ECC0017

Written evidence submitted by Dr Lorenzo Pasculli (Associate Head of Research, Coventry Law School; Associate, Centre for Financial and Corporate Integrity; Sessional Lecturer, Imperial College London at Coventry University - Imperial College London)

Submission (2613 words, references excluded)

Introduction

The submission provides key findings from the research by Dr Lorenzo Pasculli on various aspects of economic crime in the United Kingdom (UK), including causes, legal framework, regulatory agencies and law enforcement.

The submission seeks to contribute to reviewing the progress made in combatting economic crime and identifying effective ways to improve it, with a specific focus on the following terms of reference:

• Concerns regarding or improvements to the UK’s anti-money laundering and the sanctions regimes, including but not limited to corporate liability for economic crime.

Concerns regarding or improvements to the UK’s anti-money laundering and the sanctions regimes, including but not limited to corporate liability for economic crime

Background

The UK response to economic crime can be summarised into two main strategies: law enforcement and ‘responsibilisation’. This is particularly evident throughout the Economic Crime Plan 2019-2022. Law enforcement encompasses prevention, investigation and prosecution of economic crime by state agencies, such as the Serious Fraud Office (SFO), the Crown Prosecution Service and the judiciary. Responsibilisation seeks to compensate the difficulties in policing economic crime through traditional methods by devolving crime control responsibilities to companies and their managers through regulation, self-regulation and public-private partnerships (Pasculli and Ryder, 2020; Fouladvand, 2020). For instance, the Money Laundering Regulations 2017[1] require financial institutions to adopt various measures to prevent money laundering, including training, due diligence, record-keeping and internal controls. The implementation of such duties is supervised by both non-governmental self-regulatory organisations, such as professional associations[2], and governmental regulators, such as the Financial Conduct Authority (FCA) or The Office for Professional Body Anti-Money Laundering Supervision (OPBAS)[3]. Responsibilisation strategies are largely focused on risk assessment and management: the Money Laundering Regulations 2017 dedicate an entire chapter to this[4].

Ideally, law enforcement and responsibilisation should be complementary. Corporations and self-regulatory agencies should reach where traditional law enforcement cannot. On the other hand, law enforcement should intervene when non-governmental bodies and companies fail to comply with their obligations. In addition, law enforcement and responsibilisation should be complemented by broader social policies aimed at identifying and removing the root causes of economic crime – that is, any social, cultural, economic, psychological and even biological development that motivates or facilitates economic crime. Unfortunately, the UK is far from achieving an ideal balance between these three elements. Enforcement of the law of financial crime is still weak and problematic, and this undermines responsibilisation, as it weakens corporate and individual compliance. Moreover, serious efforts to tackle the root causes of economic crime are still lacking.

Corporate liability for economic crime

SFO’s annual reports show some progress (conviction rates by case have increased from 80% in 2017-2018 to 95% in 2019-2020), the prosecution of corporations and individuals responsible for economic crime is still inadequate due to various shortcomings.

1. Fragmentary criminalisation. Behaviours that are commonly perceived as serious crimes or defined as criminal by international law are not yet criminalised in the UK. For instance, trading in influence (‘peddling’) – the abuse of political influence in exchange for undue advantages – is not a criminal offence, despite its criminalisation is required by the UN Convention against Corruption and the Council of Europe’s Criminal Law Convention on Corruption. While some instances of peddling could be prosecuted as bribery offences under the Bribery Act 2010 or as some of the 112 offences under the Political Parties, Elections and Referendums Act 2000, other cases fall short of the requirements for such offences. Another significant example is revolving doors appointments. Gaps and fragmentariness in criminalisation allow impunity, undermine prosecution and deterrence, and convey ambiguous public messages about the acceptability of such practices (Pasculli, 2019a and 2019b).

