Corporate crime

Failing to prevent the facilitation of tax evasion: note on Government's guidance

The Criminal Finances Act 2017 introduced two new offences (the first relating to the UK and the other to a foreign jurisdiction), each committed where a relevant body (those most affected by the new offence are likely to be in the financial services, legal and accounting sectors) fails to prevent an associated person criminally facilitating the evasion of a tax. Where the relevant body has put in place reasonable prevention procedures to prevent the criminal facilitation of tax evasion by an associated person (or where it is unreasonable to expect such procedures) the relevant body shall have a defence.

In late 2017, HMRC published guidance explaining the policy behind the new offences. The guidance offers suggestions as to the types of processes and procedures that can be implemented to prevent associated persons from criminally facilitating tax evasion. Such prevention procedures are, according to the guidance, to be informed by six non-prescriptive principles that advisers should take into consideration when determining how best to formulate prevention procedures on behalf of relevant bodies. This note (found here) has been prepared to assist advisers to understand each of the principles identified in the guidance.

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Disclosure: time to cut the Gordian knot?

Non-disclosure in criminal proceedings has long been recognised as a “potent source of injustice” (per Glidewell J in R v Ward [1993] 1 WLR 619, the successful appeal against convictions relating to the 1973 Euston station and M62 bombings). The collapse of the Liam Allan trial has brought the issue back to national attention.

Regrettably, current evidence suggests that this is not an isolated incident. The 2017 joint review of disclosure by HM Chief Inspector of the CPS and HM Inspector of Constabulary found that scheduling of unused material is “routinely poor” and, alarmingly, revelation by the police to the prosecutor of material that may undermine the prosecution case or assist the defence case is rare.”  Non-disclosure also remains the most common reason for the Criminal Cases Review Commission referring cases back to the Court of Appeal.

The disclosure regime established by the Criminal Procedure and Investigations Act 1996 (‘CPIA’) was the statutory response to notorious miscarriages of justice in the 1970s and 1980s, but, 20 years on, it does not appear to be functioning as it always should. The recent explosion in the volume of electronic material is posing still further challenges for investigators and prosecutors seeking to comply with the regime by identifying disclosable material. The R v R & Others [2015] EWCA Crim 1941 is a prime example. The unused material constituted 7 terabytes of data. At the point the case was stayed (the decision was later overturned on appeal) there had been no progress beyond primary disclosure for five years.

The SFO is turning to technology for answers. In the Rolls Royce case, artificial intelligence was used to sift, index and summarise documents.  While that may provide the long-term solution, the software is not readily available beyond the SFO, not least because of cost.

Some commentators and academics suggest the solution lies in adopting the currently forbidden ‘keys to the warehouse’ approach whereby the defence are given access to all material obtained during the investigation (subject to limited public interest grounds for non-disclosure). That would undoubtedly represent a dramatic shift in the approach to disclosure in England and Wales. If we look to other jurisdictions, however, the proposal is not as radical as it might first seem.

In most civil law jurisdictions, the defence have access to all material obtained during the investigation. Generally, in inquisitorial systems, the prosecution prepares for the investigating judge a dossier that contains all the evidence and the full record of the investigation. The judge will then grant the defence access to the full file at some point in the proceedings; exactly when depends on the jurisdiction.

The approach in common law jurisdictions varies. Canada, for example, allows the defence full access to all relevant material obtained in the investigation. In the landmark ruling in R v Stinchcombe [1991] 3 SCR 326, the Canadian Supreme Court affirmed that all relevant information, including unused material, must be disclosed subject only to the reviewable discretion of the prosecution to withhold material irrelevant to the case or on public interest grounds (such as national security or witness safety).

The Canadian Supreme Court dismissed the suggestion that such a general disclosure duty was incompatible with an adversarial system as contrary to the burden of proof and the function of the prosecutor as a minister for justice. Sopinka J went further and observed that:

“…the fruits of the investigation which are in the possession of counsel for the Crown are not the property of the Crown for use in securing a conviction but the property of the public to be used to ensure that justice is done.”

Sopinka J also pointed to a further principled argument for full disclosure, namely, that the decision as to whether an unused witness statement was “…sufficiently useful to put into evidence should be made by the defence and not the prosecutor.” 

Similarly, in England and Wales, it is arguable that notwithstanding the provision of a carefully-worded defence statement, a defendant remains in a better position to know what might assist her case than the most diligent prosecutor.

In the USA, the ‘Brady rule’ (so-called after the seminal Supreme Court case of Brady v Maryland 373 U.S. 83 (1963)) provides a constitutional right to exculpatory material. There is, however, a growing ‘open file’ trend at State-level, partly in response to restrictive Federal discovery rules. Some of those schemes make reciprocal defence disclosure a condition of full access to the case file to ensure equality of arms.

The proponents of such schemes argue that they improve efficiency by avoiding pre-trial disclosure arguments and appeals and allow defendants to make better-informed and timely plea decisions. Those points accord with the reasoning of the Canadian Supreme Court in Stinchcombe, which found that any increase in prosecutorial workloads because of full disclosure would be offset by the time saved in resolving disclosure disputes. The ‘open file’ approach would also arguably reduce the scope for police or prosecutorial incompetence or impropriety and improve confidence in the fairness of trials.

Such an approach is also not entirely without precedent in England and Wales. Before the CPIA regime, the common law had developed its own answers to non-disclosure. In 1993, Ward (supra) established a new disclosure standard: all evidence of help to the accused should be disclosed. The Court of Appeal emphasised that,

“…all relevant evidence of help to the accused” is not limited to evidence which will obviously advance the accused’s case. It is of help to the accused to have the opportunity of considering all the material evidence which the prosecution have gathered, and from which the prosecution have made their own selection of evidence to be led.”

That potentially broad obligation was clarified in the later cases (see most notably R v Keane [1994] 1 WLR 746 which held the test was one of materiality). Ultimately, the CPIA, which came into force a few years later, curtailed the prosecutorial disclosure obligation. It must be remembered, however, that the statutory scheme requires that a full schedule of material in the possession of the prosecution is always provided to the defence, save for material which attracts public interest immunity. The defence are, therefore, always made aware of the existence of material and can request copies of it. If the prosecution decline to provide access to the material then application can be made to a judge.

Shifting the burden of identifying material that might undermine the prosecution or assist the defence to the defendant does present its own difficulties. Arguably it is inefficient as the time and cost of examining vast quantities of unused material would fall on both sides, instead of the prosecution alone. To accommodate that, the current public funding arrangements for defence lawyers, which do not provide for specific remuneration for reviewing unused material, would have to change. Even then, it is unlikely to be workable in the most document-heavy cases as the defence would require enormous resources, in terms of both manpower and IT systems, to review all the material. In short, and perhaps unsurprisingly, there are practical difficulties with any disclosure regime.

In the final analysis, such a sweeping change is unlikely to be attractive to the legislature. There is after all broad consensus that the CPIA provides a principled, Article 6 ECHR compliant disclosure regime. The recent criticism relates to its practical implementation and the 2017 joint inspection report provides a series of recommendations from better training to improved strategic oversight which, if implemented properly, would go some way to remedying those concerns.

