Horizon Scanning: Investigations and Enforcement

The second quarter of 2024 has seen an increased focus by authorities on tackling bribery, financial crime and fraud – and increased scrutiny of how internal investigations are conducted. Looking ahead, we expect significant developments in the UK and beyond. We predict key focus areas will include:

• navigating the outcome of the UK general election: the two main parties make wide-ranging commitments in respect of financial crime in their manifestos which will impact on organisations conducting business in the UK;
• a continued focus on fraud and reducing financial crime. As we near the expected date when the failure to prevent fraud offence will come into force, companies should conduct risk assessments and review and enhance their existing policies and procedures to ensure they effectively prevent fraud being committed by their employees or third parties for the benefit of the company or its clients;
• an increased focus by sanctions authorities on decentralised finance and those operating in the crypto space, and the impact of the new EU sanctions package against Russia, focussing on energy, finance and trade;
• requirements to conduct risk-based human rights and environmental due diligence following the introduction of the EU Corporate Sustainability Due Diligence Directive; and
• continued ramping up of EU financial crime legislative developments and enforcement capabilities.

1. UK General Elections: what to expect

Ahead of the UK General Election on 4 July 2024, both the Labour and Conservative parties have included several general policies in their manifestos relevant to investigations, enforcement, and financial/business crime. However, the following are noticeably absent from both manifestos: (i) detail on what the policies would entail; (ii) how they differ from previous proposals; and (iii) any discussion about how UK authorities’ budgets would be increased to deliver these policies.

Labour’s manifesto: This sets out a “new expanded fraud strategy” with a focus on online, public sector and serious fraud. A Labour government would also seek to work with technology companies to prevent their platforms being exploited by fraudsters. As part of this new fraud strategy, a Labour government proposes to work with policing bodies to standardise IT procurement, standards and training. The Labour party has also pledged to enact legislation to limit tax avoidance, with a focus on large businesses and wealthy individuals. This includes increasing registration and reporting requirements, strengthening the powers of HM Revenue & Customs (HMRC) and investing in new technology to increase capacity within HMRC. The manifesto also pledges “to tackle corruption and money laundering, including in Britain, Crown Dependencies, and in British Overseas Territories.” This echoes David Lammy’s (Shadow Secretary of State for Foreign, Commonwealth and Development Affairs) comments in May, outlining Labour’s plans for a whistleblower reward scheme, a policy initially floated by the SFO’s Director, Nick Ephgrave.

The Conservatives’ manifesto: This focusses on tax avoidance and evasion, benefits fraud and money laundering. The manifesto sets out plans to raise £6 billion per year by reducing tax avoidance and evasion; and tackling money laundering by ensuring British Overseas Territories and Crown Dependencies “adopt open registers of beneficial ownership.” Currently, most British Overseas Territories and Crown Dependencies have beneficial ownership registers that are available to law enforcement agencies but not the public; a Conservative government would seek to mandate public registers in a similar format to the UK’s ‘Persons with Significant Control’ regime. The Conservatives also intend to ban ‘SIM farms’ to reduce their use in cyber fraud. SIM farms are devices holding a large number of SIM cards, with the capacity to send a significant quantity of often fraudulent text messages in an attempt to defraud or extract private information from individuals. They are often used in Authorised Push Payment frauds, which remains a focus of several initiatives by the government and the Payment Services Regulator.

The aftermath of the election may see a Government committed to tackling fraud but with real questions remaining about how effective solutions are to be achieved and funded.

