At the advent of 2024, in-house lawyers and general counsel are cautiously observing the ramifications of Nick Ephgrave’s new leadership at the UK Serious Fraud Office with bated breath. The organisation has faced intense scrutiny in recent years due to unsuccessful prosecutions and overall inactivity. Yet, with the appointment of the former senior Metropolitan Police chief, new challenges are expected to emerge for corporations and their in-house teams from a rejuvenated enforcement authority.
Considering the SFO’s extended section 2A pre-investigative powers and new leadership, ‘we are optimistic that the enforcement agency will initiate more investigations addressing both domestic and global complex fraud and corruption issues’, says Hannah Laming, Squire Patton Boggs’ European head of government investigations and white collar.
The SFO’s launch of a criminal investigation into fraud at AOG Technics on 6 December 2023, alongside its co-ordinated raids across multiple properties owned by Alpha and Green Park businesses in September, initially confirms a more dynamic approach. Barry Vitou, head of HFW’s global investigations and white-collar practice, believes ‘the recent benign enforcement environment could soon be a thing of the past’.
Notably, Ephgrave’s police background makes him the first non-lawyer to run the SFO in its 35-year history. Vitou sees his credentials as an asset, citing that ‘his familiarity with Whitehall could improve how effectively the SFO cooperates with other agencies’.
After all, the jointly published Memorandum of Understanding between the SFO and the Financial Conduct Authority from 22 June 2023 – setting out the principles of co-operation and information sharing between the two agencies – is expected to act as a conduit for further collaboration. Ruby Hamid, co-head of Ashurst’s global corporate crime and investigations team, adds that the executive director of the Financial Conduct Authority, Stephen Smart’s former police background ‘will likely foster greater cooperation between the agencies’.
A primary criticism of former SFO director Lisa Osofsky’s reign was that active cases halved to about 35, while long-running investigations into Eurasian Natural Resources Corporation and Rio Tinto were concluded without charges being brought. Going forward, ‘it would be good to see more focused investigations, conducted within shorter time frames’, suggests Laming.
Ephgrave’s initial pledges seem promising. He has reiterated his intention to increase the SFO’s staff by up to a third, as well as declaring the organisation’s new philosophy of ‘remembering what the endpoint is’ and ‘getting there as quickly as we reasonably can’. As Vitou comments: ‘He will likely seek to speed up the investigatory process to match those of enforcement bodies in other jurisdictions.’
Legislative changes
With the SFO’s future approach likely being characterised by agility and activity, corporate criminal liability and fraud investigations have been catapulted to the forefront of the agenda for many corporations. As Vitou aptly highlights: ‘The Government has reformed the law of corporate criminal liability for economic crimes and created a new failure-to-prevent-fraud offence’.
Hannah Laming, Squire Patton Boggs
Effective since 26 December 2023, the ‘senior manager attribution liability’, introduced by the Economic Crime and Corporate Transparency Bill, enhances enforcement agencies’ capacity to impose corporate criminal liability on corporations. This amendment broadens the scope of individual employees, who can trigger a company’s liability. Vitou notes the significance of such a change, pointing out that it’s now ‘far easier to prosecute companies for criminal fraud’.
However, the introduction of the amendment has not received universal praise. Jonathan Pickworth, head of the London investigations and white-collar defence practice at Paul Hastings, says the change is ‘a solution to a non-problem’, as it doesn’t resolve the issue of the SFO routinely failing to convict guilty executives.
‘This unhealthy obsession with making it easier to prosecute companies while not holding individual executives to account means that that the wrong people are being punished. Why should today’s shareholders and employees pay the price for the acts of the managers and senior employees committed many years ago?’ he argues.
The SFO has historically been quite successful in securing resolutions – including Deferred Prosecution Agreements – with companies. Since their introduction in 2014, the SFO has entered into 12 DPAs with corporates for fraud, false accounting, and bribery, but has been unable to successfully prosecute any of the individuals involved.
Additionally, corporates will find themselves under increased pressure once the Government’s announced failure-to-prevent-fraud offence comes into force later this year. Pickworth notes that ‘the current political will seems to be to tackle serious fraud’, reinforced by Keir Starmer’s proposal to launch his comprehensive plan to combat fraud if he is elected Prime Minister. The new offence’s function of closing loopholes that have been exploited by corporations in the past aligns heavily with this trend.
‘We have seen new fraud investigative powers granted to the SFO,’ says Vitou, alluding to the offence’s improvement of fraud prevention, while providing further protection to victims.
The new offence ensures that an organisation will be liable where a specified fraud offence is committed by an employee or agent, and the organisation didn’t have reasonable fraud prevention procedures in place. Importantly, the SFO doesn’t need to demonstrate that company bosses ordered or knew about the fraud.
The change is of particular importance to in-house lawyers and GCs. Corporations are left far more vulnerable to being held criminally liable for fraud in investigations. Ephgrave’s SFO already appears to be clamping down, showcased by its charging of former directors Reginald Larry-Cole and Scott Martin with fraud in relation to the nationwide car leasing scheme Buy2Let Cars on 19 January. Considering this, Laming states that many corporations are contemplating ‘whether they need to enhance their fraud prevention procedures in response’.
