FCA AND MONEY LAUNDERING

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1 ebook Edition 045 / November 2016 Serious Fraud, Regulatory and Complex Crime Lawyers FCA AND MONEY LAUNDERING Random money laundering investigations by the Financial Conduct Authority could prove costly for firms without proper preventative measures Firms are to be randomly investigated to make sure they are complying with their legal obligations regarding money laundering. Rob Gruppetta, the head of the Financial Crime Department at the Financial Conduct Authority(FCA), made the announcement earlier this month. Speaking at the FCA s Financial Crime Conference, Mr Gruppetta said there would be random sampling of firms covered by the Money Laundering Regulations who do not have higher risk business models. Mr Gruppetta stated that this would include businesses such as financial advisors, stockbrokers, life insurance companies and even safe deposit box providers. Around 100 of these firms will be investigated each year. The FCA claims it is being done to raise standards regarding prevention of money laundering while giving it a better picture of the risk posed. But whatever the FCA hopes to achieve, the fact remains that any firm that is obliged to comply with the Money Laundering Regulations will have at the very least a lot of explaining to do if a random investigation shows that they are failing to do this. They have to be able to show that they are capable of recognising money laundering and have taken steps to prevent it. Laundering Money laundering is the disguising of the origins of money that is the proceeds of crime. A person can launder their own criminal proceeds or have it done for them by another 1 person. Both of these are offences under the Proceeds of Crime Act 2002 (POCA): Section 327 makes it an offence to conceal, disguise, convert, transfer or remove criminal property from the jurisdiction, Section 328 makes it illegal to enter into or become concerned with an arrangement to acquire, retain or use the proceeds of crime, while Section 329 makes it an offence to possess criminal property.

2 Sections 330 to 332 of POCA make it an offence to fail to disclose knowledge or suspicion of money laundering. Suspicion, in such cases, was defined in Da Silva (2006) as a possibility, which is more than fanciful, that the relevant facts exist. If you do find yourself subject to a random check by the FCA and you have been ignorant of - or have turned a blind eye to - money laundering, you will face problems. Anyone covered by the Money Laundering Regulations has to make an authorised disclosure of such knowledge or suspicion. Precautions Your only valid defence when suspected of allowing money laundering to take place is that you had taken all possible precautions to prevent it. This means carrying out thorough checks on the identity and background of a client, business associate or any other person involved with the company who is looking to move money around it or out of it. Researching the genuine beneficiaries of a deal and the precise relationship between two parties to a transaction also must be done to prevent problems. Not carrying out such checks could lead to prosecution for failing to disclose knowledge or suspicion of money laundering. The FCA is at pains to point out that its random investigations are to help improve compliance and gauge the risk of money laundering. But don t think for a minute that this will mean prosecutions will not follow if an investigation uncovers wrongdoing that has gone unreported. Indicators Every firm, of whatever size, that is covered by the Regulations has to look for the possible indicators of money laundering. It has to be the first to find them: having them discovered for you by the FCA will mean serious legal difficulties. There is no catch-all, exhaustive list regarding what could be money laundering. But if there is an unwillingness to be open about the sums of money, investors and precise details involved in a deal or an insistence on unusual conditions being attached to it, then alarm bells should be ringing. If there appears to be no clear reason why your firm has been asked to conduct a deal, why money is being moved around in a certain way or why a transaction seems excessively complicated, money laundering has to be considered a possibility. This is also the case if there is a sudden request for a deal to be completed in cash or if assets appear without explanation. 2 Many in business will believe that they can smell a rat but many still find that their companies have been used for money laundering. At Rahman Ravelli, we regularly assess firms vulnerability to money laundering and create tailor-made procedures to prevent it happening. Introducing a policy of no cash on deals above a certain size, having designated staff examine any funding sources for a deal and imposing restrictions on access to, and use of, company bank accounts can all deter the would-be money launderer. They will also go some way to convincing any random FCA investigation that you have done all you can to prevent money laundering. Many in business will believe that they can smell a rat but many still find that their companies have been used for money laundering.