2. Bribery and Fraud

• Failure to prevent fraud: The Economic Crime and Corporate Transparency Act 2023 received Royal Assent on 26 October 2023 and introduced a new a failure to prevent fraud offence. The UK government is set to publish draft guidance on the offence in the coming months, and it is expected the offence will come into force at the end of 2024 or early 2025. See our previous horizon scan for more details on the specifics of the offence, and our series on how companies can best prepare in terms of conducting risk assessments and ensuring effective procedures are in place.
• SFO Strategy: As highlighted in our previous horizon scan, fraud continues to be a key focus for the Serious Fraud Office (SFO). This is set out in further detail in the SFO’s recent five-year strategy plan, which emphasises those areas the SFO will focus on to aid its goal of tackling financial crime (including fraud) more effectively, including: (i) the use of intelligence powers to obtain evidence more quickly and build compelling cases in a shorter timeframe; and (ii) harnessing technology, including AI, to assist with administrative tasks. For further detail on the SFO’s strategy plan, see our article here.
• Whistleblowing: In our previous horizon scan, we noted that Nick Ephgrave had proposed that the SFO should financially compensate whistleblowers. This reflects a wider trend of attempts to incentivise whistleblowers, including the introduction of a private members’ bill to the House of Commons aimed at enhancing whistleblower protections (the Bill). Amongst other things, the Bill proposes that an Office of the Whistleblower be established to set and monitor standards for the management and investigation of whistleblowing cases and investigate whistleblower complaints (see here). The Bill is not expected to make further progress in the immediate future given the dissolution of Parliament on 30 May 2024, however companies should ensure they have appropriate procedures in place to ensure they are promoting a speak-up culture and effectively addressing any speak up concerns raised. There are similar compensation schemes and protections for whistleblowers in the US and EU, for example the US Department of Justice Pilot Program on Voluntary Self-Disclosure for Individuals and the transposition of the EU Whistleblower Directive. This continual evolution of global whistleblowing laws and regulatory requirements is likely to increase the number of whistleblowing complaints further, as well as scrutiny of how reports are investigated. It is now more important than ever for companies to have effective whistleblowing processes in place and to ensure that a risk-based investigation plan is followed. For more on trends in investigating whistleblowing complaints and practical steps, see our article here.
• Parallel / Consequential Litigation arising out of Investigations: The recent settlement between Serco and its institutional investors is a timely reminder of the risk companies face of related litigation arising out of investigations conducted by authorities. In 2013, the SFO commenced an investigation into Serco in connection with allegations it overcharged the UK government for the delivery of electronic tagging and prisoner escort services. In 2019, Serco entered into a Deferred Prosecution Agreement, under which it was fined £19.2 million (plus costs) in relation to fraud and false accounting allegations. Following this, between 2019 and 2021, several civil claims were issued against Serco by investors seeking compensation for the drop in the value of their shares at the time of the overcharging allegations under s.90A of the Financial Services and Markets Act 2000. While Serco reached a settlement with its institutional investors in June 2024 (the terms of which were not disclosed), the case emphasises the serious risks companies face, both from an investigations and parallel or consequential litigation perspective, in the absence of appropriate safeguards against fraud and bribery risk. We expect to see a further increase in parallel litigation and investigations during 2024 and beyond as a result of: (i) the introduction of the new failure to prevent fraud offence; and (ii) the SFO’s commitment to play a greater role in tackling fraud under Ephgrave’s leadership. For more on parallel litigation and investigations, see our webinar here.
• Bribery: We expect to see an increased focus by regulators and investigating authorities on passive bribery (i.e. receiving or requesting a bribe). For example, the enactment of the US Foreign Extortion Prevention Act (FEPA) on 14 December 2023 establishes criminal liability for foreign officials soliciting or accepting bribes from specific US entities. This is part of a wider trend of tackling both supply and demand-side corruption. While it is yet to be seen how the US Department of Justice will enforce FEPA, it will be prudent for companies to ensure all interactions with politically exposed individuals are appropriately assessed.

This focus on passive bribery can also been seen in recent actions taken by the UK’s National Crime Agency (NCA). In August 2023, the Madagascan president’s former chief of staff, Romy Andrianarisoa, and an associate, Philippe Tabuteau, were arrested by the NCA, on suspicion of seeking an alleged bribe amounting to c. £225,000 from Gemfields, a UK mining company in connection with licences in Madagascar. Andrianarisoa was found guilty in February 2024. On 10 May 2024, she was sentenced to three-and-a-half years’ imprisonment for soliciting bribes contrary to section 2 of the UK Bribery Act 2010. Interestingly, Gemfields self-reported the requested payments and cooperated with the NCA’s investigations.

