges posed by the
events of 2020, a number of unrelated proposed reforms have been
included in the Police, Crime, Sentencing and Courts Bill. Many of
the proposals contained in the Bill have been criticised and have
led to petitions from a coalition of criminal justice organisations
and a number of public protests.
The Bill proposes wide-ranging new police powers, including the
ability to impose “conditions” on any protest which is
deemed to be disruptive to the local community and a sentence of up
to 10 years in prison for damaging memorials, such as
statues.
The Bill also proposes to extend periods of bail. The Law
Society has voiced concerns that “people accused of a crime
could be kept on bail by the police with restrictions on their
liberties for long periods while investigations proceed at a
glacial pace”. Further, Equal, an independent advisory
group which seeks to address racial bias in the criminal justice
system, have said that the Bill may have serious implications for
ethnic minority communities
Finally, as the Coronavirus Act 2020 is due to expire in March
2022, and with it the ability to conduct certain criminal court
hearings remotely, the Bill proposes to introduce the power to
conduct all hearings, including jury trials, remotely. This
proposal follows the evaluation of virtual trials conducted by
legal thinktank Justice. However, there has yet to be any extensive
research on the impact of remote jury trials on, for example, the
make-up of a jury and whether this proposal would lead to certain
potential jurors being disproportionately excluded, resulting in
racially imbalanced juries.
The Bill is currently being considered by the House of Commons
following the Committee stage and is scheduled to be debated
further on 5 July 2021.
4. Coronavirus Government Support Schemes – a “magnet for
fraudsters”?
The government’s various support schemes during the global
coronavirus pandemic, such as the Coronavirus Job Retention Scheme
(CJRS) and the Bounce Back Loan Scheme
(BBLS), have become, according HMRC’s Chief
Executive Jim Harra, a “magnet for fraudsters”. It is
perhaps not surprising therefore that the government announced in
March 2021 that it would invest £100m in a Taxpayer
Protection Taskforce to combat fraud linked to Covid-19 support
measures, with a view to recouping around £1bn.
The City of London Police have investigated 71 possible frauds
connected to the BBLS since January 2021, with the National Audit
Office estimating that the scheme could cost the taxpayer as much
as £26bn.
On 7 May 2021, two people were arrested in a suspected
£3.4m CJRS fraud. They were apprehended on suspicion of
cheating the public revenue, VAT evasion and money
laundering.
With over £6.1bn claimed under the CJRS to date and the
scheme targeted by fraudsters, the following four protections
have been introduced to assist in preventing abuse of the
scheme:
- employees have to be on a payroll by a particular date, to
prevent the use of fake employees; - claims are only accepted from employers authenticated by
HMRC; - all claims are assessed by a specialist team within a 72-hour
window, which has resulted in HMRC denying over 30,000 claims with
a value of over £300m to the end of March 2021; and - proportionate and reasonable interventions are made by HMRC
after the money has been paid.
HMRC has issued a number of ‘nudge’ letters to users of
the various schemes who it has assessed are a fraud or error risk,
in order to prompt those users to check that their use of the
scheme has been correct.
5. Increase in online fraud and cyber attacks
In May, the Telegraph reported that online fraud has risen
in the UK by up to 70% during the COVID-19 pandemic. Action Fraud,
the UK’s national reporting centre for fraud, report that more
than £34.5m has been stolen since 1 March 2020. Cyber-attacks
have also seen a significant rise, with the country’s pandemic
response infrastructure, such as the NHS and vaccine producers,
being frequent targets. The National Cyber Security Centre
declared that it has been tackling about 30 “significant
attacks” per month.
The UK’s ability to counter the increasing and ever-evolving
threat of online fraud and cyber-crime has recently been bolstered
by the government’s recent publication, on 12 May 2021, of the
“Draft Online Safety Bill”, which is intended to provide
a new legal framework for identifying and removing illegal and
harmful content from the internet. The new Bill will include
measures to tackle user-generated fraud and will force online
companies take responsibility for tackling fraudulent
user-generated content for the first time.
