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2017 – the year in Business Crime

Thu, 12/21/2017 - 12:42

2017 was, once again, a very busy year in the business crime world. It was a year when Deferred Prosecution Agreements (DPAs) came of age, when the boundaries of legal professional privilege narrowed, when the scope of failure to prevent offences was expanded to tax offences and threatened to become even wider, when one of the most famous cases in criminal law was discarded by the Supreme Court and when the government left it to the very last minute to enact the Fourth Directive on Money Laundering. Many of these developments will have considerable impact in 2018.

The SFO and DPAs

Perhaps the most significant development came early, when on 17 January 2017, the Serious Fraud Office (SFO) secured a DPA with Rolls-Royce, the British aero-engineering company. The agreement resulted in a penalty of approximately £500 million and a payment in respect of the SFO’s costs. Although the third DPA, it remains by far the most significant, covering widespread corruption over a number of years, and brought what was colloquially known as “US style fines” to the UK. For more information see Legal update, Third deferred prosecution agreement approved between SFO and Rolls-Royce (Crown Court).

The SFO has had a  mixed year. Despite the success of Rolls Royce and the subsequent Tesco DPA, and the generally positive comments made towards the SFO’s performance under its current director, it found its abolition looking inevitable in April 2017. The Conservative Party, at that point holding a commanding poll lead over the opposition, published its 2017 Manifesto, entitled “Forward together: Our plan for a stronger Britain and a prosperous future”. The manifesto includes a commitment to “strengthen Britain’s response to white collar crime by incorporating the Serious Fraud Office into the National Crime Agency, improving intelligence sharing and bolstering the investigation of serious fraud, money laundering and financial crime”. (See Legal update, Plans to incorporate the Serious Fraud Office into the National Crime Agency announced in Conservative Manifesto.)

In May 2017, the general election resulted in a hung parliament, and eventually a Conservative government propped up by the confidence and supply arrangement with the Democratic Unionist Party. The loss of a majority, no doubt compounded by a number of backbenchers speaking about the SFO favourably, led to the manifesto commitment not appearing in the Queen’s speech.

Having seemingly found itself safe, the SFO had a mixed second half of 2017.  As part of the criminal investigation into the Eurasian Natural Resources Corporation (ENRC), in a High Court ruling, Andrew J ruled against ENRC’s assertion of privilege against certain over documents prepared as part of an internal investigation into alleged misconduct. For more information, see Practice note, Legal professional privilege in internal investigations. Although seen as a victory for the SFO, there was much criticism of the decision, which seemingly threatened the ability of legal representatives to provide advice at relevant stages of an internal investigation. Permission to appeal this case has been granted, and the Law Society has sought to intervene. The appeal is likely to be one of the most significant business crime cases in 2018.

Towards the end of the year, the SFO received considerable judicial criticism for the choice of an expert witness in a LIBOR case who “lacked expertise” to give evidence in the Libor trials. At a hearing on 24 November 2017, Lord Justice Gross informed the SFO:

It’s not a matter to be downplayed when the Crown in a major prosecution calls a witness who is wholly out of his depth. We take a very serious view of what in the judgment we will describe as a debacle, whatever the outcome. We want to know how did it come about that he was instructed when he lacked expertise? We are very concerned as to how he can have been instructed, the due diligence, and how it came to light.

The expert was a key witness, who gave evidence in the Libor trials of Barclays’ traders and of the first trader to be jailed for conspiracy to defraud through Libor manipulation in 2015. It was disclosed in March that the expert had sent text messages to friends during a Libor re-trial asking for help.

The court reserved judgement to a future date. The judgement could be immensely significant for the SFO. The Libor investigations were some of the most resource intensive and expensive ever undertaken by the SFO, and the result deemed proof that the organisation was equipped to tackle serious fraud effectively. They also received blockbuster funding , where the SFO has traditionally sought and been given the resources for tackling such cases on a “cap in hand” basis.  If these trials ultimately fail the SFO may see a different financing structure put in place.

In December 2017, it seemed the SFO had been finally saved. In the Anti-corruption strategy (see Legal update, HM Government publishes UK Anti-Corruption Strategy 2017-22) the Home Secretary simply committed to the National Crime Agency (NCA) being given the power to “direct” the SFO to investigate particular cases (a power the NCA has, in reality, possessed since 2013). However, that the power was a prominent feature in the review creates the possibility of the SFO’s future caseload being largely directed by the NCA.

Finally, the search for the next Director commenced with the publication of the job advert in December 2017. The publication was very late; traditionally, the successor has been named prior to Christmas. With the interview stage listed as mid-March, and David Green QC set to depart in April, it is most likely that a senior lawyer within government will become the next Director.

Money laundering:

The Treasury unveiled plans to create a new watchdog that will tackle potential weaknesses in the anti-money laundering supervisory system. The new Office for Professional Body Anti-Money Laundering Supervision (OPBAS) will seek to improve the overall standards of supervision and ensure supervisors and law enforcement work together more effectively. The new office will come into operation on 18 January 2018. For more information see Legal update, The Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017.

