Horizon Scanning: Investigations and Enforcement

The first quarter of 2024 has seen significant developments in UK authorities’ approaches to investigations and enforcement and an increasing focus on fraud and non-financial misconduct. Looking ahead to the rest of 2024, we predict that developments affecting organisations doing business in the UK will include:

• a continued focus on fraud and reducing financial crime, in particular given the new failure to prevent fraud offence and legislation targeted at the rise in authorised push payment fraud;
• new enforcement priorities for UK authorities – the SFO, FCA and PRA have all introduced new proposals to deter, investigate and punish wrongdoing, with a clear commitment from each to expedite their fact-finding processes, conclude their investigations more quickly and incentivise whistleblowers. We will also see more focus on non-financial misconduct;
• an increased focus on regulated firms’ systems and controls relating to sanctions due to the continued impact of Russia’s invasion of Ukraine. The UK Government has also introduced a new unit to clamp down on companies evading sanctions, which will be operational later this year; and
• an increased emphasis on ESG issues in the supply chain as legislation in the UK, EU and other jurisdictions continues to evolve in response to stakeholder pressure.

1. Economic Crime and Corporate Transparency Act 2023 (‘Economic Crime Act’)

The Economic Crime and Corporate Transparency Act 2023 (‘Economic Crime Act’), which received Royal Assent on 26 October 2023: (i) introduced a new failure to prevent fraud offence; (ii) expanded the test for corporate criminal liability to include “senior managers”; (iii) expanded the SFO’s powers with the effect that the SFO can request information / documents before opening a formal investigation in all cases of fraud, bribery and corruption; and (iv) introduced specific exemptions to certain money laundering offences. In particular, we expect that the new failure to prevent fraud offence will have a significant impact as it comes into force during the course of 2024. Organisations should consider whether their existing fraud risk assessments are sufficient to cover the new offence or otherwise need to be revised. This includes putting in place effective audit and monitoring processes in relation to fraud, and enhancing their due diligence of transactions with clients and suppliers. In many cases significant enhancements will be required: whilst companies have in place procedures to prevent them from being a victim of fraud, many do not have procedures to prevent fraud being committed by their employees or agents. Companies need to start work on this as soon as possible, to ensure procedures are in place when the offence comes into force. See our previous horizon scan here for more details, and our recent webinar on the failure to prevent fraud offence here.

2. Enforcement priorities

SFO Enforcement Update

The SFO’s new Director, Nick Ephgrave, outlined the SFO’s key areas of focus in a recent speech:

1. Fraud: Ephgrave noted that his leadership would see the SFO playing a greater role in tackling fraud, with a particular focus on pursuing financial crime affecting UK victims.
2. Quicker and more focused investigations: historically, the SFO’s investigations have been lengthy, creating a burden for both the SFO and the targets of investigations. Ephgrave proposes to address this through a “rigorous and intrusive” review process for active cases to ensure that they remain focused on the central issues. We may therefore see more targeted investigations and prosecutions focusing on where evidence is strongest.
3. Disclosure: Ephgrave emphasised that disclosure remains a major challenge for the SFO and is a barrier to it conducting fast and efficient investigations. The SFO is already piloting AI review methods, but he made clear reform was needed in this area. An independent review of the criminal disclosure regime and the challenges that arise in fraud investigations is already underway, with recommendations due in the summer (see our update on this here). Increasingly targeting investigations on the key issues will also assist with disclosure.
4. Increased use of dawn raids: dawn raids (and in particular dawn raids relating to domestic fraud) have increased since Ephgrave took up his position in late September 2023. Under Ephgrave’s tenure, the SFO has conducted more dawn raids in the last 3 months than in the last 3 years. We expect instances of dawn raids (and quasi dawn raids) will continue to rise as the SFO utilises its wider s.2 powers granted under the new Economic Crime Act which allows the SFO to compel businesses and individuals to provide material before formally commencing an investigation (for more information, see here and here).
5. Incentives for whistleblowers: Ephgrave proposed that the SFO should financially compensate whistleblowers for information. This would need to be legislated for, but Ephgrave proposed that (in parallel) the SFO could make better use of the ‘assisting offenders’ provisions under the Serious Organised Crime and Police Act 2005 (which include reduced sentences and immunity provisions). The limitation to the latter approach is that such provisions may not apply to whistleblowers who report but are not involved in the suspected wrongdoing. Following Ephgrave’s comments, the FCA has separately confirmed it will liaise with the SFO to further consider proposals to incentivise whistleblowers financially; and the US DOJ has already introduced a pilot programme aimed at rewarding whistleblowers for reporting misconduct. The DOJ has emphasised that the types of offences it is keen to obtain information on include foreign corruption cases falling outside the jurisdiction of the SEC. For more information please see here. These announcements by both UK and US authorities demonstrate a clear trend by authorities to incentivise timely and voluntary disclosures of misconduct.

