This article first appeared in Fraud Intelligence and is co-authored by Karl Laird (Pupil Barrister – 6KBW).
Corruption Watch UK has claimed that “a company committing economic crime in the US is far more likely to be hit with criminal, civil and regulatory penalties than one in the UK.”1 In a hard-hitting report published on 5 March (the Report), the anti-corruption watchdog analysed the enforcement of corporate fraud and money laundering cases in New York and London over the last decade. Its conclusion: the UK is “outsourcing” its prosecution of financial crime to the US.
Corruption Watch found that in the past ten years, the UK has failed to bring a single successful corporate prosecution in connection with Libor and Forex manipulation; major money laundering; or toxic mortgages. In contrast, the US has concluded close to 20 criminal actions against New York and London banks for those same offences. Corruption Watch also criticised UK authorities for not imposing regulatory fines as high as their US counterparts; only £2.16 billion in connection with Libor and Forex manipulation, for example, compared to the £7.2 billion levied by US regulators. In total, while the US has imposed criminal and regulatory fines on corporates to the tune of £25 billion, the UK imposed no criminal fines and a mere £2.5 billion in regulatory fines.
The Report recommends that the UK should adopt a more US-style approach to financial crime. To aid the prosecution of corporates, Corruption Watch calls for the introduction of a new criminal offence of “failure to prevent economic crime” and a review of the so-called “identification principle”. It also argues that the government should commission a review of the size and frequency of regulatory penalties to determine what levels “provide credible deterrence, and lessons to be learned from the US experience.”
Prosecuting corporates is certainly less challenging in the US than it is in the UK. In the US, a company is vicariously liable for all employee actions committed during the course of their employment to the (at least partial) advantage of the company. A corporate may be found liable even when the employee acts against company policy and its compliance regime is not at fault. In contrast, the UK’s “identification principle” means that a prosecutor must prove the criminal responsibility of the “directing mind” of the organisation – essentially, very senior management. This is notoriously difficult in large corporates with complex organisational and reporting structures. For this reason, there have been calls for the introduction of a new offence of “failure to prevent economic crime” which would penalise a company if any person associated with it committed an economic crime (the only defence being that it had adequate procedures in place to prevent such crime).
Notwithstanding the relative ease of prosecuting companies in the US compared to the UK, Corruption Watch’s report presents a misleading picture of the UK’s enforcement landscape. Firstly, the scope of the Report is strangely narrow. Most notably, it compares US/UK prosecution of “corporate financial crime” without including statistics on bribery and corruption. This is, in fact, one area in which UK authorities have successfully pursued and imposed significant fines on corporates; three of the four deferred prosecution agreements (DPAs) concluded to date are corporate bribery cases, relying upon the s.7 corporate offence of “failure to prevent bribery” (UK Bribery Act 2010). Total fines imposed under DPAs since 2015 amount to over £670 million, including one fine of £497.25 million.2 These are not insignificant sums and it is unclear why these have been omitted from a report on corporate crime.
Secondly, the time frame analysed by Corruption Watch – the ten years from the financial crisis to the present – arguably does not accurately reflect the UK’s current enforcement capabilities. A decade ago, the powers at the UK’s disposal were significantly weaker, and a plethora of measures introduced since then have strengthened the hand of prosecutors - DPAs, for example, were only introduced in the UK in 2014, having been used in the US since the 1970s. New corporate offences have also been enacted, namely s. 7 of the Bribery Act 2010 and “failure to prevent the facilitation of tax evasion”, introduced in the Criminal Finances Act 2017. The 2016 Senior Managers and Certification Regime, moreover, in delineating precise areas of senior management responsibility, will arguably help to circumvent the difficulties of the “identification principle” while also improving senior executive accountability. At the time of the Libor/Forex cases and the 2008 mortgage crisis - the focus of the Report - the majority of these new measures were simply not in place. To condemn the UK’s current capabilities based on its response to historic misconduct is therefore unconvincing.
Thirdly, Corruption Watch’s analysis of Libor and Forex is particularly reductive. The Report notes how authorities in the UK failed to impose any criminal penalties upon banks for Libor and Forex manipulation. Taken at face value, Corruption Watch’s criticism is compelling, but there are a number of reasons for exercising caution.
In the Libor investigation, only two of the seven banks referred to by Corruption Watch pleaded guilty to committing criminal offences, in both instances wire fraud. The vast majority of the sums extracted by the US authorities were the fruits of negotiated settlements – either DPAs or non-prosecution agreements. While the other five banks admitted “misconduct”, this is not the same as admitting criminal liability.
Moreover, in respect of the two banks which admitted guilt, the Report fails to mention that criminality was admitted not by the parent company, but by the subsidiary. For example, one bank’s subsidiary pleaded guilty to wire fraud, but the parent company was able to negotiate a DPA.3 Although this may seem like a subtle distinction, it is important because it means that the parent company did not admit to any criminal wrongdoing which might have led to it being suspended or debarred from conducting business in the US. Therefore, the US authorities managed to punish the subsidiary whilst avoiding the collateral consequences the bank was most keen to escape. Threats of suspension or debarment from doing work in an industry or with the government – (notwithstanding the vague rules) - can be effective in cajoling corporates into negotiating a DPA. Corruption Watch does not, however, consider the different ways in which this leverage may be used by authorities in the US and the UK and the fairness of doing so.
