Understand Your Rights. Solve Your Legal Problems
The United States’ efforts to extradite Huawei’s chief financial officer, Ms Meng Wanzhou from Canada to the US for fraud and other charges has become a particular flashpoint in these broader diplomatic hostilities.
Ms Meng has been under house arrest in Vancouver since December 2018, when she was arrested whilst transferring between aeroplanes in Vancouver airport, at the request of the US authorities. Ms Meng is the daughter of Huawei’s founder, Ren Zhengfei, who is alleged to have close links with the Chinese military and communist party.
The US is seeking her extradition on the basis of allegations of fraudulently misleading HSBC and three other banks about Huawei’s links to an Iranian subsidiary. Since HSBC clears dollar transactions, the US says that the alleged misrepresentation put the bank at risk of violating US sanctions against Iran.
At a political level, Sino-Canadian relations have been severely strained by the arrest and ongoing extradition process.
On 27 May 2020, the Supreme Court of British Columbia refused Ms Meng’s attempt to have the US extradition request dismissed. The case has been followed closely in the Canadian media, being described by The New York Times as “one of the biggest legal dramas in recent Canadian memory”. In China, where Ms Meng’s plight has stirred significant resentment, the extradition attempt is often portrayed as an effort by the US to restrain the rise of Chinese technology companies.
At a political level, Sino-Canadian relations have been severely strained by the arrest and ongoing extradition process. Just days after Ms Meng’s extradition hearing was allowed to go ahead in early 2019, China arrested two Canadians on spurious espionage charges, in a move seen by many as being retaliatory.
The day before the 27 May judgment was to be delivered, Chinese Foreign Ministry spokesman Zhao Lijian said Canada must “release Ms Meng and ensure her safe return to China at an early date to avoid more damage caused to China-Canada relations.” Canadian Prime Minister Justin Trudeau responded to this unusually pointed statement by saying that "Canada has an independent judicial system that functions without interference or override by politicians” and that, “China doesn't work quite the same way and doesn't seem to understand that."
This requirement, which is known as “double criminality” was found to have been met by Associate Chief Justice Heather Holmes of the British Columbia Supreme Court.
It is clear that China sees the ongoing extradition process as being under Canadian political control. There may, in fact, be some merit in this view, despite Mr Trudeau’s protests, since the Canadian Minister for Justice may intervene in extradition cases. Ms Meng’s lawyers implored the Minister to do just that last year, saying that the case was “palpably” being “brought for political purposes as opposed to legitimate criminal law enforcement reasons.” The lawyers went on to say that “The factual and legal underpinnings for Ms Meng’s extradition are without precedent in Canadian law”, arguing that there were no violations of Canadian law and that allegations related to other jurisdictions.
The 27 May ruling represented a major setback for such arguments against Ms Meng’s extradition to the US, given the court’s finding that prosecutors had satisfied an important legal requirement for her extradition from Canada, namely that the offences for which a person is being extradited are also offences in Canada. This requirement, which is known as “double criminality” was found to have been met by Associate Chief Justice Heather Holmes of the British Columbia Supreme Court.
Despite this adverse ruling, Ms Wanzhou’s legal team say they remain confident of her eventual vindication and argue that their client should "not be a pawn or a hostage" in the wider China-US relationship.
In her judgment, Ms Justice Holmes said that "Canada's law of fraud looks beyond international boundaries," while also noting that "Ms Meng's approach to the double criminality analysis would seriously limit Canada's ability to fulfil its international obligations in the extradition context for fraud and other economic crimes."
Despite this adverse ruling, Ms Wanzhou’s legal team say they remain confident of her eventual vindication and argue that their client should "not be a pawn or a hostage" in the wider China-US relationship.
The Supreme Court of British Columbia is yet to hold hearings into additional matters, including whether there is sufficient evidence against Ms Meng to warrant extradition and whether her rights were properly respected at the time of her arrest. The Canadian Ministry of Justice also plays the role of a wildcard in proceedings, since it is entitled to decide whether Ms Meng extradition would be contrary to Canadian values, in which case it may block her extradition. However, the comments from the Canadian government thus far suggest that this is an unlikely outcome.
Canadian Criminal lawyer Gary Botting, a leading expert on Canadian extradition law, has called described Meng's extradition case as a, "political type of enterprise that the United States is engaged in."
The bottom line in these proceedings is that the US is the only jurisdiction in the world which can extradite someone merely on the basis of there being a technical dollar transfer through the states, since all dollar transactions go through New York. Therefore, even with no meaningful link to the US, there can be extradition proceedings just on that basis alone. Canadian Criminal lawyer Gary Botting, a leading expert on Canadian extradition law, has called described Meng's extradition case as a, "political type of enterprise that the United States is engaged in."
On February 13, 2020 - after the extradition proceedings started, and seven years after her arrest – Ms Meng was indicted by the US authorities on charges of trade secrets theft. These carry potential penalties of up to 10 years imprisonment.
The US Department of Justice has justified these new charges, saying that “Huawei’s efforts to steal trade secrets and other sophisticated US technology were successful” and that “Huawei was able to drastically cut its research and development costs and associated delays, giving the company a significant and unfair competitive advantage.”
In February, President Trump was reportedly “apoplectic” at the decision of the UK government to allow Huawei to play a role in developing the UK’s 5G infrastructure.
To many, these latest charges appear to be tacked on by prosecutors, in order to give more substance to the indictment than was suggested by the more tenuous original charges.
The Chinese government is furious with the United States’ actions in this case. Nor will the UK be immune from the fallout of this case, and the wider deterioration in US-China relations. In February, President Trump was reportedly “apoplectic” at the decision of the UK government to allow Huawei to play a role in developing the UK’s 5G infrastructure.
