In 2022, the UK was forced to reckon with the charge of being soft on economic crime and being the destination of choice for kleptocrats seeking to launder their ill-gotten funds. No longer able to turn a blind eye to these criticisms in the wake of Russia’s invasion of Ukraine, the government turned its focus to long-awaited legislative reforms. However, questions remain over whether criminal and regulatory agencies will be given the funding they need to make use of their new powers. A relatively sluggish year for enforcement suggests more investment is needed.
Legislative developments in response to the invasion of Ukraine
In an inauspicious start to the year, counter-fraud minister Lord Agnew publicly resigned in January, describing the government’s efforts to counter Covid loan fraud as “nothing less than woeful”. Lord Agnew resigned amid speculation that the government had shelved the long-awaited Economic Crime Bill designed to tackle gaps in regulation for combating fraud. However, the Russian invasion of Ukraine at the end of February focused minds and, in March, Parliament revived and quickly passed the Economic Crime (Transparency and Enforcement) Act (the “ECA”).
The ECA’s headline reforms (summarised in more detail in a previous W.I.R.E blog post2) include measures to improve corporate transparency through a register of overseas entities that own UK property and their beneficial owners, as well as changes to the implementation of economic sanctions and the use of unexplained wealth orders (“UWOs”).
In June 2022, the Law Commission published its much-anticipated options paper on corporate criminal liability.3 The Commission proposed a new offence of failure to prevent fraud by an associated person but stopped short of recommending a broader offence of failure to prevent economic crime. The ball is now in the government’s court to decide what to do with the proposal, although given the enduring political and economic permacrisis, it is difficult to see where the government will find the bandwidth for further reform in 2023.
OFSI has been a major beneficiary of the ECA, which gave it the power to impose civil penalties for breaches of economic sanctions on a strict liability basis. Despite its new powers, OFSI’s enforcement record this year has been underwhelming. It issued only two monetary penalties in 2022, with a combined value of £86,393.45.
The lack of enforcement action is unsurprising given OFSI’s focus on the implementation of the Russia sanctions regime. Between 22 February and 20 October 2022, £18.39 billion worth of Russian assets were reported to have been frozen, a vast increase from the £44.4 million that had been reported as of September 2021.4 OFSI has also added 1,271 new designated persons to its consolidated list and issued 33 general licenses in relation to Russia.5
Russian sanctions will continue to dominate OFSI’s activity for the foreseeable future. Unsurprisingly the agency is looking to upscale, with a plan to double its headcount during the next financial year.6 We expect to see an increase in enforcement activity in 2023 as OFSI makes use of its new powers and expanded workforce and responds to political pressure to enforce the new Russia sanctions robustly.
In February, the government established a new NCA unit, the Combatting Kleptocracy Cell (“CKC”), to investigate criminal sanctions breaches and money laundering in the UK.7 The CKC’s primary focus is criminal prosecution, but it has also made use of civil powers to freeze suspected criminal property. In March, the NCA secured two account freezing orders (“AFOs”) in respect of approximately £110,000, on the basis of suspicion that money was derived from laundering funds belonging to an individual sanctioned in the US.8 However, in October, the High Court overturned a decision by a district judge to maintain an AFO in respect of £1.5 million linked to sanctioned Russian businessman Petr Aven.9 The ruling gives Aven another chance to have the original AFO set aside and may encourage similar challenges.
Notably, the CKC has not applied for any UWOs this year, and law enforcement agencies’ failure to utilise this tool continues to attract criticism. Only nine UWOs have been granted since they became available in January 2018 and none since 2019. Agencies’ willingness to apply for UWOs may have been impacted by the High Court’s April 2020 decision in NCA v Baker to discharge three UWOs and order the NCA to pay £1.5 million in costs10 (which we analysed in a previous W.I.R.E post11). The NCA and other agencies may, however, be emboldened by the ECA which ensures that, in future, agencies’ liability to pay costs is limited to cases where they have acted “unreasonably” or conducted UWO proceedings “dishonestly or improperly”12.
The NCA itself has complained that the CKC’s efforts are being hampered by a lack of funding. The NCA’s budget for 2022/2023 is £800 million,13 but in 2019 the former head of the agency Lynn Owens said the NCA needed over £1 billion a year to do its job effectively14 (and that was prior to the onset of the economic crises wrought by Covid and rising inflation).
The NCA did end the year on a positive note, obtaining a civil recovery order (“CRO”) in respect of £53.9 million of suspected criminal proceeds held in an account at Barclays.15 The CRO is novel as it is the first time these powers have been used in a case where the account holders were not named in the court action. The case is a good example of effective public and private sector cooperation to combat fraud and provides the NCA with a blueprint for the recovery of proceeds of crime in abandoned bank accounts.