3. Sanctions

• English Courts grapple with complex issues concerning interpretation of force majeure and sanctions provisions: Two recent decisions of the English Courts are of major significance to those navigating commercial transactions affected by the imposition of sanctions. In MUR Shipping, the Supreme Court found that taking “reasonable endeavours” to overcome a force majeure event does not include a requirement for parties to accept offers of non-contractual performance, absent clear words in the agreement to that effect. This meant that a party was not required to accept payment in Euros when the agreement expressly provided for payment in US dollars to overcome the imposition of sanctions. In Celestial, the Court of Appeal found that a prohibition on providing financial services under Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019/855 (the UK Russia Sanctions Regulations) would be engaged by making payment under letters of credit, notwithstanding the underlying leases to which they related had been terminated. The same decision also contained obiter comments from the Court of Appeal to the effect that the confirming bank under letters of credit was not required to make payment in cash in circumstances where it was not contemplated by their terms. Our article considers a number of these issues in more depth – here.
• EU adopts 14th package of sanctions against Russia: On 24 June 2024, the Council of the EU adopted a 14th package of sanctions targeting Russia. These sanctions focus on energy, finance and trade, and seek to curb circumvention of the regulations. In particular, Russian LNG has been targeted – the new package prohibits new investments and the provision of goods, technology and services for the completion of LNG projects under construction and forbids the provision of reloading services of Russian LNG in EU territory for the purposes of transhipments to third countries. EU companies will also be required to use their best efforts to ensure that their third-country subsidiaries do not engage in activities that are contrary to the purpose of the EU sanctions regime. Other measures include targeting specific vessels for the first time, expanding the EU flight ban, broadening the prohibition on the transportation of goods by road, and the imposition of further restrictions of goods (including helium). The package also introduces an ability for EU operators to claim compensation for damages that are caused by Russian companies as a result of sanctions implementation and expropriation of assets.
• A growing focus on decentralised finance: Sanctions authorities are turning their focus to decentralised finance and those operating in the crypto space. We expect to see more enforcement in the UK in this area with the introduction of a new authority responsible for the civil enforcement of trade sanctions, the Office of Trade Sanctions Implementation (OTSI). See our recent blogpost on indirect governance and sanctions risk exposure in decentralised finance here. In addition, as part of the 14th package mentioned above, the EU have introduced a ban on transactions with targeted crypto asset providers established outside of the EU when those entities are considered to facilitate transactions that “support Russia’s defence-industrial base”.
• China imposes export controls on aviation goods: From 1 July 2024, China will impose export controls on equipment, software and technology relating to the manufacturing of aerospace structures and engines.

4. BHR/ESG

• 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), and had been receiving evidence until Parliament was dissolved in May 2024. This followed an independent review of the MSA that concluded in May 2019, which set 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. 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. In the meantime, the Labour Party has indicated that, if it wins the General Election on 4 July, it would introduce legislation providing for “joint and several liability” between companies across the supply chain to address modern slavery issues.
• EU developments: On 24 May 2024, the Council of the European Union approved the long-awaited EU Corporate Sustainability Due Diligence Directive (CSDDD). It will require in-scope companies, which includes non-EU companies generating in excess of €450 million in the EU single market, to undertake risk-based human rights and environmental due diligence. The 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. A phased-in implementation period will apply the obligations to the largest companies from 2027 onwards, extending to smaller companies in subsequent years. Once published in the Official Journal of the European Union, Member State transposition will start. As the latest and arguably most significant new law to be introduced requiring businesses to conduct such due diligence in their own operations and value chains, CSDDD seeks to harmonize existing requirements across the EU and is likely to serve as a benchmark for other countries looking to enact similar legislation. It enters into a landscape of fast-moving legislative developments around human rights obligations for companies. Examples include the EU’s new Forced Labour Regulation (FLR), adopted in April 2024, which will ban products made wholly or partly with forced or child labour, and the EU Deforestation Regulation (EUDR), which will apply from 30 December 2024 and require operators and traders placing relevant commodities on the EU market to show that products are deforestation-free, were produced in accordance with local laws, and subject to due diligence, including in relation to human rights. For more information on human rights due diligence in the EU see our article here.

5. Recent EU Developments: what this means for multinationals

In addition to the CSDDD, there have been significant recent and upcoming developments in EU law, which are important for organisations conducting business in (or with a nexus to) the EU.

• The new EU anti-corruption directive: this will bring together public and private sector corruption and require EU member states (Member States) to meet common baseline standards in their anti-corruption legislation. The Directive will require companies with operations in / a nexus to Member States to ensure their ABC compliance programmes to meet the new standards (the implementation of, like the EU whistleblowing directive, may vary between different jurisdictions). For more on the Directive, please see our article here.
• EU anti-money laundering package adopted: this will involve the creation of a new Anti-Money Laundering Authority (which will directly supervise certain financial institutions in the EU from 2028 onwards) and improved coordination between member state FIUs in supervision and cross-border investigations (including in relation to non-financial institutions). The AMLA Regulation, AML Regulation and Sixth anti-money laundering directive were adopted by the Council of the EU on 30 May 2024.
• The European Public Prosecutor’s Office (EPPO), which started operating in June 2021, has a mandate to investigate and prosecute directly before the national courts criminal misconduct related to the EU budget. Ever since its establishment, EPPO has been an active enforcer and in 2023 alone, it opened 1371 investigations, which is a 58 percent increase as compared to 2022. There have also been fraud-related developments in various EU jurisdictions (see here).