The shape of things to come

While we all willed Covid-19 to merrily disappear at the stroke of midnight on 1 January, in 2021 we are still very much living in volatile and unpredictable times. Though tempered by vaccine rollout efforts, the convergence of Brexit and the pandemic has created the perfect storm for white-collar crime to rise in the UK, compelling businesses to revisit their corporate governance and compliance models to assess if they can keep pace with the new order.

Despite suffering operational setbacks in the initial throes of the pandemic, UK regulators are still actively pursuing white-collar investigations and trials, with headline cases including ex-BHS boss Dominic Chappell being sentenced to six years in jail for tax evasion. What’s more, recent FCA clampdowns and HMRC dawn raids on businesses suspected of abusing the furlough scheme serve as a stark reminder that strict regulatory compliance is still – if not more – required now and in the months ahead.

As we take stock of the year gone by and look towards disruption in some shape or form across the next 12 months, what issues can GCs and white-collar crime lawyers expect to contend with?

Lifting the floorboards on furlough fraud

A hallmark of the government’s pandemic response has undoubtedly been the furlough scheme, designed to help struggling businesses retain employees and limit unemployment rates. Confusion and panic at the scheme’s inception (‘furlough’ then being a relatively obscure term to most) coupled with subsequent iterations in the form of ‘flexible furlough’ has meant businesses may have unlawfully claimed government grants, unwittingly or otherwise.

‘Speed was the enemy,’ says Andrew Sackey, who spent over a decade at HMRC prior to joining Pinsent Masons in January 2020, and establishing the agency’s ‘Offshore, Corporate and Wealthy’ enforcement division from 2016. ‘It had to get the money into people’s hands. HMRC has since written to more than 27,000 businesses, and in those nudge letters it has actually said, “mistakes happen”. It is not finished paying the money out yet, but as it is coming to the end of the scheme it wants to make sure that people do the necessary internal due diligence, to check that all the money was properly received.

‘GCs and others in business would be really well advised, notwithstanding the fact that first [HMRC] amnesty has passed, to conduct some basic due diligence of furloughed staff. For example, checking numerically if emails were going into and out of furloughed employees’ accounts during periods where they were furloughed’.

Nonetheless, without a clear legal, regulatory or statutory duty to do so, Steptoe & Johnson corporate crime partner Zoe Osborne advises caution to companies initiating internal investigations voluntarily. ‘It’s incredibly difficult to determine whether you should be lifting up the floorboards to look and see whether the decisions you made in 2020 were actually right. Furlough fraud is one of those issues, because it changed so much and people were forced into making decisions too quickly. There has to be a decision taken carefully and weighing up the risks of deciding not to do an investigation against the risks of doing so. In my experience, as soon as you lift up a floorboard, you’re damn sure to find an issue’.

Scratch my back…

The UK officially left the EU on 31 January 2020, entering into a last-minute trade agreement with the bloc at the end of the transition period on 31 December and, with the exception of Northern Ireland, exiting the single market. Lorry tailbacks aside, from a security perspective Brexit also meant the loss of the UK’s membership of, and access to, valuable EU databases and information-sharing organisations such as Europol, Eurojust, the European Arrest Warrant, and the Schengen Information System (SIS2). Given the vast array of information these systems hold – including biometrics, vehicle registrations, and criminal record details – is their loss a hindrance to the UK’s ability to combat white-collar crime?

Sackey, who previously worked at the EU on the European Arrest Warrant, believes so. ‘All white-collar crime is pursued by means of evidence, audit and building the picture of what happened years before. Under the European Investigation Orders (EIO) procedure, only introduced in 2017, that was very easy but now, that avenue has been lost. We’re formally out of the Second Schengen Information System (SIS II), the most widely used automated criminal database in Europe, which means that we won’t be able to flag issues as rapidly as we would otherwise, or gain information to know where to look.’

He noted that the National Police Chiefs’ Council and the National Crime Agency (NCA) have both previously warned MPs that the loss of SIS II will have a ‘major operational impact’ and will reduce the UK’s ability to exchange real-time alerts and data.

He also points out that under the EU-UK Trade and Cooperation Agreement (TCA) reached on 24 December 2020 the UK is no longer in the EAW scheme and instead follows a fast-track system that mirrors the arrangement between the EU, Iceland and Norway. The fast-track system is more restrictive than the previous system as EU member states can refuse to or limit the extradition of its own nationals. Further, the new surrender mechanism will revive the dual criminality requirement, where an offence must exist in both jurisdictions. ‘Those factors can have significant impacts when you’re talking about perpetrators of crime who operate on the international scene.’

Osborne, on the other hand, takes a more sanguine approach. ‘I’ve seen lots about the fact that we’re no longer members of Europol and Eurojust and that we don’t have the same access to criminal information. Actually, I support something [current director of the Serious Fraud Office] Lisa Osofsky said quite recently; just because we are no longer in Europe, I can’t imagine a case where somebody in France is going to say, “look, we are not going to share information with you where it would help to detect crime”. It might be a little more laborious, but I don’t think ultimately it will have a major impact.

‘At the end of the day, and while Europe might say differently, London is still the financial centre of Europe as a jurisdiction. As long as that is the case, they’re going to need our information just as much as we’re going to need theirs. I think there will not only be people wanting to help, but also a quid pro quo: you scratch my back, I’ll scratch yours’.