The news that HM Government is to create such an office is not surprising. Sectors at risk of being used to facilitate money laundering and terrorist financing are supervised by 25 organisations, 22 of which are accountancy and legal services providers’ professional bodies and set down in schedule 3 of the Money laundering Regulations 2007. The complex and unified landscape was therefore ripe for reform and simplification.

The Treasury concedes that professional body AML supervisors bring considerable benefits to the regime, as they are closest to the innovations and emerging risks within their sector. However, having several organisations supervising the same sectors and issuing guidance will inevitably lead to an inconsistent approach, and there are vast differences between the standards and resources of the relevant regulators, the greatest contrast perhaps being between the Financial Conduct Authority and the Faculty Office of the Archbishop of Canterbury.

OPBAS will be tasked with enforcing the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The 2017 regulations were finally published in September 2017, on Friday afternoon. They came into force the following Monday, without much of the expected guidance. There is much guidance still to be finalised.

The former Money Laundering Regulations, which came into force in 2007, contained a single criminal offence that was rarely used. The 2017 regulations contain both criminal and civil enforcement powers. It will be interesting to see how OPBAS approaches enforcement. For more information see Practice notes, Money Laundering Regulations 2017: criminal offences and Money Laundering Regulations 2017: civil penalties.

Finally, the Criminal Finances Act 2017 brought in some amendments to the Proceeds of Crime Act 2002, most notably the potential extension of the moratorium period beyond the current 31 day limit. This will come into force in January 2018. For more information see Legal update, The Proceeds of Crime Act 2002 (Investigations in different parts of the United Kingdom) (Amendment) Order 2017 published. 

Ongoing disclosure problems:

July 2017 saw the publication of two reports: a joint report from HM Crown Prosecution Service Inspectorate and HM Inspector of Constabulary, and The Mouncher Investigation Report by Richard Horwell QC, both highly critical of the way the police and the CPS handle disclosure, and calling for significant change.

Many criminal practitioners no doubt felt a strong sense of déjà vu when reading another report detailing the various failings of the disclosure process. In 2013, the DPP published a report by HMCPSI into serious failings in the disclosure process that led to a miscarriage of justice in R v Mouncher. A decade earlier, a number of prosecutions brought by HM Customs & Excise were overturned when customs officers deliberately withheld information that a critical prosecution witness was a registered informant in the infamous LCB prosecutions.  A common theme in the failings seems to be some police officers and prosecutors treating the disclosure process as some form of side issue, rather than a vital part of the criminal justice system.

The BCI blogpost, Disclosure – can we avoid another critical report in a few years’ time, highlighted past problems, in particular the difficulties of disclosure failing due to resourcing issues. Sadly, in a widely reported case at the end of the year, there were few signs of any lessons having been learned.  A rape trial at Croydon Crown Court was halted after it emerged that police had only disclosed phone messages between the complainant and her friends that threw the case into doubt on the first day of trial. The prosecuting barrister described the situation as “the most appalling failure of disclosure”. The trial judge called for a review of disclosure of evidence by the Metropolitan police, as well as an inquiry at the Crown Prosecution Service (CPS). The Met later confirmed it had launched an urgent assessment of what had happened. The Prosecution barrister, Jerry Hayes commented:

The CPS are under terrible pressure, as are the police. Both work hard but are badly under-resourced. Crown court trials only work because of the co-operation and goodwill of advocates and the bench – but time pressures are making this increasingly difficult. Because of the swingeing cuts that the Treasury continuously imposes, the system is not just creaking, it is about to croak.

This failure is deeply concerning for so many reasons, most significantly the risk of an innocent person being convicted and imprisoned. The subsequent revelations that a second trial had suffered a similar fate led to a Metropolitan Police review of all ongoing rape cases. Such failures in disclosure will not come as any great surprise to defence practitioners. This story is likely to feature heavily in 2018.

Expanding the failure to prevent offence

The criminal offence of failure to prevent the facilitation of tax evasion came into force on 30 September 2017. Under the Criminal Finances Act 2017 (CFA 2017) there is no change to the underlying offences of tax evasion, but two new corporate offences are introduced: failure to prevent facilitation of domestic tax evasion offences (section 45) and failure to prevent facilitation of overseas tax evasion offences (section 46). For more information, see Practice note, Tax offences: failure to prevent facilitation of tax evasion.

This offence is the second “failure to prevent” offence, although a consultation on further offences was launched in early 2017. The offence is similar to section 7 of the Bribery Act 2010, which introduced the corporate offence of failure to prevent bribery. The offences are effectively strict liability, in that no mens rea is required on the part of those representing the corporation. Both offences also have similar defences, although described as “prevention” rather than “adequate” procedures for the tax offence. For more information see Practice note, Failure to prevent facilitation of tax evasion: prevention procedures and policies.

