Judicial highlights include: the Supreme Court providing guidance on third party access to documents lodged at court; the High Court approving the SFO’s eighth Deferred Prosecution Agreement, this time in relation to multinational security services business G4S; and the conclusion of the FCA’s High Court hearing on the Covid-19 business interruption test case.
Meanwhile, the FCA has published its latest annual report, in which the implications of Covid-19 and Brexit play a central role, and in which it publicly censures the former WorldSpreads CEO for market abuse.
Finally, the National Crime Agency is set to continue its use of Unexplained Wealth Orders, despite court setbacks, and to receive a boost to its annual budget after the announcement that the UK will invest £100m in stronger AML checks through a tax on banks.
- Supreme Court guidance on open justice and third party access to court documents
- High Court approves G4S deferred prosecution agreement
- FCA High Court hearing on Covid-19 business interruption test case concludes
- Financial Market Test Case Scheme – more to come?
Financial crime developments
- The NCA will continue its use of UWOs despite court setbacks
- UK to invest £100m in stronger AML checks through bank levy
- The EU’s continued emphasis on the fight against money laundering
In the recent case of Cape Intermediate Holdings Ltd v Dring  UKSC 38, the Supreme Court provided guidance for non-parties seeking to obtain copies of documents which are lodged at court, but which, unlike statements of case etc, are not retained by the Court on a permanent or long-term basis.
Whereas CPR 5.4(C) provides a procedure for non-parties to obtain documents such as statements of case “from the court records”, this does not apply to documents such as witness statements for trial, experts' reports, transcripts of hearings, or trial bundles, even when lodged at court. Here, however, the Supreme Court has made it clear that the Court has an inherent jurisdiction to provide non-parties access to the documents where the open justice principle is engaged, such as where the documents have been placed before the Court in a public hearing (e.g. read out at trial).
The approach that the Court should adopt in relation to an application for access to documents pursuant to the Court’s inherent jurisdiction, includes the following:
- the non-party seeking access must explain why s/he is seeking access and how granting access will advance the open justice principle. In this respect, the media may be better placed than others to demonstrate a good reason for seeking access;
- whilst the “default position” is that access should be permitted under the open justice principle, the interests of the person seeking access should be balanced against any harm that might be caused to the interests of others (e.g. national security, the protection of the interests of children or mentally disabled adults, the protection of privacy interests more generally, and the protection of trade secrets and commercial confidentiality); and
- the Court should also consider “the practicalities and proportionality of granting the request”. It is desirable that applications should be made during trial when the documents are more likely to be “readily available” and the trial judge can control the process.
In July, the High Court approved the Serious Fraud Office’s (SFO) eighth Deferred Prosecution Agreement (DPA). The second stage of the two-step judicial process took place before Mr Justice William Davis.
G4S accepted responsibility for three offences of fraud committed by its subsidiary, G4S Care and Justice Services (UK) Ltd, in relation to electronic monitoring services provided to the Ministry of Justice. The settlement constituted the final act of a lengthy investigation by the SFO into fraud in the provision of electronic ‘tagging’ services by private contractors; the investigation also resulted in a DPA with Serco Geografix Limited (Serco) last year. Following past DPAs, the SFO has received criticism for its failure to prosecute those involved directly in the misconduct covered by the DPAs. However, in September, the SFO announced that it had also charged three former G4S executives with fraud.
Under the terms of the three-year DPA, G4S will pay £38.5m ($49m) as well as the SFO’s costs, amounting to £5.9m. The penalty was reduced by 40% as a result of “substantial co-operation” with the SFO, though it should be noted that the company did not, unlike Serco, self-report the conduct in question. The reduction therefore represents only the second time in a DPA that a discount lower than 50% has been applied.
By securing the settlement, G4S has successfully avoided the consequences of a full criminal prosecution, including the effect on its ability to procure government contracts – a significant part of the company’s revenue.
On 15 September 2020, the High Court handed down its judgment in the FCA's Business Interruption (BI) test case. The FCA pursued the test case to resolve uncertainty as to whether, and in what circumstances, the following extensions to standard cover would include Covid-19 related losses:
- BI caused by certain infectious diseases which have occurred at or within a given area around the premises (disease clauses);
- BI caused by access and/or use of the premises being impeded by certain public authority actions (denial of access clauses); and
- ‘hybrid clauses’ combining elements of the above extensions.