In-house challenges
With the expanded scope of liability among employees, in-house lawyers should mitigate the risk of corporations committing fraud and misconduct by identifying the relevant senior managers and providing adequate training to relevant senior managers. As Laming echoes, ‘a focal point in compliance inquiries has been around understanding the type of conduct by senior-level employees that may give rise to risk’.
Jonathan Pickworth, Paul Hastings
A key safeguard against misdemeanours comes from creating a positive work environment. Pickworth suggests that ‘instilling the right culture’ alongside ‘encouraging employees to seek advice when in doubt’ will be effective in combating the extended impact of the new rules upon businesses.
This culture shift could be particularly vital, with Vitou noting that ‘external factors such as pressure upon individuals to meet sales targets in a low-growth economy, high energy bills, and high interest rates increases the risk that people will cut corners or resort to unethical practices to keep afloat’. This is all too apparent, with Fintech Global reporting that in Q2 of 2023, the UK saw a rise in fraudulent activity with a total loss of £593m.
With Vitou anticipating that ‘the new failure-to-prevent offence is likely to enter into force during summer’, in-house lawyers will need to take note of the changes, ensuring that risk assessments are refreshed along with company policies and procedures. Laming comments that ‘some companies are waiting for the publication of the Government’s guidance to inform benchmarking of their existing measures’. It is predicted that such guidance will be published in the coming weeks or months and could emulate previous tax evasion and bribery guidelines.
One perhaps overlooked and important issue for in-house lawyers is reviewing existing directors’ and officers’ liability insurance. Vitou states that corporations must ensure that – in light of the amendments – ‘the D&O cover is adequate for those who could trigger liability for businesses’. Hamid stresses the need for in-house teams to be ‘attuned to when the relevant parts of the Economic Crime and Corporate Transparency Act come into force’.
The Russian invasion of Ukraine, and subsequent sanctions regulations, left in-house lawyers scrambling to ensure corporations were compliant. Over a year later, Laming confirms that ‘sanctions remain a concern for corporates’, as companies are continually compelled to check their supply chains and contractors.
Yet, in 2024, it is probable that businesses will face more intense scrutiny from the Office of Financial Sanctions Implementation. Pickworth points out that ‘until now the sanctions work has been advisory, but the Office of Financial Sanctions Implementation has been recruiting enforcement personnel and there are signs that in the coming months clients may need the help of experienced defence practitioners’.
Barry Vitou, HFW
Alongside the recruitment drive, on 11 December 2023 the UK Government announced plans to create the Office of Trade Sanctions Implementation, a new governmental body that will be primarily responsible for the civil enforcement of UK trade sanctions, including those against Russia. This step establishes a corresponding civil penalties regime for trade sanctions. In-house lawyers will have to scrutinise the background of trading partners on a more frequent and in-depth basis.
In line with the UK’s pledge to achieve net zero carbon emissions by 2050, corporations are consistently facing more stringent ESG-compliance measures. Yet this trend is not consigned to the UK, with Laming adding that ‘geopolitical uncertainty – including the high number of upcoming elections this year – combined with different stances and policies regarding ESG and compliance are making it harder for corporates to adopt a global approach to compliance’. In-house lawyers therefore must track the distinctions in sustainability compliance imposed across all jurisdictions in which their company is operating.
As the pressure to comply rises, there’s been a growing trend in greenwashing. Companies are increasingly deploying green marketing in a deceptive manner to persuade the public that their organisation’s products and aims are environmentally friendly. Pickworth notes that ‘there is a lot of talk about greenwashing, but wherever false claims are made about a product or service, the possibility of enforcement action will arise’.
At this point, it seems in-house teams should view their corporation’s green PR in the same light as the traditional advertising of goods or services. The issue should be approached with caution, ensuring that facts and figures are correct, and do not mislead investors, shareholders, or the public. Yet, it does seem substantial sections of the market are becoming attuned to such issues, with Laming pointing out that it ‘may be a consequence of some high-profile cases and the evolution of the regulatory framework across the EU’. The EU’s adoption of the first set of European Sustainability Reporting Standards (ESRS) on 31 July 2023, which compels companies to report in compliance with these new ESRS as promptly as the 2024 reporting period, is likely to make corporations seek further ESG compliance expertise.
What next?
There is still a degree of uncertainty surrounding how Nick Ephgrave’s tenure will differ from that of his predecessor, but the early signs indicate increased efficiency and activity. The dawn raids into the offices of Axiom Ince and AOG Technics certainly mark a more ‘hands-on’ approach. The expanded legislative power granted to the SFO means in-house lawyers must revamp existing compliance procedures and policies to ensure corporations avoid corporate criminal liability and fraud convictions.
As Vitou asserts: ‘Compliance is all about documenting work done around risk assessments, training, policies, and procedures, and there should be a clear audit trail’. In-house teams must keep abreast of the ongoing legal developments in the white-collar crime, sanctions, and ESG spheres, to offset significant reputational and financial damage on behalf of companies. Concludes Hamid: ‘In-house lawyers need to be strategic, focusing on one or two of the most significant regulatory changes. In addition, they should be attuned to when the relevant parts of the Economic Crime and Corporate Transparency Act come into force.’