The hill we climb

In the wake of a deadly insurrection in the US Capitol, Joe Biden was sworn in as President of the US on 20 January. For lawyers on this side of the Atlantic, the Biden administration is both a turning point for white-collar crime and an opportunity for even greater co-operation between UK agencies and their American counterparts.

‘We now have a very different President to Donald Trump, who famously said that the FCPA was “ridiculous” and a “horrible law”’, says Osborne. ‘We are certainly going to see more action coming out of the US and the Department of Justice. That’s relevant to the UK, particularly around the Bribery Act, because where the US goes, the UK tends to follow. We saw that with the Libor investigations, for example, so a new administration and more investigations opened up in the US will have a significant impact on the UK.’

“In my experience, as soon as you lift up a floorboard, you’re damn sure to find an issue.”
Zoe Osborne, Steptoe & Johnson

Nonetheless, Sackey points to the fact that despite Trump’s disdain for the FCPA, UK-US co-operation has persisted regardless. ‘There’s a lot already going on that the outgoing President hasn’t stopped. Inter-agency co-operation goes on in any event because it operates within the frameworks that already exist, and there is a huge amount of law enforcement and intel data exchange on a daily basis.

‘Because his style appears to be collaborative, President Biden will no doubt continue to push for trans-border enforcement of all sorts. Lisa Osofsky is an ex-deputy GC for the FBI, so clearly there are strong links with the US and I don’t think that slowed down, necessarily, during the recent administration’.

Osborne shares this sentiment, believing that the relationship between the UK and the US, in terms of law enforcement, has ‘never been stronger’.

Rise of the whistleblower

Whistleblowing and formal complaints are another factor that Osborne and Sackey have slated as one of the top concerns for businesses in the next 12 months, with an increased number of wronged or dismissed employees posing the biggest risk.

‘Whistleblowing is going to be a real issue for GCs this year,’ believes Osborne. ‘There are a lot of people unfortunately losing their jobs, having their pay cut, or hours cut. That creates a sense of displeasure, and employees who may have not reported things before might start reporting issues out of a sense of being aggrieved’.

‘Once you’re impacting people’s lives,’ says Sackey, ‘then that individual, rightly or wrongly, could make mischief for you, or make a formal complaint. For example, if something like furlough wrongdoing or backhanders had been buried in normal circumstances, it may have stayed buried. But, if employees in the circle of people who knew about that were made redundant, then they might consider whether it’s a good time to come forward and share that to enhance their position’.

The anticipated increase in whistleblowing coincides with a new EU Directive that provides enhanced protection to persons who report breaches of EU law. Although the UK is no longer obliged to transpose these rules into national law, businesses who operate in the EU should take steps to monitor the situation in relevant member states. Nevertheless, Sackey’s basic advice to all businesses is to ‘get your control sorted out, because it can come out of nowhere’.

A view to the future

A thousand clairvoyants would struggle to predict what the next year has in store for businesses, but it’s possible to flag some probable risks based on the challenges already posed in 2020 and the first weeks of 2021.

In Osborne’s view, ‘we are likely to see more DPAs, and much tougher regulatory enforcement of professionals, probably in a regulatory framework under the senior managers’ regime. We will also see a lot more data loss cases; we saw the massive, eye-watering fines of Marriott and British Airways, and I have absolutely no doubt that there’s going to be more of that to come’.

‘There are going to be fresh risks that develop as the commonality of the market fractures,’ says Sackey. ‘As we move into a more fractured supply chain model because of Brexit and the changing tax regimes across different countries, the Corporate Criminal Offence (CCO) is an enhanced risk across your supply chain. For example, if you’ve got a haulage company or a driver supplying goods from A to B and they’re doing something they shouldn’t that results in tax or duty being evaded, then you might be criminally liable for their dishonest facilitation. Those risks are higher now that Brexit transition has ended.’

In the midst of such an ever-shifting business environment, Sackey also urges companies to reassess their compliance obligations. ‘Whenever you’re at a border, there is a risk that there are those who will try to implement some form of criminality. That will create the risk of corporates needing to tighten their compliance regimes: If it worked in January last year, would it still work now with Covid? Or, if it worked in December when we were still in the transition period, is it going to work now in when we’re in a different model?’

Owing to constrained departmental budgets and a renewed focus on strategy, Sackey also believes there will be more joint operations, ‘because they’re cheaper and they make more impact. You’ll see the Serious Fraud Office working with HMRC, because where there’s a bribe, there’s going to be tax irregularity and quite possibly evasion.’

Osborne too ranks inter-agency co-operation as a key feature of white-collar enforcement going forward, particularly around anti-cartel laws. ‘The SFO entered into a memorandum of understanding with the Competition and Markets Authority in October last year, and said that they were going to look at how they could cooperate around the prosecution of the criminal cartel offence, which hasn’t ever really been anyone’s focus. Particularly with issues coming out of Covid, and the fact that people have been talking quite a lot about competition breaches, we could see some interesting things coming out of the criminal cartel offence’.

The twin impacts of Covid-19 and Brexit will continue to affect the way white-collar crimes are pursued, investigated and enforced. In addition to the uncharted territory of furlough, questions remain on the future of cross-border collaboration and co-operation, as well as the extent to which new and unpredictable risks will affect business. While the message probably remains the same as it did in the past – companies and their lawyers must do everything they can to ensure compliance and best practice – the only real certainty surrounding the white-collar crime landscape is more uncertainty.