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Righting another ‘wrong turn’? Dishonesty in Ivey v Genting: Part II

In this second of two posts (the first can be found here), the criticism of the Ghosh test is considered, together with a brief outline of the concept of dishonesty in the civil cases and some reflections on the future application of Ivey in practice.

The trouble with Ghosh

The decisions in Feely and Ghosh attracted a good deal of academic criticism, among others: D.W. Elliott, “Dishonesty in Theft: A Dispensable Concept” [1982] Crim LR 395; E. Griew, “Dishonesty: The Objections to Feely and Ghosh” [1985] Crim LR 341;  K. Campbell, “The Test of Dishonesty in Ghosh” [1994] 43 CLJ 349.

The essential criticisms were these:

  1. The cases did not actually provide a definition of dishonesty. Instead the jury (or magistrates) were left to give “dishonesty” whatever meaning they thought fit, having regard to prevailing social mores.  By consequence the test was not a legal one but depended on the moral views of the jury.  Moreover, simply because “dishonesty” was an ordinary English word, it did not follow that the jury should be given an uncontrolled discretion over its meaning and application.
  2. The concept of dishonesty had become a central positive feature in offences of property when it should more properly function as a negative feature, controlling liability that would otherwise arise in respect of prima facie unlawful conduct.
  3. The cases created the possibility that some persons would be acquitted on facts not differing in any material respect from those upon which other persons would be convicted.
  4. The cases assumed that juries and magistrates in England and Wales were culturally homogeneous with known and shared standards.  However, the object of the criminal law was to protect property rights and disrespect for those rights abounded – no such shared values could properly be relied upon.
  5. The cases mistook the meaning of dishonesty (a legal concept) with standards of behaviour (an ethical one).
  6. The test risked more trials as defendants had little to lose by pleading not guilty and hoping that the dishonesty element was not made out.
  7. The second limb of the Ghosh test in particular allowed the accused to escape liability where he had made a mistake of fact as to contemporary standards of honesty.  That was no proper reason for excusing criminal liability in the context of property offences – nor did such a concept operate elsewhere in the criminal law.  The Ghosh test attached too much weight to the opinion of the defendant at the expense of the rights of the victims of property offences and the criminal law does not ordinarily excuse individuals who believe that their conduct would be acceptable to others.

Wider concerns

The Ghosh test was also heavily criticised by the Law Commission.  In “Fraud and Deception (Law Commission Consultation Paper No. 155, 1999)” the academic critique of the Ghosh test was found to be compelling (at paragraph 5.28).  It was noted, among other things, that the only apparent function of the second limb of the Ghosh test was to allow a defendant to escape liability on the basis of mistake of fact about what the standards of dishonesty were among the general public: that is to say, a defendant’s misunderstanding of the moral beliefs held by the rest of society provided a basis for an acquittal.

Interestingly, however, in its later report, Fraud (Law Com No. 276, 2002), the Law Commission softened its criticism of the Ghosh test and expressed the view that its application in practice was “unproblematic” (paragraph 5.18).

It is notable in this regard that the Fraud Act 2006 came to be passed on the basis of the law as it stood in Ghosh – criticism and allSome have raised whether, in this context, the decision in Ivey might be considered judicial activism.

Though the position in other common law jurisdictions was not considered in Ivey, it is interesting to reflect that leaving the concept of dishonesty to the uninstructed view of the jury was rejected in Australia only a couple of years before GhoshR v Salvo [1980] VR 401.

In Salvo, the defendant (a used car dealer) sold a car to K, taking from K another car in part exchange.  Salvo then sold the car received from K.  He then discovered that K had no title to sell the car and was put to the expense of perfecting the title of the vehicle.  He then decided to repurchase the car he had sold to K using a worthless cheque.  His conviction for dishonestly obtaining the vehicle (by falsely representing that the cheque would be honoured) was quashed on appeal on the basis that a claim of right is a defence to a charge of obtaining.  The three judges considered the concept of dishonesty and the majority (Murphy and Fullager JJ;  McInerney J dissenting) rejected the approach in Feely while McInerney J held that Feely was rightly decided.  Fullager J found that dishonesty was not a word to be left to the jury on the basis of its ordinary meaning but, rather, meant “with disposition to defraud i.e. with disposition to withhold from a person what is his right”.  The decision in Salvo was followed in Brow [1981] VR 783 and Bonello [1981] VR 633.

Concerns about “dishonesty

Perhaps alive to these criticisms, it is apparent that the senior judiciary had been concerned for some time before Ivey about the concept of dishonesty in the criminal law and, further, an apparent divergence with civil law, especially in relation to dishonest assistance in breach of trust.

In Starglade Properties Ltd v Nash [2010] EWCA Civ 1314, Leveson LJ added a “note of concern” to his judgment if it was the case that “the concept of dishonesty for the purposes of civil liability differed to any marked extent from the concept of dishonesty as understood in the criminal law”.  He noted that the point was apt to be considered by the Court of Appeal (Criminal Division) (at [42]).

Subsequently, a five-judge Court of Appeal heard the case of R v Cornelius [2012] EWCA Crim 500 in which the issue as formulated between the parties included the correctness of the Ghosh test.  Ultimately it proved unnecessary to examine Ghosh.  It may be a matter of interest however, that the position adopted by the respondent Director of Public Prosecutions was that the Ghosh test was wrong and ought to be abandoned in favour of the test applicable in civil proceedings, as articulated by Lord Nicholls in Royal Brunei Airlines Snd Bhd v Tan [1995] 2 AC 378.

The civil cases in overview

In Royal Brunei Airlines Snd Bhd v Tan [1995] 2 AC 378, Lord Nicholls held that dishonesty was the necessary and sufficient condition of liability in cases of dishonest assistance in breach of trust.  The test of dishonesty, in such cases, was an objective one (at page 389).  To the extent that dishonesty required a subjective element, it was to be derived from the fact that it described a type of conduct assessed in the light of what a person actually knew at the time of the breach.  It was not to be found (as in Ghosh) in what a reasonable person would have known or appreciated about that conduct.  Put another way, as Lord Nicholls expressed the test, a person’s knowledge of a transaction or conduct had to be such as to render his participation contrary to normally acceptable standards of honest conduct;  it did not require that he should have had reflections about what those normally acceptable standards were. 

The decision of the Privy Council in the Royal Brunei Airlines case was considered by the House of Lords in Twinsectra v Yardley [2002] 2 AC 167.  In Twinsectra a majority (Lord Slynn of Hadley, Lord Steyn, Lord Hoffman, Lord Hutton; Lord Millett dissenting) held that a finding of liability was only permissible, where following the application of a combined subjective and objective test, dishonesty was established – a Ghosh type test.  However, the decision in Twinsectra Ltd. was explained by the Privy Council three years later in Barlow Clowes International Ltd (in Liquidation) and others v Eurotrust International Ltd [2006] 1 WLR 1476.  In that case it was decided that the test whether a person was consciously dishonest in providing assistance in breach of trust required him to have knowledge of the elements of the transaction which rendered his participation contrary to ordinary standards of honest behaviour, but did not require him to have reflections on what those normally acceptable standards were.  This approach appears to have been followed by Arden LJ in Abu-Rahmah and another v Abacha and others [2007] 1 Lloyd’s Rep 115, the Court of Appeal (Pill, Rix and Arden LJJ) and in Starglade (supra).