The section 7 offence has seen one prosecution since it came into force in 2011. It seems likely that the tax facilitation offences will follow a similar path, mainly resolved by DPA rather than prosecution. The more interesting development for 2018 will be whether the failure to prevent offences will be further expanded to include additional economic crimes. We await the results of the consultation (see Legal update, HM Government has opened a consultation on corporate liability for economic crime). Further, On 5 April 2017, the House of Commons and House of Lords’ Joint Committee on Human Rights published a report asking for a new corporate offence of failing to prevent human rights abuses.

Modern slavery:

August saw the disturbing news from the National Crime Agency (NCA) that the criminal offences of modern slavery and human trafficking are far more prevalent in the UK than previously thought. On 10 August the NCA released figures showing there are currently more than 300 live policing operations targeting modern slavery in the UK. For more information see Blogpost, Tackling modern slavery. This report was the subject of much discussion at a plenary session at the Cambridge Symposium on Economic Crime at Jesus College Cambridge in September, Chaired by David Bacon and Paul Brooks of Practical Law.

In December 2017,  two reports were published, both of which addressed the  failure of government to get to grips with modern slavery. Her Majesty’s Crown Prosecution Service Inspectorate  reported on the Crown Prosecution Service’s  response to the Modern Slavery Act 2015, finding some examples of good practice, but that more work is required in the establishment of a nationwide formal structure. The following day, the National Audit Office  reported on the effectiveness of the government in tackling modern slavery, and found that the approach has been incomplete, lacks clear accountability and has provided inadequate oversight of victim support and also very few prosecutions.

Both reports should lead to changes in HM Government’s approach to tackling modern slavery. It remains to be seen whether one reform will be the creation of a further failure to prevent offence.

Dishonesty:

Finally, perhaps the biggest surprise of the year came in the  Supreme Court judgment concerning a civil dispute over gambling winnings, Ivey (Appellant) v Genting Casinos (UK) Ltd t/a Crockfords (Respondent) [2017] UKSC 67. In the ruling, the leading criminal case on dishonesty, R v Ghosh, was heavily criticised, deemed not to correctly represent the law and “judicial directions based upon it ought no longer to be given”. For more information see Legal update, Judging criminal dishonesty no longer involves a subjective test (Supreme Court) and Blogpost, Abandoning Ghosh – an important safeguard lost?

Although technically obiter, both the Court of Appeal and a regulatory tribunal confirmed that they would be following the Supreme Court decision shortly afterwards. The practical effect of the decision in Ivey may be limited, but the surprising change does appear to have taken away an important safeguard.

 

 

 

Practical Law David Bacon

Corporate accountability and the Thomson Reuters Company Secretary forum 2017

Fri, 11/24/2017 - 16:43

The Thomson Reuters Company Secretary forum was held on the 23 November 2017, the day after the Autumn budget in which the Chancellor announced a potential new corporate criminal offence .

At the same time on 23 November the Lord Chief Justice Lord Burnett of Maldon delivered a speech on the launch of thecityuk’s legal services report 2017 and said:

“In the United Kingdom, no person, no corporation, no minister and no public body is above the law. All are subject to it. How one wishes that were so the world over. And the rule of law flourishes only in societies that have a strong, independent and incorruptible judiciary, as we have.”

The attenuation of interest in corporate accountability is evident throughout the media. Investigations or prosecutions by the Financial Conduct Authority (FCA) and Serious Fraud Office (SFO) are routinely on the front pages of our broad sheets.

There were two measures of direct relevance to business crime practitioners in the Autumn budget (see Legal update, Autumn 2017 Budget: key business crime practitioners announcements) but the second, if backed by a criminal sanction, will become a third failure to prevent offence:

These measures will put responsibility on online marketplaces to ensure that businesses operating through their platforms are accounting for VAT correctly. A call for evidence on the steps that online marketplaces can take to ensure compliance will be published in spring 2018. Perhaps no criminal enforcement will be necessary for this measure as it is effectively covered in the failure to prevent facilitation of tax evasion that came into force on 30 September. For more information see Practice note, Tax offences: failure to prevent facilitation of tax evasion.

Peter Binning of Corker Binning ably chaired a panel discussion on Corporate Crime at Thomson Reuters Company Secretary Forum 2017. The panel of experts comprised:

  • Roger Burlingame , Kobre & Kim
  • Francis Kean, Willis Towers Watson
  • Toby Duthie,Forensic Risk Alliance.

The panel discussed a wide range of issues arising from the increasing focus on corporate crime by regulators and prosecutors. The panel recognised the exponential growth of corporate prosecution and Roger Burlingame noted that this tracks what happened in the US after the implementation of the FCPA.