3 EXECUTIVES AND FRAUD RISKS Why problems at some major retailers are a warning to executives about their responsibilities. Some big retailers have been facing major legal problems. Tesco is facing a claim of more than 100M in damages from a group of investors who say that the supermarket giant made misleading statements to the stock market. It is the latest episode in an accounting scandal that emerged two years ago when a 263M black hole was identified in Tesco s finances. The controversial collapse of BHS is another example of the major headaches caused when the numbers don t add up: the authorities investigate, vested interests start apportioning blame and many involved have to defend themselves. Neither case seems to indicate a willingness nor the ability to tackle a problem before it becomes too big to manage. Which goes to prove that acting as early as possible can bring rewards or at least greater protection from prosecution. Investigation A suspicion of problems should be the catalyst for an internal investigation. We carry them out for a range of corporations and organisations. Some suspect they may have problems that need to be identified and tackled, others want to ensure no problems arise. The result can be the creation and implementation of strong, anti-corruption measures that can tackle any current problems and prevent any further ones. Some company executives, however, argue that they have little need for such investigations - or any assistance in preventing fraud. Some claim that it is The controversial collapse of BHS is another example of the major headaches caused when the numbers don t add up. 3

4 their accountants who are in the best position to know what is happening as they see all the figures. But there is no guarantee that the accountants will spot wrongdoing. A failure to identify the problem can lead to not only the risk of fraud. It can lead to a company s collapse and its executives facing serious questioning once it is in administration. Administration The Insolvency Service (IS) will want to discover why a company has had to go into administration. It will consider if there has been incompetence and any breach of the Companies Act. But executives must remember that such an investigation will not necessarily remain a civil law issue. Answers that executives give could later be used in a criminal investigation making it essential that you seek expert legal advice immediately. If the IS issues a petition for the compulsory winding up of the company or bankruptcy proceedings, the Official Receiver (OR) will be notified and will look into the causes of the winding up of a company. Legislation gives both these bodies significant powers to force those at the top of a company to explain and justify their actions. Insolvency Act 1986 Section 236 of the Insolvency Act 1986 places on officers of a company that has been wound up a duty to provide information in relation to official enquiries. If they fail to do so, the Court can summons them to appear before it. If that person fails to appear before the Court when summonsed the Court may, under Section 236(5), issue a warrant for their arrest. It must be remembered that following winding up orders or voluntary liquidation, the OR will investigate the company s failure and the conduct of its directors in accordance with the Company Directors Disqualification Act The OR can also request that information be provided under section 236(2)(a) or Section 236(2)(c) of the Insolvency Act. If you are, therefore, a senior figure of a company that fails because you did not carry out your duties diligently, Section 236 gives the authorities a lot of power when it comes to calling you to account. Truth Section 236 (2) is designed to help discover the truth regarding a company s problems so that its affairs can be put in order and the liquidation process completed. Any information using Section 236 (2) can then be given to the authorities to either initiate a criminal prosecution or director disqualification proceedings. For this reason, anyone questioned under Section 236(2) must be aware of 4 the possible implications of what they say under interview. The section applies to directors, debtors, shareholders, auditors, solicitors and bankers. Anyone who is questioned under either Section 236(2)(a) or Section 236(2)(c) could later be subject to criminal investigation. Section 236(2)(a) applies to any officer of the company. Anyone questioned under it is legally obliged to answer the questions. Section 236(2)(c) applies to any person that the Court thinks is capable of giving information regarding the business dealings of the company. The distinction between Section 236(2)(a) and Section 236(2)(c) is important. If you are asked under Section 236 to appear before the court for examination, submit a witness statement or produce any records, you may be able to resist if questioned under (2)(c) to resist that is not an option if you re questioned under (2)(a). Such situations emphasise the need for expert, specialist legal representation for executives who find themselves in such an unfortunate situation. But they should also make it clear to any executives reading this that the best way to avoid any such problems would be to as we said earlier remove the risk of wrongdoing at the earliest possible stage.

5 FRAUD AND SME S Small or medium enterprises (SME s) are often reluctant to report fraud. Aziz Rahman examines why and suggests the best way to tackle the problem. SME s are not reporting more than 260m of fraud each year because they believe it is not worth the trouble. Research just published indicated that almost one in five managers whose companies were affected by fraud did not alert the authorities. Potential damage to the firm s reputation, the fear of exposing it to further fraudulent activity and the belief that it would be too expensive to seek specialist help were among the main reasons those running fraud-hit SME s gave for not reporting wrongdoing. With a third of cases involving fraud being committed by staff and 25% being perpetrated by contractors, it is worrying that SME s will not take action to prevent any repeat offending. Necessary Knowledge The research showed that 57% of SME s never carry out fraud audits, either because they believe they are adequately protected, would spot any wrongdoing without going to such lengths or would never be targeted. Almost half of those questioned admitted they lacked the necessary knowledge to tackle fraud. If anyone who commits fraud takes the time to read this research, it will be music to their ears. SME s are traditionally vulnerable to fraud as they tend to lack the carefully-devised and implemented procedures that bigger companies employ. The fact that those running them are reluctant to tackle the problem indicates that little will change in the near future. Preventative Measures Such a situation is alarming, especially as there are actions that SME s could take which would not damage their reputation, make them vulnerable to further fraud or cost them a fortune. At Rahman Ravelli, we are regularly asked to assess the workings of firms to determine their vulnerability to fraud and devise preventative measures to remove that vulnerability. Using relevant legal expertise to design out the possibility of fraud in a workplace does, obviously, cost the company in the short term. But this can lead to long-term savings. This is because the chances of fraud being perpetrated against the company are now greatly reduced in terms of both the number of incidents and the amounts involved. Internal Investigations and Private Prosecutions Even the most publicity-conscious SME manager should also be aware that there are ways in which incidents of fraud can be acted upon without prompting unwanted attention. Corporate fraud lawyers can be used to conduct investigations on behalf of a SME. Such investigations can be 5