In broad summary, the combined effect of the cases in the civil law was that a finding that the defendant was dishonest need only involve an assessment of his participation in the light of his knowledge of the facts of the transaction.  It is this test which now forms the test of dishonesty for the purposes of the criminal law.

The approach for juries following Ivey

The approach as set out in Ivey that the criminal law ought to follow what was said by Lord Nicholls in Royal Brunei Airlines, would seem both principled and of practical merit.

As to what constitutes this test, and how it is to be approached in criminal trials, it may be of assistance to highlight two passages in the civil authorities in particular concerning the extent to which the factual circumstances (including the characteristics of the defendant) may be taken into account.

In Royal Brunei, Lord Nicholls made plain (at page 393):

…. when called upon to decide whether a person was acting honestly a court will look at all the circumstances known to the [defendant] at the time.  The court will also have regard to personal attributes of the [defendant], such as his experience and intelligence, and the reason why he acted as he did.

In Starglade Properties Ltd, the Chancellor summarised the effect of what Lord Nicholls had said in the following way (at paragraph 25):

There is a single standard of honesty objectively determined by the court.  That standard is applied to specific conduct of a specific individual possessing the knowledge and qualities he actually enjoyed.

In sum, the task for the jury is first to find the facts:  what did the defendant do and with what possible intention, belief or other state of mind that is relevant to the offence charged?  The second task is to decide whether the defendant was acting as an honest person would in the circumstances, applying their standards as ordinary and reasonable people.

Concerns addressed?

In conclusion it is perhaps interesting to reflect that, while some of the more trenchant criticisms of Ghosh have been addressed by Ivey (viz. a defendant’s ability to escape liability based on his misunderstanding of prevailing moral standards), the importation into the criminal law of the test in Royal Brunei is not without potential difficulty.

Dishonesty” remains a concept left to the jury which is undefined (save by reference to their own standards) and subject to potentially widespread variation.  Two defendants may still experience different outcomes before different juries on identical facts.  The concept of honesty among a jury drawn from Southwark may differ markedly from those among a jury drawn from Tunbridge Wells.

More significantly perhaps, “dishonesty” remains a central feature in property offences, as opposed to a limiting factor, controlling liability in respect of prima facie unlawful conduct.  This is worthy of particular attention in cases of conspiracy to defraud where the parameters of what constitutes unlawful conduct are strikingly wide, namely:  an agreement to pursue a course of conduct which risks prejudice to the economic interests of a third party.

In circumstances where the operation of basic capitalist economies routinely and inevitably risks economic prejudice to a third party, “dishonesty” forms the crucial ingredient which engages the stigma of the criminal law.  Whether it is right that this is a matter which should be left to a jury as a test of fact, or morality, as opposed to a concept which is a matter of law is perhaps a matter which requires further scrutiny.  The alternative would seem to risk, in effect, the creation by stealth of a generalised property offence of dishonesty – a matter on which Parliament has repeatedly declined to legislate.

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Righting another ‘wrong turn’? Dishonesty in Ivey v Genting: Part I

This blog has previously featured a summary of the landmark judgment in Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 and a post examining the dishonesty test now to be applied in criminal proceedings. Our analysis continues with two in-depth posts. In this, Part I, the background to the decision in Ivey is examined, along with a consideration of the Ghosh test and its operation in practice.  In Part II, the academic criticism of Ghosh is discussed together with a brief account of the concept of dishonesty in the civil cases, and some reflections on the future application of Ivey in practice.

The issue

The case concerned a professional gambler who sued a casino for his winnings at a game of Punto Banco (£7.7 million). The issues arising before the Supreme Court included whether the concept of cheating at gambling necessarily required ‘dishonesty’ and, if so, what the proper test for dishonesty would be in the circumstances, namely the test applicable in civil or criminal proceedings.  As Lord Hughes explained, the test of dishonesty in civil proceedings was whether the conduct was dishonest by the ordinary standards of reasonable and honest people (an objective test); the test in criminal proceedings, (pre-Ivey) was the two-limbed Ghosh test, namely: (i) whether the conduct was dishonest by the ordinary standards of reasonable and honest people; and, if so, (ii) whether the defendant knew his conduct was dishonest by those standards (an objective subjective test).

The judgment

In the event, Ivey was decided on the basis that dishonesty formed no part of the concept of cheating.  Accordingly, on one view, the discussion of dishonesty in the judgment might be said to be obiter and confined to the circumstances of a civil action.  The better view, however, would seem to be that the judgment represents the current state of the criminal law on dishonesty and that the two-limb test in Ghosh has been overruled.  Certainly that was the view expressed by the President of the Queen’s Bench Division in DPP v Patterson [2017] EWHC 2820 (Admin) (at [16]):  “It is difficult to imagine the Court ofAppeal preferring Ghosh to Ivey in the future.”

The judgment was the unanimous decision of a Court which included the President, future President, and the former Lord Chief Justice (Lord Neuberger, Lady Hale, Lord Kerr, Lord Hughes and Lord Thomas).  The position on any future appeal to the Supreme Court is, to that extent, predictable and it is notable that Lord Hughes expressed himself in unambiguous terms: “directions based upon [Ghosh] ought no longer to be given” (at [74]).

It follows that the directions as formulated in the current edition of the Crown Court Compendium: Part I Jury and Trial Management and Summing Up (February 2017) (pp 8-16 to 8-19) would appear to have been superseded. There is no longer a requirement for any jury to consider the subjective state of mind of a defendant as to whether his conduct was dishonest or not.

Following Ivey, the entirety of the test of dishonesty in the criminal law is now objective.  Juries are to be directed accordingly on a straightforward question: was the defendant’s conduct dishonest by the ordinary standards of reasonable and honest people?  Whilst answering that question may take account of all the circumstances, as the jury find them to be (including the defendant’s state of knowledge, belief or suspicion), a defendant’s own evaluation of his conduct no longer forms part of the test.

Righting another wrong turn?

In abandoning the Ghosh test the Supreme Court has taken another step to clarify certain areas of doctrinal debate arising from decisions of the House of Lords and Privy Council in the early 1980s.  Ivey sits alongside the seminal decisions in G v R [2003] UKHL 50, resolving controversy as to the proper test of recklessness following R v Caldwell [1982] AC 341; and R v Jogee, ‘righting’ a wrong turn in the test for parasitic accessorial liability derived from Chan Wing Siu v The Queen [1985] AC 168).

The genesis of the controversy surrounding the Ghosh test can be traced at least to R v Feely [1973] QB 530.  Feely concerned the manager of a betting shop who took £30 from the till for his own purposes.  This was contrary to his instructions, but he had a right of set-off for this amount in respect of money owed to him by his employer, so his employer was not placed at any financial risk.  His conviction of theft was quashed because the trial judge had removed the issue of dishonesty from the jury.