The Financial Conduct Authority
In late 2021, the FCA secured its first criminal conviction for money laundering after NatWest pleaded guilty to three offences and received a fine of £264.8 million.16 This case has not yet heralded more active use of the FCA’s criminal prosecution powers. This is perhaps unsurprising given the vast resources required to prosecute NatWest, which involved 30,000 staff hours, 85 compelled witness interviews, and 350 rounds of legal correspondence.17
The FCA has been relatively active in its use of civil powers to impose fines this year. In respect of failings related to money laundering controls, it is easy to understand why the FCA resolves more cases on the civil track given that the burden of proof is lower and, consequently, fewer resources are required and the prospect of success is greater. The largest civil penalty imposed this year was against Santander UK Plc, which was fined £107.8 million in December for alleged gaps in its anti-money laundering controls.18
Serious Fraud Office
2022 was the final full year of Lisa Osofsky’s time in charge of the SFO. The agency has been busy in the courtroom in what Osofsky had dubbed “the year of the trial”.19
In May, two former directors of Global Forestry Investments were convicted on three counts of conspiracy to defraud and sentenced to 11 years in prison after misappropriating £37 million from over 2,000 investors.20 In August, David Ames, chairman of the Harlequin Group, was convicted of two counts of fraud by abuse of position and sentenced to 12 years’ imprisonment for defrauding investors in unbuilt Caribbean property out of £398 million.21 In the same month, Timothy Schools, an investment manager of the Cayman-based Axion Legal Financing Fund was convicted on five counts, including fraudulent trading, and sentenced to 14 years in prison for siphoning off over £19 million in investor funds for his own benefit.22
The SFO also secured a significant corporate conviction this year and only the fourth since 2015. In May, the SFO charged Glencore Energy UK Ltd with seven counts of bribery in connection with its oil business in West Africa.23 Glencore pleaded guilty to all counts in June and was ordered to pay a fine of £281 million in November. The conviction formed part of a global resolution with the US and Brazilian authorities, with combined penalties totaling over $1.5 billion.
Glencore is the first company to be convicted of substantive bribery offences under the UK Bribery Act. It pleaded guilty to five counts of bribery under section 1 of the Act and two counts of failing to prevent bribery under section 7. The financial penalty is the largest secured by the SFO following a criminal conviction (as opposed to a negotiated outcome such as a Deferred Prosecution Agreement (“DPA”)), comprising a £182.9 million fine, £93.5 million confiscation order, and £4.5 million in respect of the SFO’s costs. In a speech given following the conclusion of the case, Osofsky cited Glencore as a case where cooperation had resulted in a swift resolution.24
Despite these successes, 2022 may be remembered more for a slew of bad publicity and criticism, culminating in the announcement in November that Osofsky would not continue as director beyond her initial five-year term.
The judgment in ENRC’s claim against Dechert and the SFO was handed down in May. It made for difficult reading for the SFO. The court found that SFO officers induced ENRC’s lawyer, Neil Gerrard, to make unauthorized disclosures of ENRC’s confidential information to the agency. SFO officers were said to have been motivated by “bad faith opportunism” and were found to have lied in evidence to cover up their wrongdoing. A second trial in the claim is scheduled for March 2023 to determine causation and quantum of any financial loss. ENRC is seeking damages of more than £41 million.
The negative publicity continued in July with the publication of two critical reviews into SFO disclosure failures in the Unaoil and Serco cases.26 In Unaoil, the SFO failed to disclose contacts between SFO senior management, including Osofsky, and a third-party fixer representing Unaoil’s founders, resulting in the Court of Appeal overturning three convictions. In Serco, the trial collapsed after the SFO failed to disclose a document that was crucial to the defence. The reviews also identified wider-ranging systemic problems at the agency, including poor morale, high turnover of staff, deficient technology, and inadequate resourcing. A lack of funding underpins all these failings, particularly as the SFO continues to face off against significantly better-resourced opponents. As the Glencore example shows, the SFO is capable of achieving significant value for money, bringing in over five times its annual budget on this case alone with recovered costs of only £4.5 million. Additional investment would ultimately finance itself with more successful case outcomes and financial penalties. In its absence, the failures of Unaoil and Serco are likely to be repeated.
Looking ahead, Osofsky will be hoping to depart on a high note. There are several opportunities for her to do so starting with the postponed trial of individuals in the G4S investigation scheduled for January 2023. The trial, which follows a DPA agreed with the corporate in July 2020, was adjourned by a year, reportedly to allow the SFO to address issues in its disclosure process. This will be an early opportunity to show that the agency has learnt from past disclosure failings, and to finally secure the conviction of an individual post-DPA.
A notable feature of Osofsky’s CV when she took over as director was her lack of experience of the UK criminal justice system, which critics have pointed to as a factor in the agency’s recent disclosure failings. The SFO may now look for a successor with UK prosecutorial experience at the highest level. However, in circumstances where the new director will no doubt be expected to achieve more with fewer resources, the position remains as much of a poisoned chalice as ever.