6 carried out with the minimum of fuss and with very few people being made aware of them. Findings from an investigation can be used to report the matter to the police. But there are other options. An SME could use the information to bring a private prosecution against the person or persons they believe carried out the fraud. Such cases can often be completed quicker than a conventional prosecution involving the police. SME managers who cited expense as a reason not to report fraud should also be aware that costs in private prosecutions can often be recovered, even if the prosecution is not successful. Alternatively, it is possible to initiate civil proceedings against the person who has committed the fraud. In such cases, the emphasis is on recovering what has been lost rather than on punishment. Civil proceedings offer the scope for an early settlement and are another way in which the fraud can be tackled in a way that is neither costly nor damaging to the company s reputation. The research and the statistics don t lie: SME s are vulnerable to fraud and yet they are reluctant to tackle the problem. But by employing the right methods they can identify the people responsible, take appropriate action and prevent it happening again without either spending a large amount of money or suffering a damaging blow to their reputation. Using relevant legal expertise to design out the possibility of fraud in a workplace does, obviously, cost the company in the short term. 6

7 BRIBERY FAILING TO PREVENT IT Investigations into Rolls-Royce underline the severe consequences of failing to prevent bribery. Aziz Rahman outlines what corporations have to do to avoid such failure. The authorities are looking very closely at allegations that Rolls-Royce used teams of agents to help it land contracts in a dozen or more countries. Not for the first time, we have a major company having to explain the methods it used to secure business. Failure to prevent bribery is costly. Many companies have had to pay colossal financial penalties in recent years for doing just that. Under Section 7 of the UK s Bribery Act 2010, it is an offence to fail to prevent a person associated with your company from committing bribery on its behalf. Obviously, bribery prosecutions have been brought and continue to be brought under other Acts for actions that pre-date the introduction of the Bribery Act. But the Act s creation of an offence of failing to prevent bribery places a major obligation on companies. Failure to meet that obligation can prove hugely damaging. Unlimited fines, up to ten years in prison and confiscation of assets can all follow a conviction. The Act differs from previous legislation in that it can punish the bribery and the failure to have prevented that bribery. Legal Representation If you are a company or individual faced with bribery allegations or you feel that you may, in the future, be asked about activities that could be interpreted as bribery then you need to seek legal representation immediately. The Bribery Act came into effect on 1 July 2011 and is used to prosecute any bribery committed from that day onwards. Anyone who suspects they may be involved in current or historic bribery must not ignore the possibility that they could face prosecution. Bribery and the failure to prevent it are high on the authorities agenda, meaning that the Act is likely to form the basis of many investigations in coming years. Investigation The first thing a company needs to do if it suspects bribery is to investigate. It is likely that only solicitors with expertise in the field of bribery will be able to conduct such an investigation effectively. They will know how to follow the evidence trail to determine whether bribery has been committed and by whom. They will also be able to judge from the evidence available 7