The Court of Appeal decided that it was for the jury to determine whether what the defendant did was dishonest applying the current standards of ordinary decent people.  This test was a notable departure from the test under the old law of larceny (prior to the Theft Act 1968) – which left the concept of ‘fraudulently’ as a matter for the judge – and from the practice envisaged by the drafters of the 1968 Act, in which the concept of dishonesty was expected to play only a minor role.

As a result of Feely, the criminal law relating to property offences changed significantly:  it was now for a jury to decide on what constituted dishonesty by reference to the prevailing moral standards and whether the defendant had transgressed those standards.

In a number of cases that followed it was held that the jury were required to take into account not only the prevailing moral standards but also the defendant’s own opinion on whether he acted honesty:  R v Gilks [1972] 1 WLR 1341;  Boggelin v Williams [1978] 1 WLR 873;  R v Landy [1981] 1 WLR 355.

This approach to dishonesty was disapproved in R v McIvor [1982] 1 WLR 409, where, in order to avoid the implications of the earlier decisions, it was held that in a case of conspiracy to defraud a different test was to be applied.

It was against this background that the Court of Appeal came to consider Ghosh.

The Ghosh test

In Ghosh, the Court of Appeal (Lord Lane CJ, Lloyd and Eastham JJ) held that in determining whether the prosecution has proved that a defendant was acting dishonestly involved a two-stage objective-subjective test.  Lord Lane CJ stated (at paragraph 1064D):

… a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest.  If it was not dishonest by those standards that is the end of the matter and the prosecution fails.

If it was dishonest by those standards then the jury must consider whether the defendant himself must have realised that what he was doing was by those standards dishonest.  In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about it.  It will be obvious that the defendant himself knew that he was acting dishonestly.  It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did. 

By introducing such a test, which looked first to the standards of reasonable and honest people and then to the defendant’s own state of mind, the Court of Appeal attempted a compromise.  On the one hand it modified the objective test, as set out in Feely, which some considered to be overly harsh, but it avoided the purely subjective approach of Gilks, which some considered to create a thief’s charter.

As to when the direction was to be given requiring a jury to apply the test in Ghosh, the Court of Appeal clarified the position in R v Price (1989) Cr App R 409:

… it is by no means in every case involving dishonesty that a Ghosh direction is necessary.  Indeed in the majority of such cases, of which this was one, it is unnecessary and potentially misleading to give such a direction.  It need only be given in cases where the defendant might have believed that what he is alleged to have done was in accordance with the ordinary person’s idea of honesty.

Put another way, Price made clear that the Ghosh test was in fact only to be applied by juries in circumstances where the second limb of the test arose for consideration, namely the defendant’s evaluation of whether his conduct was aligned with general standards of morality.

It is right to note that in practice, the Ghosh direction is now most frequently given in cases involving complex financial frauds.  In such cases it has commonly been a live issue whether, for example, a trader in esoteric financial instruments believed that what he or she was doing was dishonest by the standards of ordinary people given the conduct in which he or she engaged was widespread within the industry.

Part II will be published next week.

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How now to spot dishonesty

What place a defendant’s state of mind following the Supreme Court decision in Ivey v Genting [2017] UKSC 67?

Until Mr Ivey challenged the refusal of the Genting Casino to pay the £7.7 million he had won at Baccarat using an edge-sorting technique that he called legitimate and they called cheating, a defendant charged with an offence of dishonesty would have had a fairly good idea how a jury considering her conduct would have decided whether it had been dishonest. Since 1982, when the locum surgeon Mr Ghosh was convicted of claiming fees for operations undertaken by others, the jury would have asked itself not only whether the conduct was dishonest by the standards of reasonable and honest people (amongst whom they would have included themselves), but whether the defendant realised that ordinary honest people would consider the behaviour to be dishonest. Since the Supreme Court concluded that Genting’s categorisation of Mr Ivey’s conduct was the correct one and took the opportunity to look again at how a jury ought to spot dishonesty, a defendant’s position on the face of it has changed. But how much?

The Supreme Court was keen to remove a defendant’s own realisation that reasonable and honest people would consider her conduct dishonest from the equation. It was concerned that this could place a defendant with a warped view of the world in a better position than one in touch with contemporary morality. However, the Court did not in the process make the actual state of mind of a defendant irrelevant. Its relevance is to the state of knowledge as to the factual context of her conduct. As Lord Hughes identified (at para.60), taking the example of a person accused of travelling on a bus without paying, if they genuinely believe that public transport is free then there is objectively nothing dishonest about not paying. Similarly (taking the facts of the pre-Ghosh decision in Feely [1973] QB 530), if an employee takes money from the till, knowing that this is not permitted but intending to pay it back the next day, the objective assessment of his conduct in terms of dishonesty will differ from another employee who takes from the till without making any attempt to repay.

Whilst it could be argued that the dishonesty issue that the Supreme Court had to resolve in Mr Ivey’s case was not the question of whether the test described by Lord Lane CJ in Ghosh [1982] QB 1053 was correct, it could equally be argued (as Lord Hughes observed at para.55) that Lord Lane had not been required to devise his two part test in order to address whether it was dishonest to claim for work others had done as Mr Ghosh had. Moreover, it would be brave to suggest that the unanimous and unequivocal rejection of the Ghosh test should not be followed. As Sir Brian Leveson observed in DPP v Patterson [2017] EWHC 2820 (Admin), “it is difficult to imagine the Court of Appeal preferring Ghosh to Ivey in the future” (at para. 16).

In any event, the Supreme Court has taken the opportunity to restate the test for dishonesty that has generally been applied by courts and juries, namely by reference to her state of knowledge of the factual context of her actions judged against the assessment of reasonable persons.  For example, the Crown Court Compendium [8-6] recognises that it has been “unusual” to address the second Ghosh question.  Moreover, this is an approach that juries have already been applying in all manner of other contexts, such as whether someone’s claim to be acting in self-defence was reasonable, or whether their knowledge or belief was genuine by reference to whether it was reasonable.

And so, the answer in reality and in most cases to the question of how now to spot dishonesty is much as it was before, dependent on the assessment of the jury as to whether it was dishonest in their eyes in the circumstances that the defendant was in.

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David Perry QC
Tom Williams
David Perry QC and Tom Williams
22 November 2017

Section 2 notices: here and now?

Section 2(2) and (3) of the Criminal Justice Act 1987 (‘CJA 1987’) empower the Director of the Serious Fraud Office (‘the SFO’) to give notice in writing requiring a person under investigation or any other person whom the Director has reason to believe has relevant information to (a) answer questions or furnish information (s. 2(2)); or (b) produce documents (s. 2(3)). In what is often referred as a ‘here and now’ notice, the recipient may be required to do what the SFO’s notice requires ‘forthwith’ (see R (Rawlinson and Hunter) v Central Criminal Court [2012] EWHC 2254 (Admin), [2013] 1 WLR 1634, at [61]). What, in the context of a ‘here and now’ notice, does ‘forthwith’ mean?