Conclusion
A recurring debate this year has been whether UK enforcement agencies are being properly funded. New legislation and specialist units have been announced with great fanfare, but agency budgets are shrinking in real terms. Below inflation pay rises for civil servants suggest that the revolving door between public and private sector will operate only one way. It is hard not to see the failure to invest as counterproductive, with increased investment being likely to pay for itself with more efficient investigations and better outcomes. However, with budgets expected to remain static across all government departments, 2023 is unlikely to signal a new dawn.
1 Conservative minister resigns in anger over Covid fraud, 24 January 2022, https://www.bbc.co.uk/news/uk-politics-60117513
2 For more information see here: https://www.wilmerhale.com/en/insights/blogs/WilmerHale-W-I-R-E-UK/20220310-the-new-economic-crime-bill-can-it-deliver-on-its-promises
3 Law Commission sets out options to Government for reforming how companies are convicted of criminal offences, 10 June 2022, https://www.lawcom.gov.uk/law-commission-sets-out-options-to-government-for-reforming-how-companies-are-convicted-of-criminal-offences/
4 OFSI Annual Review, 10 November 2022, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1116689/OFSI_Annual_Review_2021-22_10.11.22.pdf
5Ibid.
6 Ibid.
7 Government takes landmark steps to further clamp down on dirty money, 28 February 2022, https://www.gov.uk/government/news/government-takes-landmark-steps-to-further-clamp-down-on-dirty-money
8 UK businessman linked to Oleg Deripaska arrested on suspicion of facilitating sanctions evasion, 11 October 2022, https://www.nationalcrimeagency.gov.uk/news/uk-businessman-linked-to-oleg-deripaska-arrested-on-suspicion-of-facilitating-sanctions-evasion
9 NCA -v- Westminster Magistrates’ Court, [2022] EWHC 2631 (Admin)
10 NCA -v- Baker, [2020] EWHC 822 (Admin)
12 s.362U(2), ECA.
13 NCA Annual Plan, 2022-2023, https://www.nationalcrimeagency.gov.uk/who-we-are/publications/594-nca-annual-plan-2022-23/file
14 NCA: ‘Double our budget to fight organised crime’, 14 May 2019, https://www.bbc.co.uk/news/uk-48261477
15 NCA secures £50m identified by Barclays as the proceeds of crime, 25 November 2022, https://www.nationalcrimeagency.gov.uk/news/nca-secures-50m-identified-by-barclays-as-the-proceeds-of-crime
16 NatWest fined £264.8 million for anti-money laundering failures, 13 December 2021, https://www.fca.org.uk/news/press-releases/natwest-fined-264.8million-anti-money-laundering-failures
17 Letter from Nikhil Rathi to the Chair of the Treasury Select Committee, 13 December 2021, https://committees.parliament.uk/publications/8240/documents/84223/default/
18 FCA fines Santander UK £107.7 million for repeated anti-money laundering failures, 9 December 2022, https://www.fca.org.uk/news/press-releases/fca-fines-santander-uk-repeated-anti-money-laundering-failures
19 Lisa Osofsky’s oral evidence to the House of Commons Justice Committee, 29 March 2022, https://committees.parliament.uk/oralevidence/10045/html/
20 First SFO trial of 2022 results in double conviction, 31 May 2022, https://www.sfo.gov.uk/2022/05/31/first-sfo-trial-of-2022-results-in-double-conviction/
21 Harlequin resorts boss jailed for 12 years following SFO investigation, 30 September 2022, https://www.sfo.gov.uk/2022/09/30/harlequin-resorts-boss-jailed-for-12-years-following-sfo-investigation/
22 Investment manager behind £100 million no-win-no-fee fraud jailed for 14 years, 11 August 2022, https://www.sfo.gov.uk/2022/08/11/serious-fraud-office-secures-conviction-in-100-million-no-win-no-fee-fraud/
23 Glencore to pay £280 million for ‘highly corrosive’ and ‘endemic’ corruption, 3 November 2022, https://www.sfo.gov.uk/2022/11/03/glencore-energy-uk-ltd-will-pay-280965092-95-million-over-400-million-usd-after-an-sfo-investigation-revealed-it-paid-us-29-million-in-bribes-to-gain-preferential-access-to-oil-in-africa/
24 Lisa Osofsky: non-cooperating companies won’t get DPAs, 29 November 2022, https://globalinvestigationsreview.com/article/lisa-osofsky-non-cooperating-companies-wont-get-dpas.
25 ENRC -v- Dechert, Neil Gerrard and the Director of the SFO, [2022] EWHC 1138 (Comm)
26 Publication of Brian Altman QC and Sir David Calvert-Smith reviews, 21 July 2022, https://www.sfo.gov.uk/2022/07/21/publication-of-brian-altman-qc-and-sir-david-calvert-smith-reviews/