That proposed involvement now once again hangs in the balance, after fallout from the coronavirus pandemic caused a number of sceptical Conservative backbenchers to put increased pressure on the government. It is now reported that this backbench pressure has produced a government commitment to reduce Huawei’s involvement in the UK 5G network to zero by 2023. More broadly, many analysts are now predicting a dramatic cooling of relations between the West and China, not least given concerns about China’s transparency surrounding the coronavirus pandemic, civil rights issues in Hong Kong and reports about China’s treatment of its Uighur Muslim population.
Whatever about these wider issues, the US will not occupy the moral high ground if it is not seen to scrupulously follow the rule of law itself, in both letter and spirit. In that broader context, it is unfortunate that the aggressive US approach to Ms Meng’s extradition from Canada has caused many to conclude that the US is effectively using Canada’s legal processes for wider political purposes.
Bambos Tsiattalou is the Founding Partner of Stokoe Partnership Solicitors and specialises in cases involving money laundering, fraud, confiscation, civil recovery and extradition matters.
Image Credit: Oleksandr Siedov
After years of overpromising and underdelivering, digital transformation has finally started producing results. Businesses across multiple industries are now accelerating growth through the creation of digital services as additions to traditional customer service channels. What’s more, large numbers of agile start-ups are disrupting the financial services and retail industries with innovative data-driven applications.
The impact of these new services has been a change in mentality. We now expect businesses to prioritise digital, and younger consumers in particular are disappointed by anything other than that. While digital services allow for instant gratification, they also make us more vulnerable to fraud. Among the industries most at risk is the legal sector, with law firms seen as lucrative targets as a result of the large volumes of sensitive information in their possession. Online channels present cybercriminals with countless new entry points for cyberattacks – with 91% of law firms falling victim to email spoofing to send spam, phishing and other fraudulent emails last year, clearly, they are not immune to cybercrime. There are various steps they can take to protect themselves, discussed below by Caroline Hermon, Head of Fraud Solutions at SAS UK & Ireland.
In the early months of 2020, we have seen a boom in digital services, while the traditional physical economy has slowed to a crawl. To stay in business, many companies are being forced to move services online faster than they had planned. In the rush to get these new digital services to market, there’s a significant risk that development teams will make mistakes and overlook the usual security checks. Unfortunately, the likely result is that fraudsters will have a field day as they find and exploit these new gaps in their victims’ armour.
To stay in business, many companies are being forced to move services online faster than they had planned.
In a highly dynamic environment where fraudsters are discovering new attack vectors every day, it’s critical for fraud prevention teams to be able to detect threats and respond quickly. Artificial intelligence and machine learning (AI/ML) approaches can help by spotting patterns in previous fraud cases and using them to detect suspicious behaviour by customers, employees or systems.
AI and machine learning are vast and highly technical fields, and it can be difficult for fraud teams to choose the best way to start their adoption journey. Nevertheless, banks and other organisations are putting a variety of interesting AI/ML-powered anti-fraud solutions into production. For example:
Digital banks such as Monzo are using smartphone cameras with facial recognition technology to prevent unauthorised users from gaining access to customers’ accounts via their mobile apps. Today’s powerful facial recognition solutions are built using machine learning models that can tell the difference between a customer’s face and a photo or mask. They can even detect when a person is sleeping or unaware that the camera is being used, potentially making them a much more powerful access control measure than traditional password-based login methods.
Banks are also using image recognition to streamline processes such as paying in cheques, where customers simply take a photo of the cheque and upload it via their banking app. Banks already use machine learning models to identify whether the image is a genuine cheque and extract the key information from it. It will be a natural progression to analyse signatures and detect more types of potential cheque fraud.
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Natural language processing and text analytics can help companies handle larger volumes of internal and external communications – such as phone calls, emails, SMS and instant messenger/chatbot interactions – while still maintaining robust anti-fraud measures. For example, in a banking context, many institutions already record the phone calls of their traders and other employees to provide evidence in cases of insider trading and other financial crimes. By using natural language processing techniques, organisations can automatically transcribe these audio files into text. Then AI/ML models can recognise relevant keywords and topics, analyse tone and sentiment, and raise alerts to the fraud team when suspicious behaviour rises above a given threshold.
False positives are the bane of fraud investigators’ existence, diverting expert resources away from the true criminals and alienating innocent customers and employees. You can use AI/ML techniques to build models that can analyse previous cases and separate out the behaviour patterns that are truly suspicious from the purely superficial anomalies.
Many current fraud detection systems use a defined set of business rules to assess the likelihood that a given case requires investigation. You can use AI/ML models to supplement and test these rule sets. This provides insight into the relationship and relative predictive power of each rule and even suggests new rules that can be added to increase the accuracy of the results.
One of the most powerful tools in an investigator’s toolkit is network analysis, which provides tools to visualise and understand the relationships between the people, places and events surrounding a case under investigation. Just like human investigators, AI/ML models can be trained to interpret these complex networks, and can often identify patterns and relationships that traditional approaches might miss.
One of the most powerful tools in an investigator’s toolkit is network analysis.
The move towards providing digital services for customers and remote working capabilities for employees poses new problems for network security teams, who can no longer count on all sensitive activity taking place behind the corporate firewall. However, you can also use AI/ML solutions to process vast quantities of network logs and identify suspicious events at a speed and scale far beyond the capabilities of human network administrators.
