2022 may have disappeared into the rear-view mirror but the economic and geopolitical strife and uncertainty that came with it have carried over into 2023. Amid the ongoing war in Ukraine, soaring inflation and energy costs and increasing scrutiny of their processes, businesses continue to face challenges that threaten both their balance sheets and their reputations.
And, from a corporate crime perspective, uncertainty also looks set to be the forecast for 2023. After a year that saw failed prosecutions and collapsed investigations raise questions about the future of the Serious Fraud Office (SFO), the organisation now needs to hunt for a new leader, with controversial director Lisa Osofsky set to step down this summer.
With potential successors yet to emerge and the SFO’s next strategy therefore up in the air, the UK white-collar and corporate crime market is in flux, at a time when counterparts in the US Department of Justice are stepping up enforcement activity.
As Dechert’s UK head of white-collar and corporate crime, Judith Seddon, says: ‘It is likely that we will see a knock-on effect in the UK in terms of increased enforcement – not least because some of the US investigations will be cross-border in nature. Furthermore, the SFO leadership is due to change later in 2023 and it will be worth watching whether there is a change of tone from that agency.’
But while much remains uncertain here in the UK, ongoing trends facing in-house legal advisers are clear. In this piece, private practice lawyers at two leading UK and US firms highlight the issues that in-house lawyers need to look out for in the year ahead and prep their departments for.
The new normal
Exploding into life after the February 2022 Russian invasion of Ukraine, the issue of sanctions continues to be of paramount importance to in-house counsel and their private practice counterparts alike. Links with Russian money or assets and connections to potentially sanctioned individuals are all sources of risk, as well as embarrassment, for businesses.
With the list of prohibited services expanding at the end of 2022, it isn’t just the financial services sector feeling the strain. While the surge in sanctions work initially drove in-house counsel straight to their external lawyers for guidance, it is now just another part of doing business day-to-day. And what this means for lawyers working inside companies is more work, not all of which can be outsourced to advisers.
‘The one thing that eclipsed everything else in 2022 was sanctions,’ says Barry Vitou, co-head of corporate crime at HFW. ‘It’s eased a little now but if you’re in-house, sanctions have gone from something you probably didn’t have to think about too much to something you now have to think about all the time – an extra job.’
John Bedford, a white-collar crime partner at Dechert, echoes this, stating: ‘Clients are grappling with the implications of the huge raft of new sanctions regulations arising from Russia’s invasion of Ukraine. Importantly, the requests have been coming from clients involved in a wide variety of industries and sectors, reflecting the breadth of the sanctions. We have also seen an increase in requests for advice around crypto assets, the regulations and the standards to apply to sanctions and [anti-money laundering] AML screening of those assets.’
Bedford believes that this trend will deepen in 2023, potentially extending as far as enforcement action relating to breaches of the Russian sanctions, with the FCA likely to be scrutinising the effectiveness of companies’ sanctions systems and controls.
As a result, Bedford says corporate counsel should lean on their private practice advisers if necessary. ‘To the extent that in-house lawyers do not have the bandwidth to deal with the myriad issues that arise day-to-day in these areas, they should have trusted advisers to whom they are able to turn and who can, at pace, deal with them.’
Enemies within
Another area where corporate counsel need to be on top of their game is ESG. With corporate culture increasingly under the microscope against a backdrop of high-profile bullying and harassment allegations within both the public and the private sector, the focus now is extending beyond the E, towards governance, creating new challenges for in-house counsel.
These risks are likely to be exacerbated by mounting redundancies across a host of industries, including big tech, which increase the chances of whistleblowing claims around corporate misconduct.
As a consequence, Vitou warns that in-house counsel need to be aware that they may need to right wrongs. ‘Expect more media exposés – in part because the media now have more time to find stories after Brexit and the pandemic eclipsed the news cycle in recent years. I would advise companies to think about whistleblowing claims and how they deal with them.’
He goes on to suggest that whistleblower claims can be a blessing in disguise – if handled properly. ‘Counterintuitively, whistleblowers represent an opportunity for businesses to sort their own house out.
It’s an opportunity to fix something internally,’ he argues of the potential upside. However, if not handled correctly and not taken seriously, the potential risks could be significant. ‘As a last resort, some whistleblowers will approach regulators and/or the media if they feel their concerns are not being dealt with by their employers,’ he adds.
Vitou stresses that if a company does find itself dealing with a whistleblower, it’s important to make sure that the in-house legal team is involved, to ensure that proper procedures are followed.
It’s a position that Seddon at Dechert agrees with: ‘In-house lawyers (and external counsel, as necessary) should be involved – to provide the protection of legal privilege – in circumstances where there may be potential regulatory or legal exposure. Where there is an allegation arising from a whistleblower, any related investigation should be handled in accordance with policies that exist, with regard for anonymity/confidentiality as appropriate or as required.’
Her colleague, Matthew Banham, adds: ‘ESG is, rightly, high on the regulatory and enforcement agenda with corporates facing a patchwork of new and proposed ESG legislation across the UK and EU. By their nature ESG factors, especially those impacting supply chains and the environment, are of global interest and it is an area that is likely to see an increase in whistleblowing, for example from investors concerned about ‘greenwashing’ (misleading marketing and disclosures around ESG-related products), to social and environmental failings in corporate supply chains.’
Looking beyond the whistleblowing that may trigger an investigation, all aspects of ESG are set to remain at the forefront of the corporate agenda, meaning that businesses must keep a keen eye on the emerging regulatory and legislative landscape for ESG issues, as well as accompanying enforcement risks.
And these risks extend far beyond internal reporting and investigations, with ESG-related disputes set to soar. As Vitou comments: ‘There are landmines out there for companies. So far, the focus has been more on the E than the S and the G, but I think governance probably sits at the top of ESG and drives everything. We’re starting to see the impact of lawyers not being involved early enough in ESG matters in some of the overblown green credential lawsuits that are coming through. We’re still in foothills but I think that the scrutiny around ESG claims will only increase. Companies can’t just shoehorn what they already do into ESG concepts – they must change how they work.
‘In-house lawyers need to be pushing to get more involved in the discussion around ESG and in particular representations made about business’ green credentials. Misleading claims around ESG credentials have the potential to be one of the big litigation risks for all companies for years to come’.
Audits
Annual audits are also expected to be another potential driver of work for in-house lawyers and their private practice advisers. This is being driven by increasing caution by auditors when it comes to signing off accounts, leading to more investigations and additional need for businesses to improve their controls and processes.
Seddon expands on the risks, which are being exacerbated by the economic headwinds and cost-cutting efforts by companies: ‘As the impact of the recession starts to bite, we expect to see an uptick in fraud investigations as well as an increasingly rigorous audit testing of companies’ financial accounts. The Financial Conduct Authority’s focus on market abuse in this context will be undiminished, and we expect to see more enforcement actions as issues are exposed.’
For Seddon, the pressures behind this are twofold: ‘In the case of auditors, given the regulatory scrutiny that they themselves face, we have seen a growing trend for them to want to understand the underlying audit evidence prior to signing off companies’ accounts’, she argues.
2023 looks set to be busy from a regulatory perspective for in-house counsel, despite all the uncertainty. In this setting, the most successful legal departments will be those that are proactive in identifying and mitigating against potential hazards before they turn into damaging and costly investigations. This means pushing for involvement as companies vigorously assess their internal policies around ESG and workplace culture, with clear processes in place and a transparent approach to whistleblowing.