8 whether there is a chance of a successful prosecution. Such an informed approach is not only important in terms of assessing any likely criminal liability for bribery. It is also vital in deciding how to proceed. When it comes to the offence of failing to prevent bribery, a company has a defence if it can show it had in place adequate procedures designed to stop bribery being carried out on its behalf. An investigation can not only help examine whether bribery was committed. It can also analyse the procedures that a company has in place to combat bribery if there were any. How robust were these procedures? Were they regularly maintained and reviewed? If so, who was responsible for them? If such procedures were in operation, how did they fail to prevent bribery? Such questions are best asked and answered by a solicitor with expertise in this area of law. They will know how the authorities would react to the answers that are given and what the likelihood would be of a prosecution and conviction for failure to prevent bribery. From this information, they can determine the best approach to be taken by their client. Self-reporting A company that conducts such an internal investigation can self-report the problems that they have uncovered. By doing this and then cooperating with the authorities, it is also possible that they will be treated more leniently. If it took a favourable view of the company s efforts, the Serious Fraud Office (SFO) could offer it a deferred prosecution agreement (DPA) whereby a prosecution is suspended on the condition that the company agrees to meet a number terms, such as fines, compensation orders or improvements to working practices. But such treatment is only likely if the company can point to efforts it has made to combat bribery. If the failure to prevent bribery is due to the company doing little or nothing, it will have little defence to the allegations. If it has in place a disciplinary system alongside its anti-bribery procedures it could argue that it had done all it could to prevent wrongdoing. This is a delicate area where informed legal advice and careful handling is necessary. Putting it bluntly, any company that self-reports has to be able to show that it had taken steps to prevent the bribery happening. There is little value in reporting to the authorities that you have been involved in bribery if you cannot point to anything that you did to prevent or tackle the problem. Such anti-bribery procedures must be devised with the help of a legal expert. Only then are they likely to be both fit for purpose and capable of convincing the authorities that you did all you could to prevent bribery in your organisation. The alternative, if prosecuted under the Bribery Act, is a very heavy punishment for what can prove to be a very costly failure. 8 An investigation can not only help examine whether bribery was committed. It can also analyse the procedures that a company has in place to combat bribery if there were any.

9 PREVENTION OF BRIBERY A global standard for anti-bribery programmes has been introduced at a time when UK managers are reporting that international bribery remains common. So how do you prevent your company becoming involved in it? Prevention is better than cure. And nowhere is that more obviously the case than with bribery. If you prevent bribery, your business can flourish without the burden of illegal expenditure and the constant threat of investigation, prosecution and possible conviction. Curing such a problem can prove costly in terms of time, money and reputation. In the UK, the Bribery Act 2010 has become arguably the toughest piece of legislation in the world when it comes to tackling corruption. There have not yet been many Bribery Act prosecutions but that is likely to change as the authorities complete more investigations and become more familiar with using it. Anyone looking to make sure they are not prosecuted under the Act may have noticed that the International Standards Organisation has issued the first ever global standard for anti-bribery compliance programmes. This standard, known as ISO 37001, provides guidance on introducing and maintaining anti-bribery systems in the workplace. Bribery Act There is an argument that says those that need anti-bribery procedures should already have them. But that does not appear to be the case. Research just published by the Henley Business School found that more than 85% of UK managers operating internationally are using bribery as a normal practice in what are called emerging markets. The dangers of this are clear. The Bribery Act covers all companies based in, or with a close connection to, the UK. They can be prosecuted under the Act in the UK for bribery that was carried out on their behalf anywhere in the world by their staff, intermediaries, third parties or trading partners. Penalties of up to ten years in jail and unlimited fines do not appear to be preventing managers using bribery, at least according to the researchers at Henley. But such activity by managers is putting their companies at risk; even if they believe they are merely maintaining a business relationship rather than obtaining a particular reward. Companies have to be looking at preventing this. The question is how. Anti-bribery Procedures Companies need to be aware of all the risks of bribery in the business sectors and countries where they operate. Being aware of the risk is only part of a company s responsibility. Section 7 of the Bribery Act makes it an offence to fail to prevent bribery. This is why it is so important for a company to have its vulnerability to bribery assessed and then appropriate staff training and anti-bribery procedures introduced. The training has to be in-depth, ongoing, subject to regular monitoring and review and communicated and implemented to all staff. If the upper echelons of a company are not seen to be taking action against bribery, there is little chance of the rest of the workforce taking prevention seriously. Diligence As it takes two parties to be involved in bribery, a company must carry out 9

10 thorough due diligence on any individuals or organisations it trades with. Some people reading this possibly some of Henley Business School s 85% - may wonder how they can meet the demands of the Bribery Act. Legal advice is available and should be sought whenever necessary. Ignorance of the law is no defence. If your company employs a manager who makes up part of that 85%, you need to seek legal assistance immediately. You cannot stumble on, paying no attention to the risk of prosecution and the possible damage that could be done to your company. Any discussions between you and your solicitor are subject to legal professional privilege; meaning that you can talk through the problems in privacy before deciding on what course of action to take. One possible course of action is using your solicitor or one more familiar with white collar crime issues to conduct an internal investigation to assess the nature and scale of the bribery. Such an approach can help a company if and when it decides to self-report any wrongdoing, as it shows that it has taken steps to address the problem. This, in turn, can help the company obtain a deferred prosecution agreement (DPA), whereby prosecution is suspended if it meets certain conditions; such as paying a fine or compensation or cooperating with the prosecution of individuals. But any hope of leniency from the authorities will be dashed if a company cannot show it has done what it can to prevent bribery. If you prevent bribery, your business can flourish without the burden of illegal expenditure and the constant threat of investigation, prosecution and possible conviction. 10

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