Ultimately, the threat of fraud within the legal sector has potential for serious reputational and financial fallout, highlighting the need for pre-emptive fraud defences. Open source coding tends to be the starting point for many organisations in their AI journey, and works perfectly well for small-scale initiatives. But enterprise-grade deployments are highly complex and call for a much more robust approach, plus scaling with open source can be difficult. Among the factors to consider is the need for governance to ensure information is used for its intended purposes, as well as ongoing model testing and monitoring to ensure accuracy and avoid bias. Here, taking a centralised approach is a good way to go. By this, we mean putting an analytics platform in place which supports not just traditional statistical methods, but also newer AI/ML-enabled techniques.
Neil Williams of business crime solicitors Rahman Ravelli outlines why the Covid-19 pandemic may mean the SFO cannot return to business as usual.
While these are uniquely testing times for many of those in business, the situation is perhaps least straightforward for the Serious Fraud Office (SFO). While many in business and finance will – it is hoped – return to workplaces at some point in the near future to resume what they did in pre-virus times, it is unlikely to be so simple for the SFO.
By the time things return to anything like normal, the SFO’s version of normal may differ significantly from what it was just a few months ago. This could, given time, be an opportunity for the agency to show its mettle and expertise as it meets a variety of new or increased challenges. But any perceived failure to meet those challenges could lead to questions about its effectiveness. It is, after all, only three years ago that the then Prime Minister intended to hand the SFO’s duties to the National Crime Agency.
Such a plan was eventually dropped. But now the SFO will now have to juggle its existing workload – which it tends to tackle with mixed results – with what is certain to be a slew of new investigations arising from coronavirus.
By the time things return to anything like normal, the SFO’s version of normal may differ significantly from what it was just a few months ago.
There is likely to be a public interest in – and strong backing from the public for – investigations and prosecutions of businesses and individuals suspected of making or attempting to make fraudulent gains from the healthcare challenges posed by the pandemic. Whether this is by price fixing of pharmaceuticals or equipment, pandemic-related investment fraud, the sale of counterfeit medical products or online selling of goods at hugely inflated prices or goods that do not exist, the SFO may well have a huge amount of pandemic-related work coming its way. Having had its fingers burnt many years ago with its failed Operation Holbein investigation into pharmaceutical price fixing – which was, at the time, the SFO’s biggest ever prosecution – it may not be relishing any more such cases.
Yet there is a strong possibility such cases will arrive at the SFO’s door. As will allegations relating to those looking to use real or non-existent charities as vehicles for fraud. It would also be a huge surprise if the government’s Coronavirus Job Retention Scheme was not targeted by those in organised crime looking to make fraudulent gains. Chancellor Rishi Sunak has also acknowledged that the payment scheme for the self-employed may also be vulnerable to fraud.
The SFO, therefore, may soon have a bigger workload due to recent events. But such events may also indirectly lead to the SFO facing more challenges from the past.
Warren Buffett’s quote, “It's only when the tide goes out that you discover who's been swimming naked,’’ may not have won any awards for good taste but the point it makes remains valid – when the economy takes a turn for the worse we get to see who wasn’t as legitimate as they appeared before the bad times. The economic problems that coronavirus prompts may reveal historic fraud that would otherwise have remained hidden. And that may well produce more work for the SFO.
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The situation at this very moment may mean that the SFO has time to examine cases that have been in the in-tray for a long time while more pressing ones demanded immediate attention. The SFO is now in a position to do some spring cleaning in relation to the cases that do not usually receive prompt action; either because they are not considered urgent or because they were simply too time consuming to make swift progress on. The SFO Director Lisa Osofsky has often spoke of her desire for her agency to move swiftly and efficiently. The lockdown may well give the agency the chance to tackle investigations that have been lingering too long for her liking.
The SFO could, therefore, view the virus-related lockdown as a blessing that gives it the chance to play catch-up on some cases. But it could equally come to regard it as a curse, if and when the avalanche of expected virus-related fraud cases arrives on its desks.
Precisely how such matters will develop is impossible to forecast with pinpoint accuracy. But what can be said with a degree of certainty is that the SFO is facing a number of challenges. They may not all be new. They may not all arrive at the same time. But how it manages the workload that COVID-19 looks set to induce will be provide a true indicator of the SFO’s own health.
The first thing to consider is: What type of mediation is best suited for the particular fraud dispute in question? There are two types of mediation: facilitative mediation and evaluative mediation.
Facilitative mediation
In a facilitative mediation the mediator’s role, as the title of the type of mediation suggests, is to facilitate the participants to reach an agreement. I would recommend that those attending a fraud mediation should be called “participants” and not “parties”. My recommendation in a fraud dispute is to set the tone, both in pre-mediation correspondence and at the mediation, by using the word “participants”. Choosing to do so helps to promote a friendly atmosphere in a fraud dispute; it is conducive for a settlement and it helps attention to be diverted away from entities, personalities, dislikes - by and against both -, and onto the real issues in dispute.
One key characteristic of facilitative mediation is that the mediator has no form of judicial, arbitral or other decision-making function. This is particularly important when considering what sort of mediation to recommend to clients in fraud disputes. If the fraud dispute lends itself to one where some sort of decision may be needed to help reach a settlement, then a stand-alone facilitative mediation may not be the most appropriate form of mediation. Below, I list the situations where a facilitative mediation on its own might not stand in a fraud dispute.
Evaluative mediation
Returning to the types of mediation, the other type of mediation is evaluative mediation.
In this type of mediation, the mediator is asked to give a (normally) non-binding opinion on the merits of the matters in dispute.