2. Corporate impunity. There are well-known challenges in prosecuting corporate crime, such as costs, evidence-gathering, determining effective sentences, avoiding unintended consequences on innocent parties, society or financial stability, such as loss of employment and tax revenues. To circumvent such difficulties, the UK is following the lead of the US in using deferred prosecution agreements (DPAs). These are negotiated settlements between the prosecution and a corporation investigated for economic crime. DPAs allow the company to avoid prosecution by paying a fine, cooperating with the investigating agencies, and improving its internal governance. New guidance published by SFO on DPAs marks another step towards the normalisation of DPAs as the ordinary avenue to respond to corporate crime[5]. DPAs remain very few, with the first DPA in the UK concluded in 2017 and only 3 DPAs concluded in 2019-2020[6]. DPAs are very problematic (Grasso, 2016; Ryder, 2018). Since they don’t require any admission of guilt and lack the publicity of a full-blown trial, DPAs lack the symbolic and expressive value of criminal convictions. This frustrates the needs of justice (Palmer, 2020) and undermines the public perception of the seriousness of corporate offending (Fouladvand, 2020). DPAs also frustrate deterrence and retribution, as financial penalties allow corporations to ‘buy their way out of prosecution’ (Fouladvand, 2020; Pasculli and Ryder, 2020).

3. Individual impunity. SFO’s annual reports show that individuals responsible for serious economic crimes are rarely prosecuted and convicted[7]. The last report (2019-2020) acknowledges that SFO’s charging decisions have attracted criticism following some high-profile acquittals and shows a decline in numbers of prosecutions and convictions: only 5 cases opened compared to 11 in 2018-2019 and 7 in 2017-18; only 6 individuals charged compared to 8 in 2018-19 and 24 in 2017-18. The 2019-2020 report mentions ‘successful convictions’ but no figures are given, while successful convictions had been growing from 10 in 2017-18 to 17 in 2018-19. Conviction rates by defendant have declined from 80% in 2017-18 to 53% in 2018-19 and 62% in 2019-20. The SFO’s caseload has also been steadily declining: from 75 cases in 2017-18 to 70 in 2018-19 to 65 in 2019-20. The lack of individual prosecutions and convictions might depend on problems of evidence or jurisdiction – see, for instance, the cases of Tesco, Standard Bank (Palmer, 2020) and LIBOR (Johnson, 2020) – but also on lack of resources, prosecutorial discretion or ‘reluctance’ of national authorities to prosecute corporate executives (Fouladvand, 2020; Palmer, 2020; Ryder, 2018). If companies negotiate their way out of criminal trial and individuals are not prosecuted then the escape from punishment is absolute (Pasculli and Ryder, 2020). The Economic Crime Plan 2019-2022 does not address this problem.

4. Reporting issues. Economic crime is very hard for state authorities to detect unless victims, whistleblowers or companies themselves report misconduct. However, reporting channels are too confusing to be effective. The list of prescribed people and bodies for whistleblowing is interminable[8]. Reporting channels for fraud are too many (Citizens Advice, Action Fraud, SFO online reporting form and many others) and it can be difficult for victims – particularly the most vulnerable ones – to identify the right channel.

Sanctions regime

The UK seeks to compensate the inability of the national criminal justice system to effectively deal with transnational economic crime by imposing restrictive sanctions – such as asset freeze or travel bans – on foreign the individuals or organisations involved. The Sanctions and Anti-Money Laundering Act 2018 (SAMLA) introduces sweeping executive powers to impose a wide range of sanctions for very broadly defined purposes. Sanctions are in strong tension with the rule of law. Although their contents are similar to criminal sentences, sanctions fall short of the safeguards of criminal law and justice and international human rights law. SAMLA allows one minister to become legislator, judge and enforcer: the same minister who introduces and regulates sanctions also designates those to whom they apply[9], determines how to enforce them (including by creating criminal offences)[10], and reviews and revokes designations[11]. Judicial review operates only ex post – after a person has already suffered the restrictive effects of sanctions – and according to very limited procedural safeguards. The proceedings can be determined without a hearing, in the absence of a party and without giving them full particulars of reasons and evidence[12]. The post-Brexit withdrawal of the UK from the jurisdiction of the European Court of Justice – a committed guardian of individual rights and liberties against sanctions[13] – will deprive designated persons of a further judicial remedy. Such a concentration of powers in the executive is arguably necessary. The purposes for which a minister is authorised to make sanctions regulations relate to policy areas that fall within the ordinary remit of Parliament. There is no reason to delegate these to government. Nor are such powers limited to temporary or exceptional circumstances. The review period of sanctions regulations is three years[14], proving that sanctions can apply to long-lasting situations. Sanctions are, therefore, a questionable shortcut to ‘punish’ transnational offenders when prosecuting them would be too difficult or, worse, to pre-emptively neutralise individuals deemed to be somehow dangerous. Moreover, research suggests sanctions have a minimal deterrent effect and can be counterproductive, as they may unintendedly incite more criminality (on all above issues see Pasculli, 2012, 2015 and 2019b; Pasculli and Ryder, 2020; Bradshaw, 2020).