Peter Binning outlined the growing willingness of prosecutors to pursue large corporations such as Rolls Royce while Roger Burlingame provided a transatlantic perspective, commenting that it remains to be seen whether the SFO will be able to install the kind of obedience by corporates the US Department of Justice (DOJ) has been able to achieve. All the speakers recognised an increased willingness for prosecutors to pursue both the company and the officers as individuals. For more information on the Rolls Royce case see Legal update, Third deferred prosecution agreement approved between SFO and Rolls-Royce (Crown Court)

Toby Duthie noted that there had been some scepticism in the past about the SFO’s ability to tackle  larger companies as their successes had been with small companies with tightly held management. He suggested that following the DPA in Rolls Royce, the size of the settlement and the level of coordination between the SFO, DOJ and the Brazilian prosecutors , the credibility of the SFO has risen.

Francis Kean suggested that the SFO wanted to widen the “failure to prevent” model pioneered in the UK Bribery Act to all fraud thus significantly increasing the compliance burden on companies. David Green  CB QC has been frank about his desire to see the expansion of failure to prevent to extend to all economic crimes which was consulted upon in Q1 of 2017 see HM Government has opened a consultation on corporate liability for economic crime . This position has wide support from  NGOS , see Joint Committee on Human Rights report recommends reconsidering the expansion of failure to prevent offence to include more than economic crimes

From correspondence disclosed from Amber Rudd, this step is being side-lined by more pressing Brexit related matters.

The session was interactive and delegates were asked to vote on the Thomson Reuters conference app, on whether they perceived Corporate liability as a bigger risk to their organisation than Brexit. The vote came in at 53 % no, 47 % yes.

The panel also discussed the changing world of internal investigations and the starkly different rules governing legal professional privilege (LPP) (following the ruling in SFO v ENRC ) on both sides of the Atlantic and the increased cooperation between different national regulators and prosecutors. The decision in ENRC is now subject to appeal, see Legal update, Permission to appeal granted to Eurasian Natural Resource Corporation Ltd (Court of Appeal).

Roger Burlingame recognised that LPP in the US was rock solid but where he was advising a company where there was a UK touchpoint in the investigation, he ensures that US lawyers are up to speed on the impact of the erosion of LPP in the UK. For more information see Practice note, Waiving privilege in an internal investigation.

A key theme throughout the discussion was the importance of separate and effective legal representation for individual directors and officers and the need to ensure that appropriate insurance is in place to provide it. In a further poll 62% of attendees said they would review their Directors and Officers insurance policy “tomorrow”.

Peter Binning raised the important topic of “educating the board” and the need for simple direct information to ensure that decisions are taken at the outset from a position of knowledge. This would include information on Deferred Prosecution Agreements and the relevance of self-reporting after Rolls Royce. Information on data management issues, and obtaining evidence from overseas are all important for a board to understand.

The session ended with a reminder from Peter Binning that every individual and company is innocent until proven guilty and companies need not allow themselves to be bullied into cooperating with prosecutors by the threat of prosecution. In support of this Roger Burlingame recommended in the face of investigation that a company do some careful research and look for an experienced  criminal lawyer who would have the right skill set to advise the company in respect of criminal procedure and evidence.

While it is not surprising that Brexit tops the list of organisational risk for most Company Secretaries, it is stark that 47% of respondents consider corporate liability a greater risk. Corporate liability, turned on its head as a result of section 7 of the Bribery Act 2010, saw its first expansion this year with the failure to prevent facilitation of tax evasion, and in all likelihood will be expanded to cover additional economic crime offences in the future. With an increasingly empowered SFO and HMRC, the former due to appoint a new Director imminently who will no doubt be keen to make their mark, there has never been a more important time for companies to ensure their efforts to prevent economic crime are sufficient.

Morag Rea and Ben Henriques of Corker Binning

Practical Law Morag Rea

Ransomware exploits law firm opportunities

Thu, 11/09/2017 - 15:36

On 24 October 2017 the law firm Appleby confirmed that they had been subject to a ‘data security incident’ in 2016. Appleby also confirmed that it had received enquiries from the International Consortium of Investigative Journalists (ICIJ), which had published the Panama Papers in 2016, regarding the data breach. 

The data, leaked on 5 November, contained 13.4 million documents and is the subject of an investigation by 100 media groups. Appleby said the disclosure was caused by an illegal computer hack, perpetrated by an intruder who deployed the tactics of a professional hacker and not someone who works for the firm. They confirmed that the company takes client confidentiality extremely seriously .

There are echoes of the situation when 11 million documents spanning several decades were leaked from the Panama firm Mossack Fonseca.

Mossack Fonseca complained that the data leak was external and filed a complaint with state prosecutors.  This throws up two separate legal issues:

  • The extent to which any individual responsible for the data hack has committed a criminal offence.
  • The extent to which Mossack Fonseca could be held liable for failing to protect their client’s data.