An alternative to the provision of an opinion prior to the participants meeting with the mediator in a fraud dispute is for the mediation to commence and then agree on a set time (say, in four subsequent hours) for a non-binding opinion to be obtained from the mediator.
This opinion can be provided at various stages in the mediation process. It could be provided before the participants meet with the mediator; the opinion is thereafter used as a basis of settlement discussion between the participants at the mediation. I am very keen on this form of process, and I have written about the mediation process, including a form of Practice Note, as an Appendix to the next edition of Contentious Trusts Handbook, the leading textbook written by Carl Islam of 1 Essex Court. This way of using the evaluative form of the mediation process, on which I am, as I have said, very keen, either with or without a facilitative mediation, will, I believe, become more and more popular in fraud disputes because it takes the heat out of the situation, which is very helpful in fraud disputes where almost always the temperature is very high.
An alternative to the provision of an opinion prior to the participants meeting with the mediator in a fraud dispute is for the mediation to commence and then agree on a set time (say, in four subsequent hours) for a non-binding opinion to be obtained from the mediator. The mediation is thus adjourned with a fixed date/time to continue. I would recommend set times in fraud cases because it concentrates the mind. I also recommend fixing the next date in fraud cases because it keeps the participants feeling that they are very much in mediation-mode. The particular advantage of this process is that the non-binding opinion can take into account all that has been said to date at the mediation. Further, in fraud disputes, a break in the mediation process allows the dust to settle and wiser counsels to prevail. In my experience, fraud disputes are often complicated and are tangled affairs; therefore clear heads and a pause for thought often pay serious dividends.
Considerations for settling a dispute
I address now what the participants to a fraud dispute should consider in order best to settle the dispute.
First, they should, in my opinion, consider whether the fraud dispute is amenable to settlement at all. I am not one of those mediators who says that every fraud dispute is amenable to mediation. Some may be too intractable to resolve without court or arbitral process.
Another classic example is a case where creditors are seeking to trace assets and get behind various companies into which relevant assets have been placed as a result of fraud.
Secondly, and in any event, my recommendation is that mediation should certainly be considered in every fraud dispute, not least because the courts in these modern times increasingly say that mediation should be considered in every case with costs consequences following if it is not. However, if mediation is not suitable, my recommendation is that this should be made plain in correspondence so that this can be referred to at the costs stage of the fraud dispute, after final court or arbitral resolution, by way of corroboration.
Thirdly, if it is considered that mediation is a sensible route for the fraud dispute to be resolved, then I recommend that the issue of which type of mediation to use should be carefully examined. There is not a specific rule that can be applied to all types of fraud disputes; they all need to be carefully analysed.
It is worth looking at some examples of fraud disputes as these can be used as a guide. A classic example is a case where there is an issue about whether a trust-creating instrument has been procured by fraud. In order to achieve the best result on a settlement, this type of fraud dispute may well be one where it would be very beneficial to have a non-binding opinion as to the validity of the trust, including the circumstances surrounding its creation, coupled with a facilitative mediation.
Another classic example is a case where creditors are seeking to trace assets and get behind various companies into which relevant assets have been placed as a result of fraud. In order to achieve the best result in a settlement in this type of fraud dispute, it may well be the case where a facilitative mediation will be the most beneficial form of mediation, because there may be a deal to be struck between allowing the asset tracers to have some of the assets - but leaving the companies otherwise intact - coupled with an undertaking by the tracers not to wind-up the companies and not to seek an opportunity to trace any further assets.
Using the mediation process to settle
I recommend that, even if the mediation is getting bogged down, the participants should try and keep the mediation from coming to an end.
I have considered how best the choice of mediation can be used to settle fraud disputes. I now look at how best to use the procedure in mediations in order to reach a settlement in fraud disputes.
ANTHONY TRACE QC
4 Pump Court, Temple, London, EC4Y 7AN | www.4pumpcourt.com
Aziz Rahman of corporate crime solicitors Rahman Ravelli details the fraud risks posed to business by coronavirus and the ways such risks can be minimised.
At the time of writing, everyone is observing restrictions on their movements and many millions are either working from home or have stopped work altogether in an effort to stop the spread of COVID-19.
As a response to such a seismic blow to the economy, Chancellor Rishi Sunak announced huge packages of financial assistance last month in the shape of grants for the self-employed and payment of the wages of employed workers. Yet in announcing his help for the self-employed, the Chancellor acknowledged that such a scheme may be attractive to those looking to perpetrate fraud.
His statement was a recognition that whatever the health of an economy - or the financial standing of an individual or a company within it – there will always be those looking to make fraudulent gains. The situation that has been created by coronavirus will have produced new opportunities for those who commit fraud. And fraud is like a virus: it will spread and cause the maximum amount of harm unless the right precautions are taken. To paraphrase the criminologist Dr Donald Cressey, perceived financial need, opportunity and rationalisation all help promote fraud. With the current economic uncertainty, the chance for state financial hand-outs and the possibility that many may feel they should be getting something, all of Cressey’s conditions appear to be present.
The situation that has been created by coronavirus will have produced new opportunities for those who commit fraud.
That is the case when it comes to both the Chancellor’s attempts to help employees and the business world in general: new developments produce new fraud possibilities.
This is arguably why the Financial Conduct Authority (FCA) has gone to great lengths to warn that the present situation may be exploited by those looking to defraud, using anything from investment fraud and advance fee fraud through to clone firms. The FCA is urging those in business to use its Financial Services Register and its Warning List to check on the authenticity of any financial proposition made. Similarly, the National Crime Agency (NCA) is highlighting risks posed by the likes of bogus online medical equipment suppliers, fake HM Revenue and Customs, bank and loan company officials and computer hackers passing themselves off as software engineers. Companies could even find themselves being impersonated by those looking to make illegal gains.