Tackling the causes of economic crime

The Economic Crime Plan 2019-2022 mostly focuses on law enforcement and responsibilisation, with a strong emphasis on the assessment and management of risks caused by specific situations and practices. There is no commitment to understanding and addressing the root causes of economic crime. When deeper social and human developments are neglected and law enforcement is ineffective (see above), situational measures become a ‘tick-boxing’ exercise for companies and an easy way for government to show that ‘something is being done’ without actually taking any responsibility for more complex and delicate societal issues. Without broader social policies, responsibilisation strategies can turn into the deresponsibilisation of government (Pasculli, 2020). The difficulty in understanding the root causes of economic crime or devising adequate policies cannot be an excuse for inaction. Many studies identify the human and social causes of economic crime and suggest possible remedies. These include reducing social inequality through welfare, promoting values of self-worth and achievement different than mere financial success and social status through education at all levels, introducing moral, cognitive and behavioural training in the public and private sector and improving mental wellbeing and mental health support in business and government (on all this see Pasculli, 2019b; Pasculli and Ryder, 2019 and 2020; Topal, 2020). Moreover, economic crime is ‘transversal’, as it encompasses diverse practices that are often interconnected by common goals, instruments, assets and networks (Pasculli, 2012; Pasculli and Ryder 2019), as shown by recent studies on the links between terrorism and fraud (Ryder, 2019) or between tax evasion and corruption (Grasso and Pasculli, 2020)[15]. Different offences cannot be addressed in isolation but must be understood and tackled as a whole complex phenomenon. The Economic Crime Plan 2019-2022 is a first step towards a more comprehensive approach and the ‘long-term research strategy’ it promised by December 2019 is fundamental to understand the root causes and the transversality of economic crime. Unfortunately, the strategy has not been delivered yet. Coherent and systematic mechanisms to facilitate interactions between academia and policymakers are missing.

Conclusions and recommendations

1. Economic crime requires comprehensive and coordinated responses. The Economic Crime Plan 2019-2022 is a welcome effort towards such an approach, but this must be sustained, monitored and constantly improved.
2. Criminalisation is still fragmentary. Government could conduct an extensive review of relevant criminal legislation and propose an Economic Crime Bill to coordinate economic offences scattered across different statutes, fill legislative gaps and reduce fragmentariness.
3. Government should keep investing in policing and law enforcement capabilities, particularly supporting the work of all investigative and prosecuting authorities.
4. While DPAs can have some positive effects, they can also undermine the whole response to economic crime. The SFO and CPS’s DPAs Code of Practice and the SFO Operational Handbook should include the following principles:
1. DPAs should be used only as a last resort;
2. DPAs should be entered only on condition of an explicit admission of guilt by the company for some criminal offences agreed with the prosecution;
3. DPAs have the same value and effects of a criminal conviction.

Government could also promote a Bill to reform the Crime and Courts Act 2013 so as to include the above principles. DPAs should be widely publicised to raise public awareness of the seriousness of economic crimes, the responsibilities of companies involved, and the legal consequences.

5. SAMLA should be amended to restrict the use of sanctions only as a temporary and last-resort response to narrowly defined exceptional situations, such as international emergencies, and only to avoid the use of military force.
6. To improve the prosecution of transnational forms of economic crime, the government could promote through the appropriate international agencies and diplomatic channels the development of a comprehensive international convention on economic crime.
7. The lack of prosecution of individuals, especially corporate executives, for serious economic crime revealed by the SFO annual reports must be addressed urgently. An independent inquiry, possibly conducted by impartial experts, should be launched to identify the causes of the problem and possible solutions.
8. Reporting channels should be rationalised. There should be a central national online portal for those who wish to report an economic crime. The portal could include a preliminary online questionnaire to direct the applicant to the appropriate authority according to the type of offence reported. A possible template is the online reporting form incorporated in the SFO website[16].
9. A national whistleblowers authority should be established to coordinate and provide guidance to prescribed entities, act as last-resort reporting channel and support and advise whistleblowers. The US Office of the Whistleblower[17], the Dutch Whistleblowers Authority[18] are examples of such institutions.
10. Law enforcement and responsibilisation strategies are necessary but insufficient. The Economic Crime Plan 2019-2022 should be integrated or amended so as to extensively address all the possible root causes of economic crime in coordination with any other relevant (also non-crime related) policy.
11. The long-term research strategy promised by the Economic Crime Plan 2019-2022 must be delivered as soon as possible. It must explicitly address also the root causes of economic crime.
12. Government should establish a permanent platform to facilitate the interactions with and input from academia. This could be modelled on the examples of the Parliamentary Office for Science and Technology (POST) and the Royal United Services Institute (RUSI)’s Strategic Hub on Organised Crime (SHOC). RUSI would be well placed to host/run the platform.

