Criminal law insights: April 2020

Fraud in the time of COVID-19

It now appears inevitable that the global spread of COVID-19, and governments’ responses to it will cause a severe, if hopefully short-lived, recession. There is clear potential for it to morph into an all-singing, all-dancing financial crisis. Economic crime tends to surge during and following a recession as collapsing markets flush out ongoing fraud that was hidden whilst times were good. Whilst the crisis is ongoing, increased financial pressure on companies and individuals increases both the incentives and opportunities to engage in fraud.

Our current circumstances are practically a perfect storm in this regard: the markets have dropped dramatically; price volatility is hitting all-time highs; commodity prices have crashed; and (unlike the 2008-2009 financial crisis) COVID-19 is truly global and will likely lead to a significant recession in every country around the world. Meanwhile, the reach of government, and the contact points between business and public officials, is expanding rapidly and into new areas.

We are already seeing a spike in COVID-19 related phishing attacks and the first enforcement action against a COVID-19 fraud (by the DOJ in relation to a seller of fake vaccines: see here). We expect much more to come.

Such economic crime can put a huge burden on companies, both in terms of direct cost to organisations in the midst of the crisis and as a result of enforcement action and parallel civil proceedings pursued in the years following its conclusion. As such, companies need to be on the lookout for warning signs of fraud and other forms of financial crime and ensure that the undoubted pressures of the current crisis do not weaken their focus on compliance and proper risk management.

For further analysis and some recommended steps for companies to take now, see our article.

AI in Investigations

The range and sophistication of ‘smart’ technological solutions which are available for deployment in investigations has grown exponentially in recent years, in parallel with (and to a large extent in response to) the rise in data volumes. Thus, while the amount of evidence which potentially falls to be analysed and/or reviewed has grown significantly, so has firms’ ability to deal with it effectively using these evolving technologies.

Some of the newer tools we have been using enable us to interrogate data sets in different ways by going beyond keyword searching and traditional ‘linear’ review. For example, we are seeing the use of Natural Language Processing (NLP) in early stages of investigations - which enables computers to understand and process the human language and get closer to a human-level understanding of the context behind the words being used.

One of the most interesting types of NLP which can now be used in reviews is Sentiment Analysis. This categorises text to determine whether the communication has positive, neutral, or negative connotations (including analysis of the use of emojis). At present, we find it useful in identifying key time periods where negative or stressful communications tend to become more prevalent. We anticipate this being of benefit in the future for the detection or investigation of fraud and other criminal conduct, due to the impact of these behaviours on the demeanour of those involved (for example, where it creates stress, nervousness, anger, or elation). See our article for further examples on this topic.

Smarter, faster analysis using tools like this has become the benchmark, rather than the exception. As law firms and technology specialists work ever more closely together to create innovation and bespoke solutions, we consider the sector is poised at the tip of the next wave of evolution in this area. How long will it be before the next generation of tools are deployed to anticipate criminal conduct in a widespread or systemic manner, rather than merely detect it after the event?

Reforming corporate liability: is a ‘failure to prevent’ offence the answer?

There has long been debate around the SFO’s ability to successfully prosecute companies for criminal offences. Doing so under the current legal framework requires identifying that an individual who constituted the ‘directing mind & will’ of the company committed the offence.

This issue was the subject of a government call for evidence in March 2017. Since then there has been significant support for the introduction of a general ‘failure to prevent’ economic crime offence. This proposal would extend the model of corporate liability introduced for bribery and tax evasion - whereby companies are automatically criminally liable for an offence carried out by any associated person unless they can show that they had adequate procedures in place to prevent such offending - to other economic crimes including fraud. The Government is yet to publish its response, though the Economic Crime Plan released in July 2019 stated that it would do so ‘shortly'.

The debate has continued in the meantime. Lisa Osofsky, the director of the SFO, described the UK’s approach to the attribution of corporate liability as “antiquated” and in need of reform. The current state of the law means that SMEs can be more easily prosecuted than large corporates: Osofsky told parliament last year that, without reform, she could, “go after Main Street, but I can’t go after Wall Street”.

We remain unconvinced. In each case where the SFO has failed to establish corporate liability they have also failed to establish individual liability. On that basis a ‘failure to prevent’ offence should make little difference. Moreover, the use of ‘failure to prevent’ offences, particularly in DPAs, can lead to inconsistent results as between companies and the relevant individuals – generating unfair (and to the non-lawyer, often incomprehensible) outcomes. The compliance burden in monitoring the broad range of conduct that could lead to fraud would also be significantly greater than is required in relation to the existing bribery and tax evasion offences and there is little evidence that there would be any significant further deterrent benefits atop of existing enforcement risks faced by corporates.

For further analysis see our article. Our full response to the 2017 call for evidence can be found here.

Fight or flight: insights from the Airbus DPA

Following almost four years of investigation, on 31 January 2020, Airbus and the SFO entered into a DPA in which the company admitted to five counts of failing to prevent bribery contrary to section 7 of the Bribery Act 2010. Under the terms of the DPA, Airbus agreed to pay fines of almost €1 billion, by far the largest penalty agreed under a DPA so far. This DPA is a much-needed victory for the SFO and forms part of a €3.6 billion settlement with French and US authorities, the largest global bribery resolution to date.