It is now, therefore, arguably more important than ever to be alert to the risks. This means both having well thought-out and properly executed measures in place to prevent and / or identify fraud and responding promptly and appropriately if fraud is suspected.
A prompt, thorough internal investigation will always be the best way to establish if there has been fraud committed, why it happened and how to prevent repeat occurrences. This may, at first glance, appear difficult given current working restrictions. But it can be done with some “out of the box’’ thinking. Interviews, for example, could be conducted via telephone or video link; although consideration must be given to legal issues such as confidentiality and privilege in the jurisdictions where they are carried out. Document collection can be done remotely or by using an appropriate third party, providing all relevant data protection requirements are met. Once such an investigation has been completed, decisions then need to be made regarding whether its findings are shared internally and / or disclosed to the relevant regulatory agency.
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It should at this point be emphasised that despite the unusual circumstances the law and the agencies that enforce it are still functioning; even if changes are being made. To give one significant example, while Business Secretary Alok Sharma has announced a temporary suspension of the wrongful trading provisions, the law in relation to fraudulent trading - and the potential for director disqualification – remains in place. It is a development that shows that while businesses’ current problems are being acknowledged by the government, companies cannot expect to be immune from either the dangers of fraud or the consequences of becoming involved in it.
Recent weeks have seen significant upheaval in the business world – and a clear possibility for those looking to commit fraud. But companies must ensure they do what they can to minimise the potential turmoil.
Prohibiting US firms and individuals from paying bribes to foreign officials in furtherance of a business deal, the FCPA’s impact in the CEE/SEE (Central and (south)Eastern European Countries) region continues to grow. We speak to Jitka Logesová who heads the firm-wide Corporate Investigation practice at Wolf Theiss, on what impact the FCPA has and the importance effective compliance management systems play in such situations.
What is the relevance of the Foreign Corrupt Practices Act in the CEE/SEE region?
The influence of the FCPA is tremendous. To give you some perspective, most of the corporate investigations that we are currently running in the CEE/SEE region are somehow FCPA-triggered. The CEE/SEE countries are still perceived as more vulnerable to corruption than the rest of Europe as indicated, for example, in the latest Transparency International Corruption Perceptions Index. The concept of corporate criminal liability was introduced gradually and relatively recently in some of the countries in the region. However, at the same time the will of public authorities to prosecute corporate crimes is generally on the rise. For example, since 2015 the number of commencement of criminal proceedings against legal entities in the Czech Republic increased almost by double. So if companies have business activities occurring in this part of the world, they should really focus on compliance issues and being able to present an effective compliance management system, to enable them to emit as much corporate criminal liability as possible.
Why is the FCPA so important here and what impact can the violations of the Act in jurisdictions outside the US have?
The Foreign Corrupt Practices Act gives the United States authorities effective power to prosecute US and foreign companies with certain ties to the United States jurisdiction for bribery of foreign officials. The word "foreign" is particularly important, indicating that the legislation covers illegal activities (bribery of foreign officials) outside the United States, in every other jurisdiction where a company or an individual have set up their relevant business. If, for example, non-compliant behaviour, or even suspicious behaviour, is detected in one of the company's CEE/SEE subsidiaries, the company can be held liable for this, not only in that particular jurisdiction, but also in the United States, even if the activity occurring in the US subsidiary was legal.
The sanction being imposed by the DOJ is extremely high and excludes additional costs, such as legal fees, costs of monitorship, costs associated with updating the compliance system (etc). Alleged violations of the FCPA are extremely sensitive to deal with. The potential of reputational damage is tremendous and it has serious consequences with respect to business.
Having been found guilty entails being possibly excluded from participation in public tenders in the EU for several years. These are significant losses and that is why the investments into compliance should not be neglected. Besides, third parties are nowadays more cautious and pay much more attention to the compliance of their business partners than a few years ago as a precondition to get involved with them. The interesting thing is that the Foreign Corrupt Practices Act was established in 1977, but it started to be actually enforced almost 30 years later. The CEE/SEE corporate criminal liability and anti-bribery laws are only a few years old and the authorities are still struggling to use them effectively. The US authorities have much longer experience with enforcing the FCPA. The extraterritorial reach of the FCPA is vast, which is also due to the fact that it has never been tested sufficiently by courts – most of the cases are settled.
There seem to be many factors at play. How can companies ensure that they are not violating the rules given this?
The key resides in an effective compliance management system. Legal entities should use all efforts and adopt adequate measures to prevent, or at least minimise the risk(s) of a crime being committed. Companies which are managed appropriately will not suffer from criminal liability. I would like to point out that solely the adoption of certain measures is absolutely insufficient. In the event of a crisis situation, the authorities take into account the effectiveness of the measures and whether there exists a real compliance culture within a company. Therefore, such measures must address the specific situation of the legal entity and form an effective compliance management system.
What would you classify as an ‘effective compliance management system’?
A proper compliance management system should be based on proper risk analysis and reflect the size of the entity, complexity of regulatory requirements, international nature of the company, the scope of business, the risk profile of the entity and the market environment in which it operates. Moreover, a compliance management system must not only be put in place and forgotten about, as it is in need of a continuous update in light of new circumstances and risks. Of course, even if the system is set up correctly, a crime can still be committed due to a breach of obligation by an individual. The human factor cannot be eliminated completely. However, the crime should not be attributed to the company in such an event.
How does a corporate investigation proceed if a company is under suspicion of violating the FCPA?