FCA Enforcement Update

Based on recent developments, we expect the FCA to focus on:

1. Non-financial misconduct: On 7 February 2024, the FCA published a ‘notice to provide information’, formally requesting information relating to incidents of non-financial misconduct. The data collected will inform the FCA’s ongoing supervisory work programme across multiple wholesale market sectors in connection with the FCA's focus on culture and non-financial misconduct. For more information please see here.

On 8 March 2024, following publication of the Treasury Select Committee’s ‘Sexism in the City’ report, the FCA further confirmed that it will prioritise proposals that tighten expectations on firms to tackle misconduct, such as bullying and sexual harassment. This follows on from the FCA’s consultation paper last year, which set out the FCA’s aims to promote diversity and inclusion across the financial services sector, including proposals to better integrate non-financial misconduct considerations into staff fitness and propriety assessments, conduct rules and the suitability criteria for firms to operate in the financial sector. Final policy statements are expected in the second half of 2024.

The above highlights how important it is for firms to continue to track the FCA’s expectations in relation to non-financial misconduct; and ensure that any decisions relating to conduct issues are appropriately challenged and recorded. Great care needs to be taken in investigating such issues and considering when notifications are required.

2. Publicity of enforcement investigations: the FCA is consulting on its proposals to announce publicly the opening of new enforcement investigations into firms, if it considers it is in the public interest to do so. In making this determination, the FCA will refer to a new consumer focused “public interest framework”. This represents a significant shift in approach - currently, the FCA only publishes information about its enforcement investigations when these lead to outcomes.

There has been considerable controversy around the new proposals, with many noting that publishing the identity of firms is not necessary to achieve the FCA’s objectives and carries potentially significant adverse consequences for firms named as under investigation, particularly when the FCA still closes a large number of investigations without proceeding to enforcement (the FCA’s Annual Report published in July 2023 showed that the FCA had opened 100 new cases, and closed 107).

3. Approach to interviews and interview procedures: the FCA has also proposed changes to its approach to interviews and interview procedures, in that it may refuse the attendance of a particular legal adviser where this may potentially prejudice the investigation. This includes where the legal adviser has a conflict of interest or owes a duty of disclosure to another person (including the interviewee’s employer). This signals that the FCA will take a much more restrictive approach to the attendance of lawyers acting for the firm where the FCA is interviewing the firm’s current or former employees.
4. Prioritising enforcement cases: the FCA has confirmed it wants to speed up investigations, acknowledging that the longer it takes for outcomes to be determined, the longer it takes for the FCA to send signals to the market about what it considers serious misconduct to be. It proposes to do so by focusing on a streamlined caseload of investigations which are better aligned to its strategic priorities. The FCA has confirmed it will close more quickly those cases where no outcome is achievable. However, the consultation paper does not set out how these proposals will be achieved in practice.

PRA Enforcement Update

The PRA published a revised approach to enforcement on 30 January 2024. The Policy Statement introduces the following, significant changes to the PRA enforcement process, emphasising that it is seeking to incentivise cooperation:

1. Early Account Scheme (EAS): we mentioned in our previous horizon scanning updates here and here that the PRA is proposing to introduce a new scheme whereby investigations were effectively outsourced to the firm, with a discount of up to 50% available. This has now been introduced, with the expectation that it will speed up investigations by the PRA. However, the PRA still maintain considerable discretion, with the discount of 50% not guaranteed unless the PRA consider it merited. This means the decision to enter into the EAS is not likely to be one that is taken lightly.
2. Changes to the approach to financial penalties for firms and individuals: this includes (1) amendments to its policy on financial penalties imposed on firms by introducing a matrix which sets out the starting point for penalties linking to the firm’s impact categorisation; and (2) updating the methodology for calculating fines for individuals and thresholds at which individuals may be able to apply for a reduction of a fine on the basis of serious financial hardship.

For more information see our article here.

When considered against the backdrop of 2023, a year when, for the first time, fines imposed by the PRA exceeded those imposed by the FCA, it is clear that the PRA is looking for new ways to deter, investigate and enforce non-compliance. The revised approach also illustrates the PRA’s focus on expediting its investigation process.

3. Authorised Push Payment Fraud

The UK Government has published draft legislation that would enable payment service providers (PSPs) to delay payments processing by up to four business days when there are reasonable grounds to suspect fraud or dishonesty. The proposed new rules have been drafted in response to a rise in Authorised Push Payment (APP) fraud.

Under the current rules, PSPs are required to credit the payment amount to the payee’s account by the end of the next business day following receipt of the payment order. The proposed new rules enable PSPs to adopt a risk-based approach to payments and allow a further three business days to assess potentially fraudulent payments. The proposed legislation will prove a welcome countermeasure to the Payment Systems Regulator’s new rules on mandatory reimbursement for customers who fall victim to APP fraud, due to come into force in October 2024. Allowing payments to be further delayed provides PSPs with more time to investigate the potential fraud; but PSPs will need to strike a careful balance between risk mitigation and maintaining the services their customers expect.