The scale of the penalty, and the “endemic” corruption in which Airbus was implicated, are unprecedented. Yet the Airbus DPA also shows a willingness on the part of the SFO and the courts to adopt a pragmatic approach when assessing financial sanctions in a large negotiated settlement, particularly when there are significant mitigating factors in the company’s favour. Airbus received significant credit (and a 50% discount on its fine) for “exemplary” cooperation with prosecutors (even though, notably, the company did not self-report at an early stage) and overhauling its management and compliance framework. In calculating the disgorgement of profit element, the SFO accepted a concurrent approach, similar to that used in the Rolls-Royce DPA, in which gross profits were averaged across several counts, leading to a much reduced overall figure.

There will be significant interest in whether the senior executives at Airbus involved in the alleged bribery are now prosecuted by any of the agencies involved in the DPA. In recognition of the risks to those individuals, their names were not disclosed in the Statement of Facts accompanying the DPA. For further analysis of the Airbus DPA, see our article.

2020 Budget: New anti-money laundering levy announced

A potentially significant measure announced in the UK government’s 2020 Budget is to supplement public sector funding with a new levy payable by businesses subject to UK money laundering regulations. This development follows the National Crime Agency’s (NCA) concerns that it is lacking the necessary resources to curb illicit financial gains up to the tune of £100bn flowing through the UK economy and that efforts to stem financial crime are not sufficiently joined up with the private sector.

The Budget provides scarce detail on its plans beyond the stated aim to “help safeguard the UK’s global reputation as a safe and transparent place to conduct business”. It is believed that the levy will be imposed on an annual basis and expected to raise £100m for the NCA (in addition to the current NCA budget of £478m). It is likely to be put towards reforms announced in the Economic Crime Plan, including to deploy new technology for law enforcement and the NCA’s Financial Intelligence Unit, as well as to hire additional investigators.

The Treasury is due currently to open a public consultation on this topic later this spring, which will hopefully offer clarity on how the levy will function in practice and the ensuing impact on firms. We will be responding to the consultation so please let us know if you would like to input into our response.

Court of Appeal upholds first Unexplained Wealth Order

Unexplained Wealth Orders (UWO) are available to law enforcement agencies against individuals (non-EEA PEPs or those suspected of committing serious crime anywhere in the world) whose wealth is not commensurate with their known legitimate earnings. Recipients are expected to prove the legitimacy of their source(s) of wealth. Zamira Hajiyeva was the first such individual. Her husband, Jahangir Hajiyev, the former chairman of the International Bank of Azerbaijan (a majority state owned bank), was convicted of defrauding the bank out of $2.2 billion.

Some of the more notable expenses which raised red flags included an £11.5 million house in Kensington purchased through a BVI company, £16 million in Harrods between 2006 and 2016, and $42 million spent on a Gulfstream jet.

Mrs Hajiyeva appealed the UWO to the Court of Appeal on the broad grounds that:

• the income requirements of an UWO had not been met because the Court could not rely on the fact of Mr Hajiyev’s conviction following an unfair trial in Baku;
• he should not have been classified as a PEP;
• the UWO breached the rules against self-incrimination and/or spousal privilege because it might expose her husband to additional liability in Azerbaijan.

The Court rejected ground 1 on the basis that being the chairman of a state-owned enterprise meant that Mr Hajiyev was “entrusted with prominent public functions”, within the definition of a PEP. Ground 2 was rejected because although a foreign conviction may not always form the proper basis for a reasonable suspicion that wealth was gained illegitimately, this was only one of the elements used by the NCA to establish a reasonable suspicion. Crucially, Mr Hajiyev’s public salary would not have been enough to finance their lifestyle and the source of their wealth was generally vague. Finally, ground 3 was rejected because these privileges only applied to the risk of prosecution inside the UK. Further, since Parliament had created UWOs by statute, it clearly did not intend for these privileges to defeat UWOs in such circumstances.

Mixed purpose communications: legal advice must be dominant purpose for privilege to apply

In January 2020 the Court of Appeal confirmed that Legal Advice Privilege (“LAP”) will only apply where seeking or giving legal advice was the dominant purpose of the communication. This presents a risk where emails are sent to a mixed distribution list of lawyers and non-lawyers, seeking input on a document for example. If obtaining legal input is the dominant purpose of the email, it will be privileged. If the non-legal input is the dominant purpose, it will not be privileged, though responses from the lawyers should be. Where seeking legal advice is not the dominant purpose, the email will in effect be treated as a separate communication to each recipient. The analysis will apply equally to meetings with an agenda that mixes legal and non-legal issues: unless the legal issues are the dominant purpose of the meeting, records of it will not be privileged.

The dominant purpose test has always been a necessary component of asserting litigation privilege, but it is now clear that the test applies when considering LAP as well. This reinforces the importance of structuring communications so that those properly concerned with legal advice maintain privilege. Mixing legal and non-legal issues in one communication runs the risk of privilege being lost over at least part of the correspondence, minutes or other record. Practical guidance can be found here, and Colin Passmore, author of the leading text on privilege, provides further analysis in a blog post here.