Corporate Crime Insights – April 2024

April 30, 2024

Welcome to the April 2024 edition of Dentons Financial Crime Insights, where the Dentons UK Regulatory and Investigations team has pulled together news and updates from our respective specialisms which we think are likely to be of interest to our clients. As in previous editions, our team has used our combined background and experience in private practice, in-house and at each of the key AML, ABC and sanctions regulators to give you our perspective on key updates to help inform your horizon scanning and financial crime compliance.

This update covers:

• Anti-Money Laundering
• Bribery and Corruption
• Sanctions
• Corporate Fraud
• Internal Investigations

Anti-Money Laundering

• On 11 March, HM Treasury published a consultation on Improving the effectiveness of the Money Laundering Regulations (MLRs)
  • Key themes of the consultation include: (i) making customer due diligence proportionate and effective, (ii) strengthening system coordination, (iii) clarifying the scope of MLRs, and (iv) reforming registration requirements for the Trust Registration Service (TRS).
  • Of particular importance to non-financial services clients, is the proposal that further guidance be provided on triggers for the conduct of customer due diligence and source of funds checks.
  • HM Treasury is keen to hear from a wide range of stakeholders in response to the consultation, and we encourage regulated businesses to submit responses to the consultation questions. The consultation closes at 11:59pm on 9 June 2024.
• In February 2024, the Financial Action Task Force (FATF) updated its grey and black lists. The FATF identifies jurisdictions on its grey list which are under increased monitoring due to weak measures to combat money laundering and terrorist financing and should be considered high-risk jurisdictions for the purpose of internal risk assessments, triggering enhanced due diligence. Our clients should ensure that their AML policies are updated to reflect the below changes.
  • The black list remained unchanged from October 2023, with the Democratic People's Republic of Korea and Iran subject to countermeasures, and Myanmar subject to enhanced due diligence measures.
  • Kenya and Namibia were added to the grey list.
  • In line with its initial determination in October 2023, the FATF removed Barbados, Gibraltar, the UAE and Uganda from its grey list following successful onsite assessments verifying that the countries have met their commitments in the FATF action plans.
• The new year started with a significant AML enforcement action in the gambling space, with Gamesys Operations Limited being fined £6 million by the Gambling Commission for social responsibility and AML failures (press release, 10 January 2024). The Gambling Commission investigation revealed that some customers were able to evade AML thresholds and spend significant amounts without AML checks being conducted. Gamesys had also failed to conduct adequate customer due diligence, being over-reliant on third party information (internet research) and verbal assurances. Bet365 has also recently been fined more than £500,000 for AML failures including a failure to conduct sanctions checks on new clients.
• The Environmental Agency has launched a new economic crime unit, intending to investigate and prosecute money laundering in the waste sector. We will shortly issue an article exploring this new development and how it might impact our clients.

AML and Financial Services

• The FCA published an update on its progress on reducing and preventing financial crime on 8 February 2024.
  • The FCA states that it has maintained a robust and proportionate approach to authorisation, refusing over 88% of Crypto registrations over the last financial year. It states, "Those firms that do not have sufficient AML controls, designed to ensure confidence in the financial system and prevent money laundering, can expect to be refused." Firms registering new AML business are actively encouraged to ensure that they have considered the adequacy and appropriateness of controls pre-application.
  • Mark Francis, FCA's director of Wholesale and Unauthorised Business Investigations, also commented on the update, urging firms to read it. We anticipate to see increased activity by the FCA in the four key areas identified by Mark, namely (i) using technology for money-laundering detection, (ii) improving information sharing, (iii) raising consumer awareness to deter fraud (especially APP fraud), and (iv) firm's metrics for monitoring the effectiveness of their AML and anti-fraud measures.
  • Finally, Last month the FCA published a 'Dear CEO' letter, sent to AML regulated firms and outlining persistent failures and weaknesses documented during the course of recent financial crime supervision. All recipients of the letter are expected to conduct a gap analysis in respect of the weaknesses identified and take any remedial action required. In our experience such letters shouldn't be ignored as they may be used as an aggravating feature in circumstances where systems and controls weaknesses are later found (ie you are 'on notice' that there is a potential issue and you failed to take steps to remediate). This is definitely something to build into horizon scanning across the next six months. Please feel free to reach out if you want to discuss further. Weaknesses identified were:
    • Discrepancies between the firms registered AML activities and the activities that they were actually undertaking.
    • Poor resourcing of financial crime teams;
    • Failings in the mandatory business wide risk assessment, ranging from poor quality assessments to a complete failure to conduct and document such an assessment adequately identifying business risk exposure;
    • Poor quality customer risk assessments
    • Poor quality or insufficiently detailed policies and procedures.
    • Inadequate training
    • Governance failings, including failing to properly document decision making.