Mossack Fonseca nor Appleby fall under the jurisdiction of UK regulators. However, should a UK regulated firm find itself it the same position, it would have to consider both cybercrime and data protection issues. For more information, see Practice notes, Cybercrime; overview and Data Protection Act 1998: criminal enforcementSolicitors are obliged under the Code of Conduct to maintain effective systems and controls to mitigate risks to client confidentiality client money, and to comply overall with our regulatory arrangements.

Data breaches at law firms are a growing concern: confidential information, often sent in unencrypted emails, risks being stolen and ransomed back to firms, used for fraud or sold to third parties to be used in crimes such as insider trading. The Information Commissioner’s Office regards solicitors as facing the same types of threats as other businesses. ICO figures  from the first quarter of 2016 show the legal and justice sectors reporting the fourth highest number of data security breaches.

It is not just the risk of hacking to provide information to journalists that poses a risk to law firms’ internet security. Cybercriminals are aware that law firms hold client identification documents and financial details and that even the biggest law firms do not have the same cybersecurity resources as banks. A reported £7million of client money was lost to cybercrime in 2016. Ransomware is becoming a fast-growing threat.

Ransomware threat

Ransomware is malicious software that blocks access to an organisation’s data and is accompanied by a demand, threatening to delete everything unless the organisation pays up. Law firms have valuable datasets, a duty of confidentiality and a public reputation to protect and so are high-value targets. According to Verizon’s 2017 Data Breach Investigation report  ransomware has moved up from the 22nd most common form of malware in 2014 to the fifth most common because it is quick, low-risk and lucrative.

On June 27, 2017 DLA Piper’s advanced-warning system detected suspicious activity on their network, which was related to the global cyber event known as “Petya”. An investigation and remediation efforts were immediately initiated and relevant authorities including the FBI and UK National Crime Agency were notified.

“Petya ransomware” takes over computers and demands $300, paid in Bitcoin. The malicious software spreads rapidly across an organisation once a computer is infected using the EternalBlue vulnerability in Microsoft Windows or through two Windows administrative tools. DLA Piper has not said whether it paid any ransom, but it has confirmed that it found no evidence that any client information was affected.

Law firms are pre-emptively opening Bitcoin wallets to pay ransoms in case their data is hacked according to John Sweeney, president of IT and cyber security advisors LogicForce. He suggested that opening a Bitcoin wallet is just one contingency plan firms can make to prepare for cyber breaches in which client data is stolen. He said that firms may see this as a useful last resort when the data is not backed up and cannot be restored unless a ransom is paid.

Although Sweeney stressed he did not advocate paying ransoms, he thought it made sense for firms to have a Bitcoin wallet in case. However, paying a ransom is no guarantee that access will be returned immediately or that a one-off ransom will be sufficient.

What should firms be doing?

Firms must do more to enhance cyber security. The PWC 2017 law firm survey notes that:

  • The majority of law firms have reported that they suffered a security incident in the past 12 months and the most common of these remains phishing attacks.
  • 12% of firms claim to be recipients of such attacks on a daily basis with a further 30% identifying attacks on either a weekly or monthly basis.
  • The increasing level of threat means it is more important than ever to have effective and tested business continuity plans and a resilience framework.
  • It is a concern that 16% of all firms claim not to have any such framework and of those that do, only 75% test their business continuity plan annually.

Peter Wright, Chair of the Law Society’s Technology and Law Reference Group, and managing director of DigitalLawUK, highlighted the number of organisations that have been hit by ransomware attacks recently (most notably the NHS). He too recognises that many firms will do almost anything to get that data back, especially if they don’t have effective back-up systems in place. Many law firms do not have effective back-up systems and have not fixed this area of vulnerability. He records speaking to one organisation which was attacked by ransomware three times in one year, and which paid £150k to the perpetrators but did not invest in a back up system.

He commented on the ransomware attack on DLA Piper noting that if one of the largest law firms in the world did not have the adequate safeguards in place to protect against a ransomware attack then it begs the question who does?

It is clear that these crimes are under reported for fear of losing client confidence.

The Chief executive of the SRA has said that where client money or information is lost, firms need to report it to the SRA. He confirmed that the SRA will take a constructive and engaged approach, particularly if the firm is taking steps to make good any losses to the client, and demonstrated that it has learned from the incident. See Solicitors Regulation Authority publishes IT security: keeping money and information safe

He emphasised that the SRA would be in a better position to advise firms on how to protect themselves if it was told about failed incidents as well as about successful attacks.

Firms should be aware of No More Ransoms,  a site dedicated to stopping ransomware. It is a joint initiative between Europol, the Dutch police and IT companies Intel and Kaspersky, providing a way to recover files affected by four different types of ransomware. The NCA is also involved in international efforts NCA publishes statement on international cyber crime incident.

Firms may also wish to consider whether they need cover for their own potential losses from cybercrime, beyond those affecting the client. In the wider business context, it has been increasingly common to take up specific cyber insurance

Practical Law Morag Rea

Abandoning Ghosh – an important safeguard lost?