The FCA adopted the position of policyholders in bringing a claim against eight insurers. It sought declarations from the Court as to the cover available in principle for Covid-19 related losses under 21 sample policy wordings intended to represent the issues commonly in dispute between insurers and policyholders. The judgement considers each sample policy wording in turn, and much turns on its detail in the case of each policy. However, certain broad themes can be identified:
- most sample disease clauses were found to provide cover, as long as at least one case of Covid-19 had occurred within the relevant policy area, for losses that flowed from the incidence of Covid-19 both within and outside that policy area (and not only, as the insurers contended, for losses directly flowing from the incidences of Covid-19 within the policy area).
- prospects for recovery under ‘prevention of access’ or ‘hybrid’ clauses are more limited. For example: some policies were found only to provide cover where it was impossible to use the premises for any of the business ordinarily carried on there (rather than use merely being hindered); certain policies were found to require that measures impeding access were mandatory, with the force of law – not mere guidance issued in public announcements; and some policies were found only to cover restrictions flowing from a local incident (such as a bomb scare, or gas leak), and not a broader ‘state of affairs’ like a nationwide pandemic.
- The Court’s approach to policy construction allowed it largely to sidestep any issues of causation which may have arisen. In particular, by concluding that the insured peril was a ‘composite peril’, indivisibly comprising the nationwide outbreak of Covid-19 and the resulting government and public response, it was unnecessary to consider causation issues that arise where there are multiple possible causes of loss (which may have nullified otherwise valid claims – for example because, even if a business’ access had not been prevented by government actions, loss would have resulted from Covid-19 deterring footfall in any event).
More about the specific implications for insurers can be seen in our article.
This is the first case to operate under the Financial Market Test Case Scheme, which allows issues of “general importance” which require “immediately relevant authoritative English law guidance” to be heard without the usual requirement for a current cause of action between the parties (such as the claim of a particular policyholder against a particular insurer). Arguably, the test case has been a good advert for the scheme. Judgment was achieved, on an expedited basis, by September, in proceedings brought in June. It allowed issues across multiple affected policies to be decided, which may otherwise have resulted in multiple proceedings, difficulties coordinating interested parties, delays and uncertainty as to the overall position of policyholders and insurers.
While the decision itself did not favour insurers on various points, a market-wide decision should have assisted in more swiftly establishing the overall impact of Covid-19 on this business line, confirming reinsurance cover, and responding to the result. Indeed, some insurers have reported that their anticipated losses following the judgment are lower than those previously anticipated in a worst case scenario and subsequently saw their share price rise. It will be interesting to see if the Scheme is now speedily used, as was anticipated, to resolve market-level issues arising out of the Brexit process, or in other disputes relating to bulk consumer contracts.
The Court will hear submissions from the parties at an additional hearing in October, as to the appropriate declarations to be made following its ruling. At that hearing, the Court will also consider any applications to appeal its ruling. Given the significance of the decision and the impact any delay may have on businesses looking to rely on cover, it would not be surprising if an appeal leapfrogged the Court of Appeal to be heard directly by the Supreme Court. Indeed, this was anticipated by the parties’ framework agreement for the conduct of proceedings. It is to be expected that insurers will now be exploring the prospects for such an appeal.
If you wish to know more about Litigation developments, please contact Barry Donnelly.
Unsurprisingly, Covid-19 and Brexit are key themes in the FCA’s Annual Report for the year ended 31 March 2020. The published report also provides the regulator’s annual enforcement data and updates to its anti-money laundering (AML) work.
- Covid-19: The FCA continues to expect affected firms to “keep their governance arrangements under review” and to allocate “responsibilities for responding to coronavirus in the way which best enables them to manage the risks they face.” The report also notes that there have been high levels of volatility in the investment management sector.
- Brexit: The FCA has made arrangements to ensure that the UK financial services sector is prepared for the UK’s withdrawal from the EU. This work has included making changes to the Temporary Permissions Regime (TPR) and the Temporary Marketing Permission Regime (TMPR), both of which will be available from the end of the transition period. The FCA received notifications from over 1,000 EEA-based firms that wish to use the TPR, and 600 fund managers that wish to continue temporarily marketing over 9,000 EEA-domiciled investment funds/sub-funds under the TMPR.
- Brexit: Along with Covid-19, has emphasised the need for the FCA to keep pace with the changing economic landscape. Therefore, it has announced a review of its approach to ensure that it is “able to meet existing and new regulatory challenges”. That said, the FCA will press on with its transition from LIBOR to risk-free interest rate benchmarks. Firms will not be able to rely on LIBOR after the end of 2021.