Criminal Justice Act 1987

Section 2(2) sets out the power to compel a person to answer questions or furnish information (with emphases added):

(2) The Director may by notice in writing require the person whose affairs are to be investigated (“the person under investigation”) or any other person whom he has reason to believe has relevant information to answer questions or otherwise furnish information with respect to any matter relevant to the investigation at a specified place and either at a specified time or forthwith.

Section 2(3) sets out the equivalent power to compel a person to produce (a specified class of) documents:

(3) The Director may by notice in writing require the person under investigation or any other person to produce at such place as may be specified in the notice and either forthwith or at such time as may be so specified, any specified documents which appear to the Director to relate to any matter relevant to the investigation or any documents of a specified class which appear to him so to relate

Where a court is satisfied on the basis of information on oath that there are reasonable grounds for believing that a person has failed to comply with an obligation under s. 2(2) or (3), it has the power to issue a search warrant under s. 2(4)(a)(i). A warrant may also be issued if there are reasonable grounds to believe that it is not practicable to serve a notice under s. 2(3), or if doing so might seriously prejudice the investigation (s. 2(4)(a)(ii)-(iii)).

Furthermore, if a person fails to comply with such an obligation without reasonable excuse, he or she will be guilty of an offence under s. 2(13): the offence is punishable with six months’ imprisonment and/or an unlimited fine.

‘Forthwith’

The Oxford English Dictionary defines ‘forthwith’ as meaning ‘immediately’ or ‘without delay’. However, the Privy Council observed in the nineteenth century in R v Price (1854) PC 203, 14 ER 78 that ‘when used in an Act of Parliament’, the word ‘has been construed to mean “in a reasonable time”’, or, alternatively, ‘as soon as the party who is to perform the act “can reasonably perform it”.’ In In re Southam (1881) 19 Ch D 169, Lush LJ was clear that the word ‘has not a fixed and absolute meaning’, and Sir George Jessel MR agreed:

I think that the word “forthwith” must be construed according to the circumstances in which it is used. Where, as in Hyde v Watts, there is a covenant to insure a man’s life, there must of necessity be some delay, for the act could not be done in a moment. But where an act which is required to be done “forthwith” can be done without delay, it ought to be so done.

In R v Secretary of State for Social Services, Ex p Child Poverty Action Group [1990] 2 QB 540, the Court of Appeal (Balcombe, Woolf and Russell LJJ) considered the duty imposed on the Secretary of State for Social Services under ss. 98-99 of the Social Security Act 1975, as amended, to ensure that any claim for income support and certain other benefits was ‘submitted forthwith to an adjudication officer for determination’. The Court of Appeal found that that duty arose only when the Department of Health and Social Security had obtained the basic information to enable a claim to be determined: the Secretary of State was under no duty to have an adjudication officer available immediately to deal with the claim and a decision on the claim could be lawfully reached after the stipulated time period if it was not practicable for it to be reached earlier. Woolf LJ implicitly rejected the submission that ‘forthwith’ should simply mean ‘immediately’ (at 553D-E):

So far we have not separately considered the sense in which the word ‘forthwith’ is used in section 98(1). It can have many meanings according to the context. However, as already pointed out, none of those meanings in the present context could require the department to submit to the adjudication officer a claim form which did not provide the material needed for a determination. In the context of section 98 the presence of the word ‘forthwith’ indicates that the department is required, once that material is available, to submit the claim to the adjudicator as soon as reasonably possible. Because of the requirement to deliver the claim forthwith the department, in deciding what steps it should take in order to make the claim suitable for submission and in carrying out those steps, is under an obligation to bear in mind the need for expedition.

In s. 2(2)-(3) CJA 1987, ‘forthwith’ does not necessarily mean ‘immediately’: it is more likely to mean ‘as soon as reasonably possible’ in all the circumstances, and, in particular, without deliberate and unnecessary delay. A court determining this question would bear in mind that:

(i) the powers set out in s. 2(2)-(3) are designed for use in complex and document-heavy SFO prosecutions, where some material may inevitably take some time to locate;

(ii) if an application for a search warrant under s. 2(4) could routinely be made as soon as the SFO served ‘here and now’ notice, this would be (a) disproportionate where there has been insufficient time to comply, given the intrusive nature of a search warrant; and (b) probably ineffectual if the material is indeed difficult to locate;

(iii) it is unattractive to suggest that prima facie criminal liability arises under s. 2(13) if an immediate response is clearly impracticable, even if a person would probably have a ‘reasonable excuse’ defence in any event (the ‘reasonable excuse’ defence still has an important function if, for instance, it is not possible to provide the document at all, a circumstance anticipated by s. 2(3)(d)).

Conclusion

Although the meaning of ‘forthwith’ has not been judicially determined in the context of a ‘here and now’ notice, it is likely to mean ‘as soon as reasonably possible’. This will be a question of fact: although it may sometimes mean ‘immediately’, this will not necessarily be the case. If an immediate response is impracticable, the better view is that prima facie liability does not attach for the offence under s. 2(13); in the alternative, the person in question would be likely to have a defence of ‘reasonable excuse’. If a response has not been immediately forthcoming but it is not yet ‘reasonably possible’ to provide one, it would, for the same reason, be inappropriate for an application for a search warrant to be granted by a court under s. 2(4); and, until such an application is granted, the SFO have no right of entry simply because a ‘here and now’ notice has been served.

 

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Rosemary Davidson
Rosemary Davidson
15 November 2017

Co-operating after Brexit — what’s the future for security, law enforcement and criminal justice?

The Government’s paper ‘Security, law enforcement and criminal justice: a future partnership paper’ suggests that the intention is to maintain a similar level of co-operation with the EU following Brexit. However, issues such as data protection, jurisdiction and the fact that such ‘co-operation’ with a non-Member State would be unchartered territory for the EU, mean that achieving this will be far from straightforward.

 

What is the potential impact of Brexit on cross-jurisdictional crime investigation and enforcement?

Brexit is likely to have a huge impact on all areas of cross-jurisdictional crime investigation and enforcement within the European Union. In particular, it is unclear whether a post-Brexit UK will be able to continue to:

  1. participate in key EU criminal justice co-operation measures, such as the European Arrest Warrant (EAW) and the European Investigation Order (EIO);
  2. access EU criminal justice databases, such as the Schengen Information System, the European Criminal Records Information System (ECRIS, and data shared under the Prüm agreements; or
  3. play a role in institutions such as Europol and the Eurojust.

 

What does this new report tell us about the Government’s priorities on criminal justice and enforcement during the Brexit negotiations?

Although this paper is light on detail, references such as ‘avoiding operational gaps’ and the ‘opportunity to build on what has already been achieved through decades of collaboration’ suggest that the Government will be seeking to replicate the current arrangements as closely as possible.

In the paper, the Government emphasises three areas in particular as important:

  1. data sharing
  2. practical operational co-operation; and
  3. co-operation through agencies

This reflects the three main areas of EU criminal justice co-operation. Data-sharing includes access to the EU’s criminal justice databases, such as those already referred to. ‘Operational cooperation’ is a reference to arrangements such as the EIO (which the paper expressly refers to), and also the EAW and other EU mutual legal assistance measures. ‘Cooperation through agencies’ is a reference to institutions such as Europol and Eurojust. The paper makes particular reference to Joint Investigation Teams (through which EU states can jointly investigate cross-border criminal activity), a facility that the UK currently makes heavy use of.