Fri, 10/27/2017 - 11:02

In a surprising Supreme Court judgment concerning a civil dispute over gambling winnings, the leading criminal case on dishonesty, R v Ghosh, was heavily criticised, deemed not to correctly represent the law and “judicial directions based upon it ought no longer to be given”. This judgment will impact on all future cases where dishonesty is an issue. Perhaps the most surprising aspect of this decision was the largely uncontroversial nature of the “Ghosh test”, which had neither seen sustained criticism of its fairness, nor any apparent difficulty with its application.

Edge sorting:

The facts of the case would not have appeared out of place in a James Bond movie. In Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67, the appellant was a professional high-stakes gambler and the respondent was a London casino. The appellant visited the casino with an associate and engaged in a card game known as Punto Banco, a variant of Baccarat. The different odds applied to certain bets means that the casino enjoys a small advantage taken over all the play.

The appellant won a sum in excess of £7m, from a £1m stake. After conducting investigations, the casino refused to pay the winnings, on the basis that the appellant had cheated by using a process known as “edge sorting” (for more information see Legal update, Judging criminal dishonesty no longer involves a subjective test (Supreme Court)).

The appellant subsequently sued the casino to recover the winnings.  In subsequent litigation (Ivey v Genting Casinos [2016] EWCA Civ 1093) the High Court held that the appellant’s use of edge sorting was cheating. The case was referred to the Supreme Court.

Criminal dishonesty:

In one of the most famous cases in criminal law, R v Ghosh [1982] EWCA Crim 2, the court stated that the test for dishonesty under the Theft Act 1968 was a two stage test to determine whether a defendant had acted dishonestly:

  • A jury had to first decide whether, according to the ordinary standards of reasonable and honest people, what was done was dishonest. If it was not dishonest by those standards the prosecution would fail. This is known as the objective test.
  • If it was dishonest by those standards, then the jury had to consider whether the defendant himself had to have realised that what he was doing was, by those standards, dishonest. This is known as the subjective test.

The subjective test is purely focused on whether the defendant knew what he was doing was dishonest or would be considered dishonest by others, rather than morally justified.

During the trial process, it is not necessary to provide a Ghosh direction to the jury in every case (R v Price [1990] 90 Cr App R 409). The full direction is only required in situations where “the state of the evidence is such that the offender might have believed that what he or she is alleged to have done was in accordance with the ordinary person’s view of honesty”. It is not often invoked or required in criminal trials. When the direction is required, the exact form of words from the Ghosh case is necessary and a failure to direct the jury on this is likely to result in a successful appeal. For more information on dishonesty see Practice note, Theft, basic offence.

The Supreme Court:

The Supreme Court unanimously dismissed the appeal. The judgement stated that it was common ground that the parties’ contract for betting contained an implied term that neither of them would cheat. The claimant had staged a carefully planned and executed operation that amounted to cheating. It would clearly be a cheat to secretly gain access to the shoe of cards and rearrange them:  the same result was achieved here by directing the actions of the croupier unwittingly to do the same thing.

More significantly, the court examined the concept of dishonesty, and held that the second leg of the rule adopted in Ghosh has serious problems:

  • It has the unintended effect that the more warped the defendant’s standards of honesty are, the less likely it is that he will be convicted of dishonest behaviour.
  • It was based on the premise that it was necessary in order to give proper effect to the principle that dishonesty, and especially criminal responsibility for it, must depend on the actual state of mind of the defendant, whereas the rule is not necessary to preserve this principle.
  • It sets a test which jurors and others often find puzzling and difficult to apply.
  • It has led to an unprincipled divergence between the test for dishonesty in criminal proceedings and the test of the same concept when it arises in the context of a civil action.
  • It represented a significant departure from pre-Theft Act 1968 law, when there is no indication that such a change had been intended.
  • It was not compelled by authority. Although the pre-Ghosh cases were in a state of some entanglement, the better view is that the preponderance of authority favoured the simpler rule that, once the defendant’s state of knowledge and belief has been established, whether that state of mind was dishonest or not is to be determined by the application of the standards of the ordinary honest person, represented in a criminal case by the collective judgement of jurors or magistrates.
  • The less a defendant’s standards conform to society’s expectations; the less likely they are to be held criminally responsible for their behaviour. The law should not excuse those who make a mistake about contemporary standards of honesty, as a purpose of the criminal law is to set acceptable standards of behaviour.

In civil cases there is an objective test of dishonesty, arising from Barlow Clowes International Ltd (In Liquidation) v Eurotrust International Ltd [2005] UKPC 37. In Ivey, the Supreme Court stated that this test should also be adopted in criminal matters, as “there can be no logical or principled basis for the meaning of dishonesty to differ according to whether it arises in a civil action or a criminal prosecution”.

The Supreme Court judgement, technically obiter, went further to suggest the second leg of the test in Ghosh does not correctly represent the law and judicial directions based upon it ought no longer to be given.

What are the implications for criminal law?