4. Sanctions

1. Russia and the rise in sanctions designations: in the wake of the second anniversary of Russia’s invasion of Ukraine, many governments have made further designations and continue to increase the complexity of the sanctions regimes relating to Russia and Belarus. The US has designated over 500 new entities and individuals. The EU’s 13th package included nearly 200 new designations, as well as the introduction of further trade measures targeting (amongst other things) circumvention by third country companies.
2. Impact of UK sanctions regulations on commercial counterparties: the number of sanctions-related cases and appeals before the English courts are set to the continue to rise this year. On 6 March 2024, the UK Supreme Court heard an appeal of the MUR Shipping judgment, which considered when a force majeure event could be overcome in the context of sanctions. Permission to appeal the much-publicised PJSC National Bank Trust and another v Mints and others [2023] EWCA Civ 1132 case to the Supreme Court was also granted earlier this year (albeit the reasons for the appeal have not been disclosed). The outcome of this appeal may have further implications for the meaning of “ownership and control” under the UK’s sanctions regulations.
3. UK Sanctions Strategy / OTSI: on 22 February 2024, the UK Government published its first “sanctions strategy” document. The sanctions strategy refers to the new Office of Trade Sanctions Implementation (OTSI), which will be responsible for the implementation and enforcement of trade sanctions and is set to be operational later this year. OTSI will have a range of powers, including the ability to impose monetary penalties for non-compliance. The sanctions strategy also refers to future action that the UK government intends to take, including continuing to develop its collaboration with agencies in other jurisdictions and engagement with the private sector. As well as looking forward to how sanctions may be implemented and enforced, on 4 March 2024, the Foreign, Commonwealth and Development Office published a Post-Legislative Scrutiny Memorandum which includes a preliminary assessment of the provisions and implementation of the Sanctions and Anti-Money Laundering Act 2018. The Treasury Committee has also launched a new inquiry to evaluate whether the UK’s economic sanctions regime against Russia is effective – submissions are due on 28 March 2024.
4. US Sanctions: the US Government continues to emphasise the risks of non-compliance with US sanctions for non-US entities, and on 6 March 2024, the US Department of Commerce, US Department of the Treasury and US Department of Justice issued a Tri-Seal Compliance Note setting out the obligations of foreign-based persons to comply with US sanctions and export laws. This follows the issue of a new Executive Order 14114 in December 2023, which among other things, provided for the imposition of secondary sanctions on non-US financial institutions in relation to certain conduct concerning Russia.

5. ESG/BHR

1. UK Modern Slavery Act: on 24 February 2024, a House of Lords Select Committee (Select Committee) was appointed to review the “impact and effectiveness” of the UK Modern Slavery Act 2015 (MSA). This follows a previous independent review of the MSA that concluded in May 2019, setting out several proposals for reform. The UK Government responded to that independent review in September 2020, with a set of commitments to amend the MSA. This included strengthening the disclosure requirements for commercial organisations under section 54 and the introduction of mandatory reporting topics, coupled with fines for non-compliance. Those proposals have not yet been implemented. In the meantime, the Labour Party has indicated that, if it wins the general election expected later this year, it would introduce legislation providing for “joint and several liability” between companies across the supply chain to address modern slavery issues. The Select Committee is due to publish its findings on 30 November 2024. A core component of its review will be whether the MSA has “kept up to date” with global developments, noting more onerous human rights reporting and due diligence laws have emerged in other jurisdictions including Australia, Canada and the EU. For more information on human rights due diligence in the EU see our article here.
2. EU developments: following votes of the EU Council and the EU Parliament’s Committee of Legal Affairs in March 2024, it is expected the EU Corporate Sustainability Due Diligence Directive (CS3D) will be adopted once it has been formally approved by the EU Parliament during its plenary session in April. Despite negotiations during the legislative process narrowing the scope of CS3D’s requirements, the Directive will set a new benchmark for human rights and environmental due diligence obligations for in-scope organisations, which includes non-EU companies generating in excess of €450 million in net turnover in the EU single market (subject to a phased implementation period). CS3D’s due diligence obligations extend to a company’s own operations and its subsidiaries, as well as direct and indirect business partners in the company’s upstream supply chain, and certain downstream activities. Also in March 2024, the EU Parliament and Council reached provisional agreement on a new Forced Labour Regulation (FLR), which would ban products made wholly or partly with forced or child labour from entry into the EU single market. Like CS3D, the FLR will have a significant impact on the large numbers of UK and other non-EU businesses for whom the EU is a primary export market.