Further, on 11 May 2021, the government called for information
on the Computer Misuse Act 1990 (CMA). The CMA is
the primary UK legislation relating to cyber-dependent crime. The
purpose of the call is to identify whether there is any online
activity causing harm in an area covered by the CMA that is not
adequately covered by existing offences, including whether law
enforcement agencies have the necessary powers to investigate and
take action against those attacking computer systems, and whether
the legislation remains fit for purpose following the technological
advances since the CMA was introduced.
6. More tools in investigators’ armoury – Account Freezing
Orders and External Request Orders
Account Freezing Orders (AFOs) and Unexplained
Wealth Orders (UWOs), introduced by the Criminal
Finances Act 2017 in a bid to improve the UK’s ability to
tackle corruption, money laundering, tax evasion and terrorist
financing, were designed to allow investigators the time to
properly examine the origin and use of funds suspected of
representing the proceeds of crime, whilst also preventing the
suspected perpetrators from using the funds.
External Request Orders (EROs) allow other
countries to apply for financial crime-linked court orders in the
UK. With similar powers to that of an AFO, EROs fulfil the
Financial Action Task Force’s long proposed harmonisation of
domestic and international measures for freezing and forfeiting
assets suspected of representing the proceeds of crime.
On 12 November 2019, Magistrates’ Court Rules were
introduced to provide a similar level of international co-operation
in respect of the freezing and forfeiting the proceeds of crime as
is available in domestic cases.
On the domestic front, the figures continue to show that AFOs
are popular with UK regulators. The City of London Police having
had a 3,500% increase in the use of these powers in 2020 and HMRC
having frozen and forfeited over £29m in the first 10 months
of 2020/21. The SFO recently used an AFO to recover
£247,000, some 13 years after the individual was convicted of
conspiracy to defraud, demonstrating that the UK authorities will
use new powers to track down the proceeds of historic
crimes.
Whilst the use of EROs in a foreign context are yet to be tested
in the courts, the updating of the Magistrates’ Court Rules has
streamlined the procedure for foreign governments to apply to the
UK courts to freeze and subsequently forfeit criminal
assets.
7. European Public Prosecutor’s Office appoints its first
anti-fraud prosecutor
Laura Codruta Kovesi has been appointed as the EU’s first
anti-fraud prosecutor. The European Public Prosecutor’s Office
(EPPO), which is tasked with investigating and
prosecuting fraud and financial crimes involving EU financial
interests, launched on 1 June 2021 in response to criticism of the
bloc’s ineffective handling of fraud. Previously, the European
Anti-Fraud Office (OLAF) was the only EU
anti-fraud body, and it was considered by many to be ineffective in
addressing fraud due to its lack of power to prosecute cases.
Whereas OLAF is only able to make recommendations to member states,
EPPO prosecutors will be able to bring cases before national
courts. The EPPO is based in Luxembourg, and Ms Kovesi will be
supported by a team of Prosecutors comprising one European
Prosecutor for each member state, and further European Delegated
Prosecutors (EDPs) who operate within member
states.
The EPPO is not without its own teething problems, the first
being its budget which, at €44.9 million, is relatively low
compared with those available within individual member states. The
second issue for the EPPO is that several key countries, including
Sweden, Denmark and Ireland, have either opted out or decided not
to join the EPPO and Finland and Slovenia have failed to appoint
prosecutors to the organisation. However, other countries have
fully committed to the EPPO, with Italy appointing 22
EDPs.
8. NCA reports on the rise of cryptocurrency crime
The National Crime Agency (NCA) recently
published its annual National Strategic Assessment of Serious
Organised Crime report highlighting the increased bribery and
corruption risks that UK companies may face as a result of Brexit
and the COVID-19 pandemic. The report contains a list of factors
which may contribute to increased risks, including the turbulence
of the UK market driving businesses to seek deals in new
jurisdictions, and the difficulty monitoring home-working staff,
who may be more likely to engage in corruption.