Bribery and Corruption

• The Serious Fraud Office (SFO) has been fairly active lately. Some recent developments in the last quarter include:
  • New SFO director Nick Ephgrave gave his first public speech - some key takeaways include the need for continuing investment into the SFO; making the most of the new ECCTA powers (see our previous insights edition); the need for faster case progression such as introducing a "rigorous and intrusive review process" to ensure investigations stay focussed on core issues and implementing a bolder approach - including actively shutting down investigations where it is clear the SFO is never going to reach the threshold for charge. Bolder has also meant more dawn raids and swifter action - the SFO has conducted more dawn raids in the last three months than in the last three years.
  • securing the conviction of a former Ministry of Defence (MoD) official for misconduct in public office, by taking secret payments in exchange for commissioning work from offshore consultants for the MoD;
  • charged two former Petrofac senior executives with bribery. From 2012 to 2018, the individuals have been allegedly involved in paying over US$30 million to influence the awarding of contracts related to oil facilities in the UAE worth around US$3.3 billion.
• The UK has fallen to its lowest-ever score in Transparency International's corruption perceptions index (CPI). It was ranked as the 20^th most transparent country in the world in 2023, in contrast to the 8^th and 11^th place between 2012 and 2021.
• The proposed European Bribery Directive is still progressing through the legislative process. The proposal is currently at the committee stage, sitting with the Committee on Civil Liberties, Justice and Home Affairs.

Sanctions

UK Sanctions Update:

• On 19 February 2024, alongside the G7+ Coalition partners, the UK implemented significant changes to the Oil Price Cap attestation model, strengthening the compliance regime. We anticipate that the more stringent attestation requirements will materially increase the administrative burden for providers relying on the Oil Price Cap General Licence. Providers should prioritise familiarising themselves with the new requirements and ensure that they have allocated adequate resources to manage the increased number of attestation requests.

Our full article setting out the changes and the obligations on involved persons can be found here.

• On the 22 February 2024, the UK announced new asset freezes targeting 50 individuals and entities, including 14 linked to manufacturing munitions, foreign entities supplying sanctioned material and equipment to Russia, oil traders, shipping companies and diamond companies. The UK also expanded its Common High Priority Items List to include 5 new codes related to Computer Numerical Control machines and announced its first sanctions strategy setting out the Government's approach to using sanctions.

• On 23 February 2024, the UK Supreme Court accepted an appeal to hear the civil claim brought by Russian banks PJSC National Bank Trust and PJSC Bank Okritie against Russian businessman Boris Mints and his sons; this opens the possibility for clarity from the Supreme Court as to the breadth of the concept of control.

• On 28 February 2024, and in force from 1 March 2024, the UK introduced a prohibition on the import of diamonds which originate in Russia and have been processed in a third country.

EU Sanctions Update:

• The EU adopted its 12^th package on 19 December 2023, including (amongst other things): asset freezes targeting a further 145 Russian individuals and entities; an import ban on Russian diamond; an expanded scope of other goods and technology restricted for sale, supply, transfer or export to for use in Russia; an expanded scope of Russian origin or exported metals whose purchase, import or transfer, or whose transfer between third countries, is prohibited; and a requirement to include a "no re-export to Russia" clause in all contracts for the export or supply to third countries of certain goods restricted under the Russia regime.

Our full article on this new requirement can be found here.

• The EU adopted its 13^th package on 23 February 2024, including asset freezes targeting a further 194 Russian individuals and entities; and a further expanded scope of restricted goods and technology for sale, supply, transfer or export to for use in Russia, including advanced technology items used in the production of drones, missiles and wider military system.

• The European Parliament voted on 12 March 2024 to approve new harmonised rules and minimum standards for the enforcement of EU sanctions. It is now expected that the EU Council will adopt the proposed directive into law by May 2024 with few further amendments.

Corporate Fraud

• At the beginning of March 2024, the initial provisions of the Economic Crime and Corporate Transparency Act 2023 were enacted, involving a significant overhaul of the powers granted to Companies House. The new rules allow the agency to scrutinise company information more thoroughly and demand evidence where necessary. Stricter checks on the validity of company names have been enforced, physical addresses for companies mandated as well as the (new) requirement for a registered company email address. Further, companies must now verify the legality of their activities upon incorporation and within their confirmation statements. These changes, supported by new criminal offences and civil penalties, aim to bolster the integrity of the UK's business sector. Rollout of these changes have been phased to limit the impact on legitimate businesses, but we should also expect further changes to come.