This is the most significant cases in relation to dishonesty in the past 35 years, effectively ruling that the two stage test in R v Ghosh used to determine whether an action is dishonest is incorrect, and substituting it with a different test:

The test of dishonesty is now that of the standard in civil actions. The fact-finding tribunal must ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts and then determine whether his conduct was honest or dishonest by the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest”.

This new test removes the requirement for the Crown to prove that the defendant knew or believed that what he did was dishonest, or any element of mens rea, from offences of dishonesty.

There is unlikely to be any immediate impact. In contrast to another recent case, R v Jogee [2016] UKSC 8 (18 February 2016) where the Supreme Court held that the concept of joint enterprise had been miscast for a number of years, there is not likely to be a flood of cases suggesting wrongful imprisonment, nor has there been longstanding criticism of and campaigns against the former interpretation of dishonesty.

Going forward, the practical impact seems to make prosecuting cases involving dishonesty slightly easier. In most cases the second limb does not become an issue, but can have a significant impact, particularly on minor naïve conspirators who are perhaps assured by more senior colleges that their actions are standard practice and not dishonest. Similarly, those with a genuine belief that their actions are perfectly normal (for example, a foreign national unaware that travelling on public transport required payment) risk being caught by the change. In addition, the notion there is an “unprincipled divergence between the test for dishonesty in criminal proceedings and civil action” is curious. There are a huge number of divergences between criminal and civil law for obvious reasons, not least the risk to a person’s liberty.

It will remain the right of a jury to acquit someone regardless of the judge’s direction, and of course the Crown must still consider whether it is in the public interest to prosecute someone who has made a genuine mistake in undertaking an objectively dishonest action. The test in R v Ghosh provided an important, even if rarely used, safeguard for defendants that may now be lost. Its removal has the potential to criminalise the innocent.

Moreover, to suggest that the law should not excuse those who make a genuine mistake about contemporary standards of honesty, is somewhat authoritarian and contrary to liberal tradition. Juries are occasionally reminded that a criminal court is not a court of morals, a stricture which appears to have slipped some judicial minds. To suggest that a purpose of the criminal law is to set acceptable standards of behaviour is to confuse criminality and morality, and a step on a dangerous path.

Practical Law David Bacon

Is the SARs Annual Report of any relevance?

Fri, 10/13/2017 - 14:48

Earlier this week, the National Crime Agency (NCA) published the Suspicious Activity Reports (SARs) Annual Report for 2017, which covered 18 months between October 2015 and March 2017. SARS are received by the United Kingdom Financial Intelligence Unit (UKFIU). Unsurprisingly, UKFIU has continued to experience a year on year increase in the number of SARs received. The next report is likely to be more interesting, given the significant number of developments scheduled to the “anti-money laundering” provisions in 2017-18.

The NCA is the UK’s principle body for receiving notifications of suspicious activity for money laundering purposes. For more information, see Practice note, National Crime Agency: overview.

Both the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2000 (TACT) impose a duty on firms in the regulated sector (and on their employees) to make a report where they know or suspect, or have reasonable grounds for knowing or suspecting, that another person is engaged in money laundering or terrorist financing, in respect of information coming to them within the course of business in the regulated sector (sections 330 and 331, POCA and section 21A, TACT). For more information, see Practice note, Reporting Suspicious Activities: overview and Note for the board on when to make a disclosure on money laundering

The Annual Report – overall SARs:

The overall number of SARs received by the UKFIU over the 18 month period of October 2015 to March 2017 was 634,113. This included 43,290 received in March 2017, which was the most SARs ever recorded for one month, an increase on 7,406 from the previous March. Compared with reporting periods of previous SAR Annual Reports, the UKFIU received 419,451 SARs between October 2015 and September 2016, which was an increase of 9.84% on the same period for 2014–15 (381,882).

The vast majority of SARs came from credit institutions, the number from banks totalling 525,361 or 82.85% of all SARs. Other key figures include:

  • Accountants and tax advisers: 6,693 (1.06%).
  • Independent legal professionals: 4,878 (0.77%).

The SARs report also demonstrates a significant growth in the number of cases where a “defence against money laundering” (DAML) has been requested (27,471). The UKFIU introduced the term “defence against money laundering” as it had found that the term ‘consent’ was being frequently misinterpreted. POCA  allows reporters a defence against a money laundering offence by seeking the consent of the NCA to undertake an activity which the reporter believes may constitute one of the three principle money laundering offences (see Practice notes, Acquisition, use and possession offence, Arranging offence and Concealing offence).

The report suggests that the term ‘DAML’ is aimed at improving submissions by clarifying what the UKFIU can or cannot grant. A similar procedure in place enables requests for a defence against terrorism financing (DATF).