The standard corporate investigation usually consists of three phases. The first one comprises the review of initial information, background searches and sometimes initial fact-finding interviews with relevant custodians. Background searches reveal red flags and identify individuals who we should focus on during the data review or who should be interviewed in the next stages to understand their involvement in the matter.
The following investigation phase resides in the technology-assisted electronic data review based on appropriate keywords. Data protection and privacy issues are extremely important at this stage and the use of proper technology and the right definition of keywords reduce the risk of breaching data protection and privacy rules. The red flags either prove or disprove to be real, sometimes new facts emerge and the scope of the corporate investigation adapts to reflect these.
After the data review, the interviews with individuals involved follow in order to fill in the missing pieces of information, to confront them with findings and give them the opportunity to explain what happened. We then proceed with an analysis of all the findings and propose recommendations to the client.
Concerning the final stage, the company decides - or it might be effectively "forced" by law enforcement authorities - to implement an effective compliance management system. The existence of an effective compliance management system is a precondition for the possibility to release the company from its criminal liability (compliance defence) and aims at preventing misconduct in the future.
How should companies handle their reputation (with clients or the media) when undergoing a corporate investigation?
It is of utmost importance to be prepared, even if the company is not in a crisis situation yet. The ‘crisis communication’ preparation should be a part of the first phase of the whole process and it should be based upon the background searches and be constantly updated throughout. The company should consider hiring a local agency with a substantial track record in crisis communication if it is not able to manage the situation using internal resources. It is necessary to appoint a manager responsible for coordinating these activities, prepare for various hypothetical situations and to involve the experts conducting the corporate investigation to the process. Lawyers need to be involved at all times during the communication stratégy. The potential legal consequences of every communications step should be taken into account.
JITKA LOGESOVÁ
Partner
Pobřežní 12
186 00 Prague
Czech Republic
jitka.logesova@wolftheiss.com
Jitka Logesová heads the firm-wide Corporate Investigation practice at Wolf Theiss covering the CEE/SEE region. She specialises in corporate investigations, compliance, corporate criminal liability/white-collar crime and asset recovery. Before joining Wolf Theiss, Jitka established and built up a firm-wide compliance, risk and sensitive investigations practice at another regional law firm. She was tasked by the Czech General Prosecutors office to help draft the methodology for state prosecutors on how to evaluate corporate compliance management systems and to educate the state prosecutors in this respect. She has wide experience in various sectors, where she advised clients primarily on FCPA triggered issues and investigations, led a number of corporate internal investigations in CEE/SEE and advised on various compliance issues including setting up anti-corruption and compliance programmes. Jitka is Senior Co-Chair of the International Bar Association (IBA) Anti-Corruption Committee. She is also a Certified Auditor for ISO 19600 (compliance management systems) and for ISO 37001 (Anti-Bribery management systems). She has also published extensively on these topics and is a frequent speaker at compliance and anti-corruption conferences. Further, Jitka teaches a Business Ethics class as a guest lecturer at the Anglo-American University in Prague.
The European Anti-Fraud Office (OLAF) is an institution mandated by the EU with the notion of protecting the Union's financial interest. It is an administrative body which investigates fraud against the EU budget, corruption and serious misconduct within the European institutions, and develops anti-fraud policies. But are their investigations thorough and meet legal requirements, or do they merely result in administrative bodies paying out a lot of money for an unjust, poorly conducted investigation into fraud?
How straightforward are OLAF’s investigations?
Many people are not aware that in addition to its responsibilities, OLAF can conduct investigations on fraud reported by people who choose to remain anonymous – something that is not common amongst other administrative institutions. This, however, can be quite costly. Once an investigation is launched, those working on it will, in most cases, travel across the globe – to wherever the investigation takes them. The anonymous nature of the signal begs the question – is this investigation economically justified if it does not achieve its desired outcome? For instance, it doesn’t uncover tax fraud, which has had a harmful impact on the EU budget.
When we talk about such investigations, it might be worth questioning whether they mainly relate to the anonymous person who reported the fraud and their interests, or whether it’s something that’s actually worth investigating. In this context, it is unclear what OLAF’s procedure is when it comes to dealing with anonymous reports and the lack of clear and precise regulation on the subject raises doubts about the investigators’ objectivity.
Anonymity provokes unjust, costly investigations
Generally speaking, all of this could make it possible for the European Anti-Fraud Office to settle personal corporate interests by working on investigations which were reported by someone who remained anonymous, whilst the person who’s being questioned faces the costs of defending their rights. I have witnessed similar cases throughout my career, namely when the court overturns a customs decision based on a report by the Anti-Fraud Office or information received from them during the inspection, which suggests that the alleged breach of customs legislation is not present.
In this case, the customs authorities issued their decision based on the information and allegations they received from the Anti-Fraud Office, but if the court was to reverse that decision, it was the customs authorities who would have had to cover the court fees. This, in turn, is not fair, because customs authorities are not equipped to verify whether the allegations made by the Anti-Fraud Office are true and issue their statements based on the information which OLAF provides. However, if it turns out that the allegations are not substantiated by due process of law, the court would overturn the decisions of the customs authorities, but still cannot award the costs of the case to OLAF. Thus, a costly investigation conducted by the European Anti-Fraud Office, whose allegations were not supported by evidence, could result in unnecessary costs for local administration – mainly because it is obliged to not question OLAF’s reports.
What this example illustrates is that instead of investigating fraud, OLAF could sometimes harm national administrative bodies, whilst trying to gather additional funds for the EU budget.
Is OLAF economically justified?