• Whilst UK banks have been generally supportive of the proposed 'Suspended Accounts Scheme', outlined in the latest Criminal Justice Bill, they have queried the apportionment of liability. The scheme would allow the UK government to redirect funds in frozen accounts (for at least seven years where the owner does not come forward) of participating lenders to fund government projects combatting economic crime. However, unlike similar schemes (like the one involving dormant accounts), the has Government argued that it would not be practical for them to take on the risks associated with the funds - such as challenges of unfair suspensions or customer complaints - as suspensions are due to a proactive decision by the bank. The Home Office have planned to pay the banks a rebate if the customer later claims to recover the funds, but subject to a cap. This is currently seen as an impasse by the banks, especially as accounting rules mean that lenders are technically unable to unlock the suspended assets at all. Efforts to resolve the deadlock have been unsuccessful thus far, with accountants have been brought in to find a potential solution.

• The FCA won its case against a former Goldman Sachs analyst Mohammed Zina, who turned a £140,000 profit from insider trades financed through fraudulent bank loans. Zina was found guilty on all 9 counts brought against him by the FCA and sentenced to 22 months in prison. His brother, Suhail Zina, a former Clifford Chance lawyer, was acquitted days prior to the end of the trial. A proceeds of crime hearing is also scheduled for September this year. Across the pond, famous former-crypto entrepreneur Sam Bankman-Freid, was sentenced to 25 years imprisonment following the collapse of crypto-trading platform FTX. FTX founder, Bankman-Fried was convicted of taking more than £6.3 billion from customers, which came to light after a run on deposits sparked by rumours of financial trouble.

• We are anticipating guidance from HMRC is respect of the 'reasonable procedures' defence for the offence of failing to prevent fraud. Our clients shouldn't however be waiting for publication, and should already be thinking closely about their internal fraud controls. We set out some things to be thinking about here.

Internal Investigations

• On 13 February 2024 Nick Ephgrave gave his first public speech as Director of the Serious Fraud Office, which provided some colour as to the direction of the body over the next few years. Somewhat controversially given the SFO's limited budget, he advocated for a change in SFO policy to allow for whistle-blowers to receive incentive payments for information. Whistleblowers have seen substantial payouts in the US; however, this practice has been thus far resisted by the SFO and the FCA. It should also be noted that legislative changes would be required for payments to begin, the UK government is conducting a review into whistleblower laws with findings expected soon. Mr Ephgrave also suggested that, going forward, the SFO will more closely collaborate with US law enforcement.
• In February 2024, the FCA began a consultation into its enforcement policy. The proposed amendments to the FCA Enforcement Guide (in consultation paper CP24/2 link) seek to increase transparency in the investigations process by announcing details of some of its ongoing investigations. This will constitute a significant change in the approach of the regulator given that, at present the FCA avoids publicly announcing its investigations in the first place. The FCA propose to announce the opening of enforcements investigations, including the subject of the investigations (although the regulator has been keen to highlight it will generally not announce where the investigation is against a named individual), the sector and regulatory provisions to which the investigation relates and a summary of the suspected breach of FCA rules. The FCA are also proposing to announce and publish updates on investigations that have already started, publicly highlighting where an investigation has found no rule breaches. However, of relevance to those considering internal investigations is the emphasis the FCA has placed on the value of internal reports. The FCA has suggested that if it receives an internal report, drafted by an external third party, the company may be less likely to enter the FCA enforcement process (see page 42 of the CP24/2 consultation paper). As these investigations are now likely to be publicised it is even more clearly advisable to catch, investigate and report potential rule breaches as quickly as possible. The deadline to respond to the consultation is 16 April 2024.

• In early March, The Treasury Committee published its report on 'Sexism in the City' which, among other things, referenced the shortcomings of the investigation practices of financial services firms when dealing with complaints of harassment. The Diversity Project told the Committee that there is a sense that "if it's not criminal, it's not that bad". The Committee has been keen to contrast the way financial services firms deal with non-financial misconduct, with the way it treats financial misconduct, with the latter treated with more severity than the former. The Committee criticised current whistleblowing legislation, strongly recommending that the Government seeks to strengthen its current framework. The Committee also recommended that the FCA launch a campaign to publicise the availability of its whistleblowing phone line. In the context of internal investigations, the Committee suggested that firms review whether their HR departments are adequately suited to investigate allegations of abuse or harassment with a direct line to senior leadership or the board. The Report instead suggested that firms consider setting up external investigation process where HR departments are not sufficiently independent of the accused.