The total amount of assets denied to criminals as a result of DAML requests (both those refused and granted) over the 18 month period was £56,541,579. In comparison to the 2014-15 figure of £46,375,449, the total for 2015-16 was £33,433,271, a decrease of 27.91%. The total restrained over 2015-16 as a result of refused DAML requests was £14,089,147, a considerable reduction from the £43,079,328  figure for 2014-15. The suggested reason for the drop is because 2015’s figures were skewed by two very large refusals, in the region of £10m and £9.2m.

However, the amount of cash seized from refused DAML requests for 2015-16 saw an increase of 1,127.09%, from £1,313,437 to £16,117,014. The reason for this was a cash detention/seizure of over £15m in 2016. For more information see Practice note, cash seizure. 

Certainly, the sums recorded in the SARs report are trivial when compared with the varying estimates of how much money is laundered every year, to such an extent that the headline cash seizure and restraint figures do not really justify the SARs process. There are however three further benefits of the SARs regime, which are touched upon in the report.

First, the extent to which the process contributes to the UK’s criminal intelligence. The UKFIU screens and analyses SARs on a daily basis for opportunities to prevent and detect crime, and can fast-track suspicions to law enforcement agencies. Over the reporting period the UKFIU  disseminated 513 SARs relating to NCA subjects of interest.

The UKFIU is also able to identify SARs containing information on potential financial crimes that target vulnerable members of society. In the reporting period 3,424 vulnerable person intelligence packages were disseminated to Law enforcement authorities (LEAs).

Secondly, over the 18 month reporting period the UKFIU also disseminated 1,955 SARs relating to politically exposed persons (PEPs) and 1,257 integrity SARs (SARs that relate to knowledge or suspicion of money laundering and/or terrorist financing that concerns an employee of an LEA or the civil service). This is the first time the UKFIU has included integrity SARs in the SARs Annual Report.

Finally, a key aspect not covered in the report is the issue of preventing the proceeds of crime entering the legitimate financial system in the UK. The great unknown is how many criminals avoid the UK banking sector, or other service sectors, because of concerns that the criminality will be picked up when applying due diligence within the regulated sector.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLR 2017) make a limited number of changes to a company’s anti-money laundering provisions (see Legal update, The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 published.) It is far too early to assess the impact of the 2017 regulations, but they clearly envisage that any issues of concern will be picked up before monies enter the system or particular services are instructed. The amount of money that does not enter the regulated sector due to the action taken by the various gatekeepers must be a consideration of any future reporting.

The future

In April 2016 the Government published its Action Plan for Anti-Money Laundering and Counter-Terrorist Finance. The Action Plan includes a commitment to reform the SARs regime, making the necessary legislative, operational and technical changes. This was followed by an open consultation on the anti-money laundering supervisory review (see Legal update, HM Government launches open consultation on the Anti-money laundering supervisory review).

On 15 March 2017, the government published the Anti-money laundering supervisory regime: response to the consultation and call for further information. For more information, see Legal update, HM Government publishes anti-money laundering supervisory regime: response and call for further information.

The call for further information proposed:

The reforms seek to address a key risk identified in the 2015 UK National risk assessment of money laundering and terrorist financing (the NRA). The NRA found that the effectiveness of the UK’s supervisory regime is inconsistent and, whilst some supervisors are highly effective in some areas, there is room for improvement across the board. For more information, see Legal update, UK national risk assessment of money laundering and terrorist financing.

The reforms also complement work across government to deliver on the commitments in the 2016 Action Plan for anti-money laundering and counter terrorist finance (the action plan), which set out how the public and private sector will work together to tackle money laundering. For more information, see Legal update, Home Office and HM Treasury publish Action Plan for anti-money laundering and counter-terrorist finance.

Meanwhile, the Criminal Finances Act 2017 will also make changes to the SAR regime. The changes that will eventually appear on the statute book include:

  • Law enforcement agencies will be able to apply for a court order to extend the moratorium period during which those who have filed a SAR and sought consent from the NCA to proceed with a transaction are prevented from doing so before consent is deemed to be given. An extension can be given for periods of up to 31 days, up to a total of an additional 186 days, in order to enable law enforcement agencies to conclude their investigations in relation to information contained in SARs.
  • The power of the UKFIU to request additional information from reporting entities.
  • Provisions to enable greater information sharing to take place between entities in the regulated sector to combat money laundering and terrorist financing, and an extension to the use of disclosure orders so that law enforcement agencies can compel the provision of information and documents in connection with a wider range of money laundering investigations and investigations into other offences.
  • Authorisation to obtain, discharge or vary a disclosure order will be able to be given by an appropriate officer within the relevant investigating authority.

There is no commencement date yet for these SAR provisions of the CFA 2017.

In such circumstances, there is little that can be deduced from the SARs report. The key considerations for the next year will be whether the OPBAS will be a success and whether the new legislation will make much of a difference to the reputation of UK PLC as a global hub for money laundering. The Financial Action Task Force (FATF) is due to inspect the UK’s money laundering arrangements for the first time in a decade in 2017/18. How far the UK has come will be interesting.

Practical Law David Bacon