The rise in popularity of cryptocurrency during the pandemic is
also of concern to the NCA. The report suggests that while some
criminals have been struggling to move their money using more
traditional methods under lockdown restrictions, the use of
cryptocurrency as a means to launder money and fund organised crime
has accelerated. The NCA report notes that revenue on the dark web
was up 14% in 2020, compared to 2019. Wider use of cryptoasset
technology by legitimate businesses, including financial services
companies, may also result in a rise in criminal exploitation where
appropriate anti-money laundering measures are not in
place.
Cryptoasset businesses, such as Bitcoin, operating in the UK
have been required to comply with money laundering regulations
since January 2020, and must be registered with the FCA before
conducting business in the UK. On 16 December 2020, the FCA
announced that any cryptoasset business failing to register could
operate under a temporary licencing regime for 6 months so that it
could deal with a backlog of applications. This has been extended
to 31 March 2022, because the FCA is concerned that many businesses
cannot meet the required standards under the UK’s money
laundering regulations.
While the fraud and corruption risks posed by the pandemic may
be temporary, the risk of abuse of cryptocurrency is perhaps more
long term. The US counterpart of the FCA, the Securities and
Exchange Commission, recognising this, has taken a strong stance in
this area by proactively challenging the behaviours of unregistered
crypto-businesses. The National Crime Agency considers that the
UK’s current measures should be adequate to mitigate risk
although to date only 5 cryptoasset companies have successfully
registered with the FCA. Unregistered businesses pose a higher
risk, which the FCA has clearly recognised. In August 2020, it
proposed that cryptocurrency exchanges should disclose the
high-risk jurisdictions in which they operate and politically
exposed persons they work with, although no such measures have been
implemented.
9. Economic crime plan update
On 4 May 2021, the UK government published an update on its
progress on the Economic Crime Plan, which seeks to tackle fraud
and money laundering with a view to making the UK a safe place for
global business. The programme, which launched in 2019, sets out
seven priority areas to combat economic crime, including better
data sharing between public and private sectors, and improving law
enforcement and the justice system in relation to financial
crime.
The update, released in May, looks at how the
government has responded to the additional challenges it has had to
face in its fight against crime during the pandemic, and discusses
how the government has improved its understanding of the threat
posed by economic crime. This includes actions taken by the
government to close perceived loopholes that might facilitate money
laundering by updating AML requirements, and the provision of an
additional £63 million of funding for the Home Office to
tackle fraud. The update also includes a forward delivery plan
which looks at potential measures to combat cash-based money
laundering.
10. Corporate crime liability extension
The Law Commission is considering the law surrounding corporate
criminal liability with a view to improving how the law punishes
crimes committed by corporations, their directors, and senior
management. The Commission is, amongst other things, consulting
with the public on how current difficulties relating to the
establishment of corporate mens rea might be
overcome.
Under the current system, if an offence requires proof of a
mental element only, the acts of a senior person who represents the
company’s “controlling mind or will” can be
attributed to the company itself. There is concern that this narrow
definition is incapable of covering a sufficient number of
individuals in large companies with complex decision-making
structures. This can make it difficult to prosecute large companies
suspected of criminal wrongdoing, leading to an erosion of public
trust in the criminal law.
The Law Commission has produced a paper which poses a number of
questions, including whether an extension of corporate criminal
liability would act as a deterrent to companies, and what the
appropriate penalties for a non-natural person might be. Views are
being sought from the public through a number of consultation
events. You can also respond to the discussion paper using this form. The deadline for responding is 31 August
2021.
The Director of the SFO, Lisa Osofsky, suggested during the Law
Commission’s launch event for the consultation on 9 June 2021,
that failure to prevent style offences, that make companies liable
for failing to stop the defalcation of their employees or agents
unless the company can show they had adequate measures in place to
prevent such defalcations, could be extended to cover corporate
criminal offences, such as fraud, which currently require proof of
mens rea. Ms Osofsky has previously mooted the
possibility of creating a failure to prevent economic crime offence
in order to close the lacuna that she considers exists in relation
to holding corporates accountable for fraud and economic crime more
generally.
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