What’s interesting is that there’s not an institution which keeps track of the expenditures that national administrations have incurred when a court has overturned their decisions based on OLAF’s reports or inspections. What I oftentimes wonder is whether the sole existence of this institution is economically justified.
In all cases of my practice, the evidence presented by OLAF in support of their allegations of tax fraud has not been suitable or there hasn’t been any evidence to support their allegations at all. This may be connected to OLAF’s employees’ lack of understanding of national laws and the requirements of the procedural laws regarding the validity of evidence, however, considering that there are requirements for national administrative bodies to issue acts for the collection of public debt (customs, tax, etc.), they need to comply with national laws. Otherwise, the work of OLAF’s employees becomes meaningless due to the incompatibility of their presented documents with the procedural rules of a given member state, and sometimes, even with EU laws.
The impact of not understanding EU case law
In this article I have chosen to refrain from using specific examples from my practice, however, the one thing I’d like to bring to your attention is that OLAF still doesn’t understand the European Court of Justice’s case-law: that export declarations for goods are not documents which can prove a higher customs value. When a certain item is being imported into the EU, there needs to be an export declaration for goods, drawn up and signed by the exporter, whilst the importer needs to submit an import declaration. An export declaration is a private document which has no evidential significance. When conducting their investigations, however, OLAF’s employees continuously ask exporters for this piece of documentation, instead of documents which can prove higher customs value. In their essence, export declarations are not evidence of payments, but OLAF continuously misunderstands their sole purpose.
My intention is not to argue that the EU does not need OLAF altogether, however, I believe that it could perhaps revise the institution’s functions and powers.
Naturally, it’s the court that carries out the administration of justice in accordance with the rule of law – as mentioned earlier, OLAF is simply an administrative body whose actions need to be kept track of. It’s a common misconception that its reports should be trusted without questioning anything they claim, when in fact they should be subject to judicial review.
Below Lawyer Monthly hears from Nicola Sharp of business crime solicitors Rahman Ravelli, who explains why the EU’s proposed central authority for investigating money laundering cannot come soon enough.
European Union finance ministers are set to authorise the European Commission to draft plans for an enforcement body that would be independent and would have what have been termed direct powers to oversee the anti-money laundering efforts in all EU member-states. If and when it comes into existence it will be authorised to police, among other things, financial institutions’ compliance with EU rules regarding anti-money laundering due diligence.
The move comes at a time when the issue of money laundering has gained increased prominence, due largely to Transparency International’s report “At Your Service’’, which painted a fairly alarming picture of the extent to which laundered money has seeped into many, if not all, aspects of UK life.
The EU, it seems, has at least recognised that more needs to be done. The way loopholes have been exploited by those looking to launder money in Europe, the damage this does to the reputation of the financial system and the potential effect on EU members’ economies have all been noted by the EU. It may be unfair to class it as a wake-up call: the EU has been aware of the problem of money laundering and has been taking steps to tackle it for years. But now the EU at least seems to recognise that more needs to be done – and it needs to be more coordinated than it has been so far.
The way loopholes have been exploited by those looking to launder money in Europe, the damage this does to the reputation of the financial system and the potential effect on EU members’ economies have all been noted by the EU.
At this stage, we are short of precise details. Some EU members want an all-new body to take on the role, others believe the task could be given to the European Banking Authority (EBA) - even though some in the EU are far from happy with the EBA’s track record – while giving Europol new authorities has also been floated as a possible way forward. EU officials have said any final, agreed plan could be introduced as regulations that apply directly to financial institutions as opposed to legislation, which would need members to adopt complementary national laws so it could be enforced in each state.
But while the proposal at this stage lacks clarity the need for something to be done is crystal clear. The EU has made repeated attempts to tackle money laundering and the results so far can be described as mixed at best.
The Fourth Money Laundering Directive (4MLD) was introduced by the EU as a genuine and well-intentioned way to address the problem. And yet it was less than a year and a half ago that the European Commission’s Justice Commissioner Vera Jourova was berating 20 European Union states for the slow and unsatisfactory transposition of 4MLD into their national laws.
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The fact that the Justice Commissioner was openly criticising more than 70% of EU members for failing to meet their obligations regarding 4MLD is perhaps the starkest reminder that Europe has a problem. More than a year after the deadline for implementing 4MLD, a mere handful of member states had transposed it into national law. Now we have the Fifth Money Laundering Directive. Every EU member should be ready to implement this by January 20 2020. Yet only a supreme optimist would believe that this is likely.
The directives have served a purpose. They have also shown that the EU is far from ignorant regarding money laundering. But ultimately they have illustrated the core of the problem – the EU has, until now, put its faith in a decentralised collection of national authorities to tackle an international issue that demands a concerted, coordinated and consistent approach.
We may not know the exact details of how the EU intends to create one body to take on the huge problem of money laundering. But what we do already know is that such action cannot come soon enough.
Here Syedur Rahman of business crime solicitors Rahman Ravelli voices concern about the effectiveness of the authorities’ efforts to tackle it.
Transparency International has argued forcefully that laundered money is making its way into even the most prestigious parts of the UK economy.
In its report ‘At Your Service’, TI makes it clear that dirty money is throughout the UK economy, with corrupt individuals taking care to place their illegal gains into service industries that are not covered by strict anti-money laundering rules.
As a result, everything from private schools, interior designers, sports hospitality providers and suppliers of designer goods are becoming beneficiaries of ill-gotten gains; although many may not know the tainted origins of the money they are receiving.
This is arguably not earth-shattering news. It has, after all, been a very poorly-kept secret that the proceeds of crime have been and are being spent on a vast scale in the UK; with London (and especially its property market) proving to be the traditional magnet for such cash. And every individual in possession of such tainted money will always look for ways of spending it that do not attract official attention.