- Enforcement: Financial penalties totalling £224.4m were imposed in the year to 31 March 2020. This is similar to the 2018/19 figure, but represents a 225% increase on the £69.9m in fines levied in 2017/18. The average length of regulatory and civil cases has increased markedly from 17.5–23.9 months.
- AML: The FCA continues to enhance its risk-based approach to AML supervision. The number of AML enforcement investigations underway has increased to 65, although it has dropped 50% of the cases that are following a criminal track. Since January 2020, it has taken on a new responsibility as the AML and counter-terrorist financing supervisor of UK cryptoasset businesses.
On 9 September 2020, the FCA publicly censured, and banned from performing any function in relation to any regulated activity, Conor Martin Foley, the ex-CEO of WorldSpreads Limited (WSL), and its holding company, WorldSpreads Group plc (WSG), for market abuse.
The public censure was released in conjunction with the FCA’s Final Notice dated 7 September 2020. The FCA also imposed, in its Decision Notice dated 3 July 2020, a financial penalty of £658,900 on Mr Foley, but this amount was subsequently removed in favour of public censure, in light of Mr Foley providing evidence that the financial penalty would have caused him “serious financial hardship”.
WSL was formed in 2003. Its principal activity was the provision of online trading facilities in financial markets through financial spread-betting and contracts for difference (CFDs). Its clients were able to invest in, hedge, or speculatively bet on thousands of global financial instruments. By 2011, WSL had approximately 15,000 clients worldwide. WSL was wholly-owned by WSG, which, from August 2007, was quoted on AIM. The company showed initial success and, particularly from 2010, a cash-rich balance sheet. After listing at a price of 47p, WSG reached a peak of 113.5p in May 2008, and maintained an average share price of 66p in 2010 and 2011. However, by 2012, while not apparent from their annual accounts, WSL and WSG were in severe financial difficulties, and on 16 March 2012, both companies collapsed. On the same day, the FCA was informed of irregularities in WSL’s accounts and, in particular, that client money reconciliations had been deliberately falsified, and that there had been inappropriate treatment of client money for a number of years.
According to the Final Notice, when WSG was floated on AIM in August 2007, its formal documentation (Admission Documentation) was materially misleading in two respects:
- it did not disclose the fact that some WSG executives had made significant loans to WSG and its subsidiaries (internal loans); and
- it did not explain that certain of WSG’s subsidiaries ‘hedged’ considerable trading exposures internally with company executives (internal hedges).
In addition, between January 2010 and March 2012, large spread-bets were placed on the trading accounts of five WSL clients, which were hedged through the purchase of a large number of WSG shares from the market. The FCA found that the spread-bets that were placed in at least two of the five client accounts were placed by Mr Foley without the knowledge of the relevant clients. The FCA also found that Mr Foley made these transactions with the specific objective of creating artificial demand for WSG shares, at a time when there was the potential for large sell orders in the market.
The FCA found that the internal loan arrangements and other transactions were made to alleviate the financial difficulties of the companies. In particular, the internal loans, which involved the secret provision of funds by certain directors to WSG and its subsidiaries, were designed to compensate for a lack of funds for hedging with brokers (as well as to meet the expectations of WSG’s lenders), while the internal hedges were used to reduce external hedging costs, which absorbed the companies’ available cash in margin charges. The internal hedges also allowed the participants, including Mr Foley, to make personal profits or receive repayment of personal loans. None of these transactions was disclosed to investors.
The FCA emphasised Mr Foley’s personal involvement in these schemes, as well as the broader deception that took place throughout WSL and WSG in falsifying their accounts. In particular, the FCA found that for a period of almost five years, Mr Foley permitted material omissions from WSG’s financial disclosures, while also managing an internal hedging strategy that involved the use of fake client trading accounts or real client trading accounts without their knowledge. These were both, the FCA found, instances of deliberate market abuse.
Mr Foley is the third and last executive of WSL against whom the FCA has taken action since its collapse in March 2012. In April 2017, the FCA fined and banned WSL’s CFO, Niall O’Kelly, as well as its Financial Controller, Lukhvir Thind, for falsifying financial information concerning WSL’s client liabilities and cash position, which was passed to the company’s auditors.
If you wish to know more about Regulatory developments, please contact Aalia Datoo.
Financial crime developments
The use of Unexplained Wealth Orders (UWOs) by the National Crime Agency (NCA) recently experienced high profile defeats in both the High Court and the Court of Appeal, tarnishing what was previously an unblemished record of UWO success in two previous cases. Despite these setbacks, the NCA announced that it would continue with its policy of using UWOs in targeting assets that it suspects have been acquired using illicit finance.