The paper states that the UK will be seeking an UK-EU Treaty that ‘provides a comprehensive framework for future security, law enforcement and criminal justice cooperation between the UK and the EU’ although there is no detail about what, in practice, this might look like.

 

What are the main areas of challenge in securing agreement with the EU in this area?

The main hurdle is that, to date, the close levels of criminal justice co-operation that take place within the EU have been limited to Member States; there is no precedent for a so-called ‘Third State’ (ie a non-EU state) to have the type of co-operation relationship with the EU that is being proposed by the UK. While the UK is in a unique position as a (soon to be) former member of the EU, it is far from clear that the EU will be willing to continue its current co-operation arrangements once Brexit is complete.

A second problem is that the Government has identified ending the jurisdiction of the CJEU in relation to the UK as one of its ‘red lines’ in the Brexit negotiations. This is likely to be a significant hurdle in the context of criminal justice co-operation, where having a mechanism to ensure consistent application of any UK-EU agreement will be key to ensuring its effectiveness. Although the Government paper refers to the need to find a mechanism for dispute resolution, it is currently unclear whether the EU would be willing to enter into the type of close co-operation relationship being proposed by the UK without oversight by the CJEU.

A further area of difficulty is data protection. The UK’s ability to continue to share data with the EU is likely to depend on its continuing ability to conform to EU data protection requirements. This could mean that the UK would be required to implement EU data protection rules even after it has left the EU, and in circumstances where it has no influence over their content.

 

What are the key areas of concern for corporate crime lawyers?

Given the number of difficulties identified above, there is a real risk that, following Brexit, the UK will have a far less effective co-operation relationship with the EU than that which is currently enjoys.

First, the UK may have to revert to reliance on the older conventions and agreements, such as the European Convention on Extradition and the European Convention on Mutual Assistance in Criminal Matters. These are not based on the EU model of mutual recognition, and are slower and less effective than the current EU measures.

Second, the UK may lose some or all of its access to the EU’s criminal justice databases, and/or be required to continue to apply EU data-protection laws even after the UK has exited the European Union.

Third, it is likely that the UK will no longer play a leading role in institutions such as Europol and Eurojust, which will decrease the level of influence that the UK is able to exert in relation to EU criminal justice policy. This may lead to a divergence in approach, for example in relation to issues such as bulk data collection and data protection rules in the area of criminal justice.

Finally, it is worth noting that the Brexit negotiations are unlikely to be finished by the end of the Article 50 negotiating period in March 2019. This means that there will almost certainly be a transitional period during which the current arrangements will continue to apply.

This article was first published on Lexis®PSL Corporate Crime on 3 October 2017. 

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Alex Du Sautoy
Alex Du Sautoy
27 October 2017

Landmark Supreme Court dishonesty ruling

The Supreme Court has overturned the long-standing Ghosh test for establishing dishonesty in criminal proceedings.

Case summary: Ivey v Genting Casinos (UK) Ltd t/a Crockfords [2017] UKSC 67

Background

The Appellant, Mr Ivey was a professional gambler who wished to sue the respondent company, an owner of casinos. In August 2012, Mr Ivey had deployed a technique called ‘edge-sorting’ when playing Punto Banco (a type of Baccarat) at one of the Respondent’s casinos. It was common ground that the technique had improved the Appellant’s chances and he had won £7.7 million over the course of a number of days. The casino declined to pay Mr Ivey the winnings, claiming that ‘edge sorting’ amounted to cheating. Mr Ivey’s claim was that it was not cheating but a legitimate technique.

It was uncontroversial throughout litigation that it was an implied term of the contract for betting between the parties that neither of them would cheat. To the extent Mr Ivey had cheated, he would have been in breach of that implied term and unable to recover his “winnings”.

At first instance, Irwin J found that Mr Ivey was a professional gambler who described himself as an “advantage player”, viz. one who, by a variety of techniques, sets out to reverse the advantage held by the house and to play at odds which favour him. The judge accepted that he was genuinely convinced that what he did was not cheating. The question arising, however, was not whether Mr Ivey thought of it as cheating, but whether it was as a matter of fact and law. The judge concluded that it was, and so did the majority of the Court of Appeal.

Judgment

Lord Hughes gave the unanimous judgment of the Court. It was found that the definition of cheating must be the same for the implied term as for section 42 of the Gaming Act 2005, which makes cheating at gambling an offence. The Supreme Court observed that certain forms of cheating do not involve dishonesty, just as certain forms of deception do not constitute cheating. The Court found that the judge’s conclusion, that Mr Ivey’s actions amounted to cheating, was unassailable, and that it was not necessary to make an additional finding on whether the conduct of Mr Ivey amounted to deception. Nonetheless, the Supreme Court went on to consider whether, if dishonesty were an essential element, such an additional element would be satisfied in this case.

Dishonesty test

The Supreme Court considered the leading authority of R v Ghosh [1982] QB 1053, and the directions to juries which have been derived from that case in determining whether there has been ‘dishonesty’ for the purpose of any offence, namely that a jury is to apply a two stage test:

  1. Was the conduct complained of dishonest by the standards of reasonable and honest people?
  2. If so, did the defendant realise that ordinary honest people would consider his behaviour to be dishonest?

The Supreme Court identified six problems with the second limb of the Ghosh test in particular:

  1. The more warped the defendant’s standards of dishonesty, the less likely it is that he will be convicted of dishonest behaviour. As it was put in Smith’s Law of Theft 9th ed (2007), para 2.296: “…the second limb allows the accused to escape liability where he has made a mistake of fact as to the contemporary standards of honesty. But why should that be an excuse?”
  2. The test is not necessary to preserve the principle that dishonesty, and especially criminal responsibility for it, must depend on the actual state of mind of the defendant. Innocent mistakes, such as genuinely believing that all public transport is free, are already covered by the first limb. In determining the honesty or otherwise of a person’s conduct, one must ask what the defendant knew or believed about the facts affecting the area of activity in which he was engaging.
  3. It is a test that jurors and others often find puzzling and difficult to apply.
  4. It has led to an unprincipled divergence between the test for dishonesty in criminal proceedings and the test for dishonesty in civil proceedings.
  5. It represented a significant departure from law before the Theft Act 1968, when there is no indication that such a change was intended.
  6. The decision was not compelled by authority. The better view of the pre-Ghosh cases is that the preponderance of authority favoured the simpler rule that, once the defendant’s state of knowledge and belief has been established, whether that state of mind was dishonest or not is to be determined by the application of the standards of the ordinary honest person.

The Supreme Court concluded that these considerations provide convincing grounds for holding that the second leg of the test does not correctly represent the law, and that directions based upon it ought no longer to be given. They held that the correct test of dishonesty is that set out by Lord Nicholls in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 and by Lord Hoffmann in Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37. The test to be applied by a jury in determining dishonesty should therefore be as follows:

  1. To ascertain the actual state of the defendant’s knowledge or belief as to the facts.
  2. Determine whether the conduct was honest or dishonest by applying the standards of ordinary decent people.