But the depth to which TI has demonstrated the scale and breadth of the problem should perhaps be seen as a wake-up call to the UK authorities, as if laundered money is seeping into all aspects of UK life that cannot be good for anyone but those with the tainted money and those with whom they choose to spend it. It is telling that while TI estimates the amount of such money entering the UK each year is around £325 billion the National Economic Crime Centre (NECC) believes it to be little more than £100 billion.
Laundered money is seeping into all aspects of UK life that cannot be good for anyone but those with the tainted money and those with whom they choose to spend it.
Either figure is alarming. And we may never determine which one is the most accurate. But the fact that the NECC’s estimate is less than a third of the size of TI’s is hardly encouraging. And both figures are glaring reminders that more needs to be done. Otherwise we are grudgingly accepting that criminal activity that involves tens of billions (if not hundreds of billions) of pounds annually can continue unchecked.
There may be some reading this who would take umbrage at the idea that there is an acceptance of money laundering on this scale. They may believe the fact that it is happening is far from an acceptance or condoning of it. But if all efforts to tackle money laundering are still allowing, depending on who you believe, between £100 billion and £325 billion to be laundered each year then surely anything other than a total reassessment of those efforts amounts to an unspoken acceptance of the current problem.
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TI’s report states that 17,000 shell companies have been used by 582 UK firms or individuals to move suspected proceeds of crime into the UK. That works out at almost 30 companies per company or individual. And yet just under a year ago the Financial Action Task Force - the G7 countries’ answer to the money laundering and terrorist financing problem – was stating that the UK aggressively identifies and pursues money laundering. It went as far as to say that the UK is a global leader when it comes to promoting corporate transparency and has “a good understanding’’ of the money laundering risks. From what TI is saying, that transparency seems far from clear when it comes to establishing the source of funds.
I would be the last person to say that little or nothing has been done when it comes to money laundering. Aspects of the Criminal Finances Act (including unexplained wealth orders), the UK’s Money Laundering Regulations and the NECC’s own Joint Money Laundering Intelligence Taskforce (JMLIT) may well be making inroads into the problem. But even the most forgiving assessment of the situation indicates that the inroads that are being made appear to be neither as speedy nor as direct as they need to be.
Here Syedur Rahman of business crime solicitors Rahman Ravelli highlights some reasons why that is not entirely accurate.
As business crime-related claims go, the one made by the chair of the US Securities and Exchange Commission (SEC) was a pretty big one.
SEC Chairman Jay Clayton chose a speech to the New York Economic Club to argue that the US was pretty much going it alone when it comes to punishing bribery and corruption. He cited figures to back his stance and followed up by calling on other nations to follow the US’s lead in tackling what is an international problem.
But does his viewpoint stand up to serious scrutiny? Only to a very limited degree.
His view that the US has spent more than two decades enforcing the Foreign Corrupt Practices Act (FCPA) is a valid enough point to make. In the past five years or so, the SEC has brought more than 70 FCPA-related cases – and these cases have involved misconduct in almost as many countries. Mr Clayton’s argument that the US is “doing its bit’’ does, therefore, seem to stack up. The FCPA is a strong piece of legislation and the US is far from shy when it comes to utilising it.
But the SEC chair can be taken to task when he claims that the US is acting largely alone; especially as he argues that other countries are taking advantage of the efforts that the US is putting in to tackle bribery and corruption. The US has, for many years, been one of a relatively small group of nations prepared to investigate bribery but the view that somehow everyone else is freeloading is unfair.
The US has, for many years, been one of a relatively small group of nations prepared to investigate bribery but the view that somehow everyone else is freeloading is unfair.
The view has also been expressed within the US that because other countries do not have strong anti-bribery legislation US companies bidding for work abroad are up against foreign rivals who are not bound by legislation as far-reaching as the FCPA; meaning the US companies are at a disadvantage when trying to clinch deals. But should that not be a reason for the US to be working closer with other nations to eradicate bribery rather than condemning them for what the SEC chair sees as a lack of effort?
Mr Clayton appears to have recognised that as markets evolve, so must the SEC. He should also recognise that the US is not the only place where efforts are being made to tackle bribery.
If we take the UK as just one example, the Serious Fraud Office (SFO) takes a multi-disciplinary approach to investigating bribery and corruption. The likes of forensic investigators, lawyers and computer specialists work closely together for maximum effectiveness. The SFO also works with other UK agencies - not to mention national and international enforcement agencies - to tackle bribery and corruption. It is looking to encourage a culture of co-operation and self-reporting among corporates. Avoiding prosecution via a deferred prosecution agreement – as was the case with Rolls-Royce – is now a possibility. Unexplained wealth orders are just one in a series of measures available to the UK authorities when it comes to targeting the assets of those suspected of being corrupt. And, in the Bribery Act, the UK has a more far-reaching piece of legislation than the US’s FCPA.
These are all reasons why Mr Clayton would be wrong to lump the SFO – and by extension, the UK – in with those he sees as falling short when it comes to tackling bribery and corruption.
But it would also be wrong to think the UK is the only nation taking a more aggressive approach to tackling bribery. Anti-corruption laws may vary significantly from jurisdiction to jurisdiction but many countries are now working harder to combat bribery. Corruption has been made the subject of agreements from bodies as sizeable and varied as the Council of Europe, the United Nations and the Organisation for Economic Co-operation and Development. The claim from the SEC chair that the US is going it alone does seem, at best, a little short-sighted.