References

Bradshaw, A. (2020). ‘Financial sanctions as a weapon for combatting grand corruption’. In: Ryder, N. & Pasculli, L. (eds) Corruption, Integrity and the Law: Global Regulatory Challenges. Abingdon: Routledge, 127-141.

Fouladvand, S. (2020). ‘Corruption, regulation and the law: The power not to prosecute under the UK Bribery Act 2010’. In: Ryder, N. & Pasculli, L. (2020) Corruption, Integrity and the Law: Global Regulatory Challenges. Abingdon: Routledge, 71-88.

Grasso, C. (2016). ‘Peaks and troughs of the English deferred prosecution agreement: the lesson learned from the DPA between the SFO and ICBC SB Plc’. Journal of Business Law, 5, pp. 388–408.

Johnson, D. (2020). ‘What role does competition law have to play in the prosecution of financial crime in the UK?’. In: Ryder, N. & Pasculli, L. (eds) Corruption, Integrity and the Law: Global Regulatory Challenges. Abingdon: Routledge, 36-53

Palmer, A. (2020). ‘Justice deferred is justice denied? The jury’s out’. In: Ryder, N. and Pasculli, L. (eds) Corruption, Integrity and the Law: Global Regulatory Challenges. Abingdon: Routledge, 89-112.

Pasculli, L. (2012). Le Misure di Prevenzione del Terrorismo e dei Traffici Criminosi Internazionali. Padova: Padova University Press.

Pasculli, L. (2015). La normalizzazione della prevenzione eccezionale del crimine globale. Improvvisazione ‘con una mano legata’ in quattro tempi e finale sull’emerso diritto della prevenzione criminale negative. In: Bonini, S., Busatta, L. & Marchi, I. (eds) L’eccezione nel diritto. Trento: Editoriale Scientifica, 319-360.

Pasculli, L. (2019a). ‘Seeds of systemic corruption in the post-Brexit UK’, Journal of Financial Crime. 26(3), 705-718.

Pasculli, L. (2019b). ‘Brexit, integrity and corruption. Local and global challenges’. In: Pasculli, L. & Ryder, N. (eds) Corruption in the Global Era: Causes, Sources and Forms of Manifestation. Abingdon: Routledge, 212-232.

Pasculli, L. (2020). ‘The Global Causes of Cybercrime and State Responsibilities. Towards an Integrated Interdisciplinary Theory’. Journal of Ethics and Legal Technologies. 2(1), 48-74. Available at: https://jelt.padovauniversitypress.it/system/files/papers/JELT-02-01-03.pdf

Pasculli, L. & Ryder, N. (2019). ‘Corruption and globalisation: towards an interdisciplinary scientific understanding of corruption as a global crime’. In: Pasculli, L. & Ryder, N. (eds) Corruption in the Global Era: Causes, Sources and Forms of Manifestation. Abingdon: Routledge, 3-23.

Pasculli, L. & Ryder, N. (2020). ‘The global anti-corruption framework: Lights, shadows and prospects’. In: Ryder, N. & Pasculli, L. (eds) Corruption, Integrity and the Law: Global Regulatory Challenges. Abingdon: Routledge, 3-13.

Ryder, N. (2018) ‘Too scared to prosecute and too scared to jail?’ A critical and comparative analysis of enforcement of financial crime legislation against corporations in the USA and the UK. The Journal of Criminal Law. 82(3), 245-263.

Ryder, N. (2019). ‘Terrorism financing and the fraud dossier’. Paper presented at the 8th Annual Wales Fraud Forum Conference.

Topal, J. (2020). ‘The practice of anti-corruption and integrity of government:
On the moral learning side of the story’. In: Ryder, N. & Pasculli, L. (2020) Corruption, Integrity and the Law: Global Regulatory Challenges. Abingdon: Routledge, 268-285.

November 2020