There is no requirement that the defendant must appreciate that what he has done is, by the standards of ordinary decent people, dishonest. If dishonesty were an additional legal element in cheating at gambling, the Supreme Court concluded, it would in this case have been satisfied by the application of this new test.

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An overview of the Criminal Justice (European Investigation Order) Regulations 2017

The Government has published the Criminal Justice (European Investigation Order) Regulations 2017 (‘the Regulations’) which will come into force on 31 July 2017. The Regulations significantly enhance the ability of law enforcement agencies to obtain mutual legal assistance within the European Union.

The background to the Regulations: the European Investigation Order Directive

The Regulations have been introduced to give effect to the European Investigation Order Directive (‘the Directive’). The Directive replaces most of the existing EU mutual legal assistance measures in relation to the transfer of evidence with a single instrument, the European Investigation Order, based on principles of mutual recognition.

A European Investigation Order (‘EIO’) is a mechanism by which investigators and prosecutors can obtain a wide range of MLA measures, including freezing assets; obtaining and transferring evidence; and hearing witnesses. The Directive streamlines previous MLA procedures into a single process under which there are limited grounds of refusal and tight time limits.

European Investigation Orders issued in the UK

There are two routes by which an EIO can be issued in the UK: (i) on application to a judicial body; or (ii) EIOs made or validated by a designated public prosecutor.

EIOs issued by a judicial body

Under Regulation 6, an application for an EIO can be made to a judicial authority by (i) a prosecuting authority; (ii) a police officer acting with the consent of a prosecuting authority; or (iii) a party to proceedings relating to an offence. This latter category includes Defendants. In England and Wales, a judicial authority is defined as including “any judge or justice of the peace”.

EIOs made or validated by a designated public prosecutor

Under Regulation 7, a designated public prosecutor may make an EIO herself, or validate an order at the request of a designated investigating authority. The definition of designated public prosecutor includes the Director of Public Prosecutions; any Crown Prosecutor; the Director of the SFO; and the Financial Conduct Authority. Designated investigators include chief officers for all police areas in England and Wales, as well as the Chief Constable of the PSNI. In validating EIOs made by investigators, the public prosecutor is taking on a quasi-judicial role.

Public prosecutors and investigators may obtain an EIO under both Regulations 6 and 7. In an Explanatory Memorandum, the Home Office explained that “Where there is currently no need for court involvement in domestic cases, European Investigation Orders will normally be made or validated by a designated public prosecutor…Where a court would normally be involved in a domestic case (for instance when issuing a search warrant), only a court will be able to make a European investigation order.”

The test for obtaining an EIO

In both types of EIO, the issuing body must apply a two-part threshold test, and then satisfy itself in relation to conditions of necessity; proportionality; equivalent domestic legality; and additional conditions in relation to certain measures.

The two part threshold test is: (i) that an offence has been committed, or there are reasonable grounds for suspecting that an offence has been committed; and (ii) that proceedings in respect of the offence have been instituted or it is being investigated.

The second stage test requires the issuing authority to satisfy itself as to the following conditions:

  • It is necessary and proportionate to make the order for the purposes of the investigation or proceedings in question;
  • The investigative measures specified in the order could lawfully have been ordered or undertaken under the same conditions in a similar domestic case;
  • Any additional requirements specified in Chapter 2 of the Regulations has been met. Chapter 2 of the Regulations imposes additional requirements in relation to certain types of measures, including: videoconference and telephone hearings; banking and financial information; real-time evidence gathering (such as monitoring bank accounts); provisional measures; and interception measures where technical assistance is required.

Defence rights

Although the Regulations embed a number of defence rights into the process for obtaining an EIO, the extent to which these rights will give rise to an effective legal remedy will depend, in many cases, on whether the affected person is aware of the fact that an EIO has been made.

The rights of the defence include the requirements of the threshold and second-stage tests considered above (Regulations 6 and 7); the additional procedural protections in relation to the measures specified in Chapter 2 (Regulations 13-18); formal requirements for the making of an EIO, including an obligation to provide accurate information (Regulation 8); and limitations on the use that can made of evidence obtained under an EIO (Regulation 12).

European Investigation Orders executed in the UK

Part 3 of the Regulations provides for an EIO to be sent to the UK central authority which must take a decision on the recognition and execution of the Order. In England and Wales the central authority is the Home Secretary.

Regulations 32 and 33 make specific provision for HMRC cases under which the Revenue Commissioners can perform certain of the functions of the Home Secretary for the purpose of recognising an EIO.

Under Regulation 51, the central authority may refer the execution of the EIO to “an executing authority” if they are likely to be able to give effect to the order, and it is expedient to do so. Executing authorities include the police; the Crown Prosecution Service; the Serious Fraud Office; the Financial Conduct Authority; the Health and Safety Executive; HMRC; and others.

Grounds for refusal

Regulation 28 provides that the central authority may only refuse to recognise and execute an EIO if:

  • one or more of the grounds for refusal applies;
  • the investigative measure sought does not exist, or would not be available in an equivalent domestic case, and cannot be replaced with another that would achieve the same result;
  • the dual criminality test is not met;
  • lack of consent (video-conference hearings and temporary transfer);
  • The measure may prolong imprisonment (temporary transfer).

The central authority may also refuse to recognise an EIO on certain grounds where the measures relate to covert investigations; real time evidence gathering; or interception.

Certain of the grounds for refusal are disapplied if the EIO relates to one of the types of evidence or measures specified in Regulation 28(2), including evidence already in the possession of the central authority (or other executing authority in the UK) where the evidence could lawfully have been obtained; evidence in databases that is directly accessible by the central authority (or other executing authority) in the framework of a criminal investigation or criminal proceedings; the hearing of a witness; non-coercive measures; or subscriber information.

The grounds for refusal are set out in Schedule 4 and include:

  • Immunity or privilege;
  • National security;
  • Lack of equivalent domestic legality;
  • Double jeopardy;
  • Territoriality;
  • Human rights;
  • Discrimination/extraneous considerations.

Challenging an EIO

 Regulation 10 provides that the judicial authority or designated public prosecutor that made or validated an EIO may vary or revoke it. In the case of judicial authorities, this can be done on application by the person who applied for the order; a prosecuting authority; or “any person… affected by the order”. This latter category plainly includes the defendant(s) in the proceedings in which the EIO was obtained, but would also appear to encompass a wider category of persons, including the owner or controller of the evidence.

There is no appeal against the making or validation of an EIO by a public prosecutor, or a decision to recognise and execute an EIO by a UK authority. In these cases, the only route of challenge will be by way of judicial review.

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Politically exposed persons

The Fourth Money Laundering Directive was transposed into UK law when the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force on 26 June 2017. The change allows firms to take a more nuanced approach to assessing the risks posed by politically exposed persons (“PEPs”).

The new regulations were released in draft form in mid-March and represent a significant change in anti-money laundering regulation.

PEPs are defined as people who have a prominent public function in the government. Foreign PEPs (including their family members and business associates) have long been subject to enhanced due diligence. From now on domestic PEPs will be subject to the same regulations.