In addition, Corruption Watch assumes that the negotiated settlements reached with these banks signify successful outcomes for the US authorities. In one sense that is true, given the significant fines paid by the banks in exchange for their not being prosecuted. But deferred prosecution and non-prosecution agreements are controversial in the US. The US Government Accountability Office has, in the past, been critical of the way prosecutors decide whether an agreement should involve deferred prosecution or non-prosecution.4 Judges in the US play a very limited role in approving the terms of a DPA. The effect of this lack of oversight is evident when the agreements referred to by Corruption Watch are scrutinised. One bank, for example, paid a monetary penalty of $160 million, yet the non-prosecution agreement does not explain how this figure was reached or why it was considered to represent a fair reflection of the bank’s responsibility for the conduct of its employees.5 To take a further example, another bank paid a fine of $625 million.6 The DPA explains that this sum was considered appropriate given the facts and circumstances of the case, including the nature and extent of the bank’s cooperation, its internal investigation, and the monetary penalties it agreed to pay to other criminal and regulatory enforcement authorities in the US and the UK. This explanation is somewhat vague, however, and does not offer much transparency.
In contrast, DPAs in the UK must be subject to judicial approval. It is for the judge, not the prosecutor, to decide whether it is in the public interest not to prosecute the corporate and it is for the judge to decide whether the terms are fair, reasonable, and proportionate. In his judgment approving the Rolls-Royce DPA, Sir Brian Leveson emphasised that the court’s role is not merely to provide formal confirmation of what has already been agreed between the parties. In the UK, DPAs are subject to a level of scrutiny that rarely, if ever, occurs in the US. There is also greater transparency as to how the terms of the DPA are reached and whether they constitute an accurate and fair reflection of the corporate’s conduct. It is unfortunate that the Corruption Watch Report does not discuss those features of UK law which are arguably more robust than the comparable US approach.
Corruption Watch’s analysis of the UK and US authorities’ response to Forex manipulation is as problematic as its discussion of Libor. The Report criticises the SFO for closing its Forex investigation in 2016 while commending the Department of Justice (DOJ) for “forc[ing] guilty pleas” from four banks , imposing total fines of £1.736 billion. Strikingly, however, the Report fails to mention that in October 2018, the DOJ lost at trial against the three Forex traders whose alleged conspiracy formed the basis of the banks’ guilty pleas. After a two-week trial, a New York jury deliberated for less than a day before acquitting the three traders. As noted by the jury foreman after the verdict: “a microscope…was placed on something that probably was happening all the time. At the end, we found there was not enough evidence.”7
This verdict certainly sheds new light on the four banks’ plea bargains. Threatened with losing their licences in the US, it is unsurprising that the banks preferred to plead guilty and pay fines rather than fight their case; when tested at trial, however, the DOJ’s evidence failed to hold up. The SFO’s decision to drop its Forex investigation was arguably vindicated, therefore, despite Corruption Watch’s criticisms. Indeed, some have wondered why the DOJ prosecuted the four banks (and their traders) in relation to Forex manipulation at all. The alleged wrongdoing was committed by four British traders in London, either working at British banks or the UK subsidiaries of US banks. From the transcripts at the traders’ trial, the DOJ’s grounds for jurisdiction relied on the hypothetical damage to the value of interstate transfers of dollars – a fairly tenuous nexus by any standard. For these reasons, the US approach to Forex can only be considered more “successful” than the UK if success is measured solely by the extraction of heavy fines from banks, which appears to be Corruption Watch’s favoured metric.
This leads us on to the fundamental premise of the Report: namely, that slapping larger fines and criminal convictions on companies is the most effective way to combat financial crime. This is questionable. Outside the discrete area of anti-trust enforcement, it cannot be said that the US approach has led to significantly higher standards of corporate behaviour than in the UK. Bigger fines do not necessarily mean better deterrence.
Furthermore, as a matter of policy, careful consideration should be given to whether it is right to levy heavy fines on companies which will negatively affect both shareholders and employees who had no involvement in the misconduct. The recommended introduction of a new offence of “failure to commit economic crime” is similarly contentious; the City of London Law Society, for example, has argued that “the majority of economic crime committed in large organisations is not wholesale and wide ranging and to stigmatise the company for the actions of an individual who is not part of senior management…is to go too far.”8 These broader questions of policy are not even considered in Corruption Watch’s Report - yet they are fundamental to any potential reform of UK corporate liability laws.
1 “The Corporate Crime Gap: How the UK Lags Behind the US in Policing Corporate Financial Crime”: www.cw-uk.org/corporatecrimegap
2 The fine of £497.25 million was imposed on Rolls Royce; see DPA at www.sfo.gov.uk/cases/rolls-royce-plc/
3 Deutsche Bank; see DPA at www.justice.gov/archives/opa/documents/deutsche-bank-resolution-manipulation-libor
5 Barclays; see non-prosecution agreement at www.justice.gov/criminal-fraud/sff/cases-libor-fx/barclays-bank/barclays-bank-plc
6 Deutsche Bank; see DPA at www.justice.gov/archives/opa/documents/deutsche-bank-resolution-manipulation-libor