In June, the Court of Appeal rejected the NCA’s application to appeal the decision of the High Court in R v Baker  EWHC 822 (Admin), in relation to three UWOs obtained against properties worth approximately £80m. In the decision at first instance, Mrs Justice Lang DBE considered that the NCA’s assumption that the properties in question were acquired with illicit funds was unreliable and that the NCA had “failed to carry out a fair-minded evaluation of the new information provided by the UBOs and Respondents”. The Court of Appeal then determined that the NCA’s appeal of that decision had “no real prospect of success”.
To add to these setbacks, the NCA was liable for significant legal costs in connection with the court proceedings. In April, the NCA had been ordered to make an interim payment of £500,000; it later emerged that the NCA was preparing to pay total legal costs of up to £1.5m.
UWOs are still a relatively new tool at the NCA’s disposal, having only been introduced in 2018, and despite these set-backs, the NCA has made it clear that it is determined to continue to make use of the UWO regime. We can therefore expect to see further applications for UWOs in the future, and financial institutions should ensure that they are aware of the relevant provisions contained in the Criminal Finance Act 2017.
In July, it was announced that the UK is set to go ahead with a £100m investment in improving anti-money laundering systems, funded by a ‘levy’ on financial institutions. The investment is intended to pay for increasing the number of investigators and improving the technological capabilities of UK enforcement bodies in dealing with illicit finance. The annual levy will represent a significant increase in the NCA’s current budget of £478m, and companies can expect to see a notable uplift in enforcement activity in an area that is slowly emerging as a priority for the UK government.
The increased funding will strengthen the UK’s Suspicious Activity Reporting (SAR) system, which has come in for criticism in recent years for its lack of clarity. A vast increase in the number of SARs in recent years has suggested that they are often being used purely for defensive purposes, so that financial institutions can feel completely confident that they have fulfilled their legal obligations. The Government is intending to introduce an “efficient and flexible” IT system to improve the quality of SARs, and will be increasing the number of investigators in the NCA’s financial intelligence unit from 127 to 180.
Part of the remaining money will be used to fund the National Economic Crime Centre – the UK Government’s coordinating body for financial crime enforcement. The other part will go towards ensuring that Companies House has greater powers of verification, given an ongoing lack of checks on beneficial ownership from overseas individuals and companies.
“Dirty money should have nowhere to hide.” With these words, Valdis Dombrovskis, the Vice President of the EU Commission, addressed the European Parliament on 8 July 2020, ahead of the debate on preventing money laundering (ML) and terrorist financing (TF). Building on the EU’s AML Action Plan adopted in May 2020, Mr Dombrovskis confirmed that fighting ML and TF was one of the Commission’s top priorities, focussing particularly on the need for effective supervision.
The number of money laundering scandals which have engulfed European banks in recent years has shown that national supervisors alone are not sufficient. Instead, a vision for an EU-level supervisor has now been set out, with direct supervisory powers in respect of risky financial institutions and more general oversight for the non-financial sector. The ability to conduct systematic on-site checks in Member States was also stated as a necessary function of such a supervisor. The two options presented were: the creation of a new EU agency; or the grant of additional powers to the European Banking Authority. Either option would face its own obstacles to establishing the much-needed and effective supervisor. The responses to the Action Plan’s consultation will assist in determining which option is selected.
The focus on supervision was set against the backdrop of a critical objective to make sure that everyone in both the public and private sectors rigorously applies relevant AML rules. To that end, the Commission’s recent enforcement efforts, including the referral of three Member States to the Court of Justice for non-transposition of the fourth AML Directive, were flagged as examples of the seriousness with which the EU is dealing with the issue. Perhaps the highlighting of the Commission’s enforcement work was also spurred by the recent call of the Council of the European Union that it should take action on a variety of fronts in the fight against ML and TF. Mr Dombrovskis also took the opportunity to call for closer partnership with the European Public Prosecutor’s Office, Europol and Eurojust, and for the introduction of the following AML measures:
- the ability to freeze suspicious transactions undertaken online;
- a mechanism to improve how suspicious flows of money are tracked and reported, and coordination of this knowledge between Member States; and
- better protection for whistleblowers.
Whilst there is broad agreement on the need for an EU-level supervisor, and on the measures listed above, the all-important details of how these goals are to be achieved, are yet to be worked out.