Proportionality

The justification for the enhanced treatment of foreign PEPs is that their very position leaves them exposed to bribery and corruption. The measures are said to be preventive, rather than punitive. However, it has long been a complaint that all foreign PEPs are treated alike.

Under the previous regime, there were often complaints that a disproportionate application of enhanced due diligence (“EDD”) to PEPs. The new regulations apply a more nuanced approach, requiring firms to assess the risks posed by PEPs in a proportionate way.

The new regulations apply a more nuanced approach, requiring firms to assess the risks posed by PEPs in a proportionate way.

It is recognised that some firms have been distinguishing between high- and low-risk PEPs for some time and tailoring their EDD accordingly. The regulations now endorse that approach. They make it clear that when dealing with PEPs, firms must assess the level of risk associated with that client and the extent of the EDD to be applied. Regulation 35(4) specifically provides that the extent of the EDD measures to be taken in relation to a PEP may differ from case to case.

Level of risk

There is evidence that some banks have been turning away clients who are PEPs, and their families, because of their status. HM Treasury has stated that refusing to establish a business relationship or to carry out a transaction simply because that person is a PEP is contrary to the letter and spirit of the law and issued a strong guideline that firms must not form judgments based solely on anyone’s status as a PEP.

It states:

 ‘when assessing the level of risk posed by UK PEPs and the extent of EDD to apply, firms should take account of the UK’s position as a world leader in the fight against corruption, money laundering, and terrorist financing.’

The consultation on the regulations goes on to say that the government would expect that UK PEPs should generally be treated as lower risk and firms should apply EDD accordingly: ‘It is right that low-risk PEPs should be treated at the lowest level, just as it is right for high-risk customers to face more stringent measures’.

Future Guidance

The Financial Conduct Authority is currently consulting on guidance on the treatment of PEPs, their family and their associates. Factors which are considered to be relevant to assessment of an individual’s risk as a PEP include:

  1. Their prominence in public life and level of influence within their organisation;
  2. Their ability to control public or party funds;
  3. Whether they have already been subject to disclosure requirements such as registers of interest or independent oversight of their expenses;
  4. Whether the PEP is associated with the local branch of a political party or the national one and whether they have any elected MPs;
  5. In the case of a foreign PEP, the level of risk associated with the country that appointed them;
  6. Whether they have stopped performing the prominent function in the preceding 12 months; and
  7. Relevant media coverage.

Under the new regulations, firms must continue to apply EDD for at least 12 months after the PEP ceases to perform a prominent function. However, they will not be obliged to apply EDD to the PEP’s family and business associates because they would no longer have the same connection to an influential person.

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Sasha Wass QC
Sasha Wass QC
20 August 2017

Deferred Prosecution Agreements: an introduction

Section 45 and Schedule 17 of the Crime and Courts Act 2013 introduced for the first time the Deferred Prosecution Agreement (‘DPA’) into the Criminal Justice system. They provide a mechanism under which a defendant organisation (but not an individual) can defer in the hope of ultimately avoiding a prosecution for certain economic or financial offences by entering into an agreement on terms negotiated with the prosecutor.

Sharing certain features with a Conditional Discharge, the DPA is a disposal of a criminal charge which is dependent on the remediation and future good conduct of the (intended) defendant. In contrast to a Conditional Discharge, no conviction results from a DPA and there is no admission of criminality.

An essential feature of the DPA scheme is the requirement that the court examines the proposed agreement in detail and determines whether the statutory criteria are met.

What are the mechanics of a DPA?

Prosecutor’s discretion

Unlike an offer to accept partial pleas of guilty or a guilty plea on a particular basis, which should emanate from the defence, it is the prosecutor in a DPA case who invites the prospective defendant into negotiations. The discretion to issue such an invitation remains with the prosecutor.

Before taking that step, the prosecutor must be satisfied:

  • That the evidential test for prosecution has been met or there is a reasonable suspicion based on some admissible evidence that the organisation has committed an offence;
  • That the full extent of the alleged offending has been identified;
  • That the public interest would be met by a DPA.

The public interest factor usually depends on the seriousness of the offence, the culpability of the organisations and the harm to the victim.

The default position is that a prosecution will take place unless the public interest factors outweigh those tending in favour of a prosecution. Each case will depend on its own facts.

Factors which militate in favour of prosecution include:

  1. A history of similar misconduct by the organisation;
  2. The conduct is part of established business practice of the organisation;
  3. The offence was committed when there was inadequate corporate compliance within the organisation;
  4. The organisation has been subject to a previous warning.

Factors which militate against prosecution include:

  1. Cooperation by the organisation;
  2. A lack of similar previous misconduct on the part of the organisation;
  3. The existence of a proactive corporate compliance programme;
  4. The misconduct represents the actions of individuals or rogue members of the organisation;
  5. The offending is not recent and the organisation has changed radically from the entity responsible for the misconduct;
  6. A conviction will have disproportionate consequences for the organisation;
  7. A conviction is likely to have disproportionate consequences for the public, the employees and shareholders of the organisation.

Co-operation

It is critical that the defendant organisation demonstrates from the outset that it has cooperated with the prosecution. This is likely to include self-reporting and uncovering criminality which the Serious Fraud Office may not have discovered independently. It will not avail a defendant company to wait for detection of criminality and then to see the strength of the prosecution evidence before deciding whether to accept culpability. Initial refusals to behave in a transparent manner are likely to militate against an invitation to negotiate a DPA.   The Serious Fraud Office has made clear that it expects a very high level of cooperation in order to qualify for a DPA. Such co-operation is likely to include the defendant organisation conducting its own inquiry into what happened.

Should such a course be taken, the recent decision of the SFO v ENRC [2017] EWHC 1017 (QB) should be borne in mind. In that case, the High Court ruled that litigation privilege does not apply to documents generated during investigations undertaken by solicitors and forensic accountants into the activities of a company investigating whether or not criminality had occurred as a result of allegations made by a whistleblower in the context of a possible criminal investigation.

If the prosecutor decides to offer a DPA, a formal letter of invitation will be issued. This represents the start of the negotiation period. Negotiations, although confidential, must be transparent; minutes of all meetings are kept and every offer and concession should be recorded.

Court

Once the negotiation stage is underway, the prosecutor must make an application to the Crown Court supported with a Statement of Facts for a declaration under paragraph 7 of Schedule 12 that:

  1. Entering into a DPA is likely to be in the interests of justice; and
  2. That the proposed terms of the DPA are fair, reasonable and proportionate.

The Court retains control of the ultimate outcome and should the Court decide not to approve the DPA proposed by the parties, the hearing is held in private so as not to jeopardise any further prosecution.

However, if the court makes the declaration sought by the parties, there follows a public hearing under paragraph 8 at which the declaration and the reasons for it are provided in open court.

At the time of writing, four DPAs have been concluded and sanctioned by Leveson, P sitting at the Crown Court. The President has scrupulously challenged the terms proposed under each of the DPAs and has made it plain that: “There is no question of the parties having reached a private compromise without appropriate independent judicial consideration of the public interest.”

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