Newsletter

2023年06月29日

Global Investigations Newsletter

International Disputes Team, Tokyo

May/June 2023

In our newsletter, we discuss key global developments in investigations, corporate crime, ESG issues, and economic sanctions. There have been many important developments, often with several cross-border elements, that companies in Asia need to know about. We now know more about the UK’s proposed “failure to prevent fraud” offence, which potentially has broad international reach. Sanctions policy and enforcement continue apace in respect of a number of jurisdictions, with substantial international alignment. New rules are being proposed for the protection of whistleblowers and for combating money laundering in the EU; the US courts have had to consider whether a foreign state-owned bank can rely on sovereign immunity and whether the SEC’s enforcement procedures are constitutional.

As always, if you have any questions about the matters discussed in this newsletter, or about other disputes-related issues you are facing, we are here to assist you—please contact one of the team members below.

SPOTLIGHT Failure to prevent fraud offence to be introduced in the UK

As already set out in our April 2023 newsletter, the UK is set to introduce a “failure to prevent fraud” criminal offence. Since the government’s publication of a factsheet on the proposed new offence, a formal legislative proposal is now in the House of Lords, the UK’s second chamber. We summarise the key features of the proposal here, but note that the proposal is still being debated in Parliament and may be subject to amendments.

The failure to prevent offence may in principle apply even to foreign companies, but only where the underlying predicate fraud offence (below) was committed as a matter of English law. For example, where an employee of a Japanese company based in Singapore makes a fraudulent statement received in England or Wales, the Japanese company may be liable as a matter of English law for having failed to prevent the commission of an English-law fraud offence. That said, for a prosecution to be brought, there needs to be both a realistic prospect of conviction and a public interest in prosecution. A relevant consideration is likely to be whether harm was suffered in the UK or whether there is some other jurisdictional ‘hook’ to link the offence to the UK. 

• Nature of offence. The offence does not apply to individuals. A company or partnership is liable where a person “associated” with that company or partnership commits a fraud offence intending to benefit (whether directly or indirectly) the company or partnership.
  • Liability also arises where the associated person intends to benefit any other person to whom (or to whose subsidiary) the associated person provides services on behalf of the company or partnership – but this does not apply where the company or partnership is (or is intended to be) a victim of the offence.
  • The new offence is a departure from traditional rules on attributing criminal conduct to a corporate body. Under the common-law “identification principle”, a company will only be liable if the conduct and state of mind of a senior officer or manager can be attributed to the company as being its directing mind and will. The identification test has been applied narrowly by the courts. “Failure to prevent”-type offences do not rely on the identification principle, and represent a significant shake-up of corporate criminal liability in England and Wales. In contrast, the common-law rules in the US are wider than in England and Wales: federal law operates on a general vicarious criminal liability or “respondeat superior” theory.
• Underlying predicate offences. The “fraud offence” that the company or partnership may have failed to prevent must be one or more of: cheating the public revenue; false accounting; false statements by company directors; fraudulent trading; fraud by false representation/failure to disclosure information/abuse of position; participating in fraudulent business; and obtaining services dishonestly.
  • Money laundering offences are not currently included, but there is an express power in the bill allowing the government to include money laundering in the list of fraud offences.
• Defence of reasonable procedures. Although liability under the proposed offence is strict (meaning that it requires no showing of intent, recklessness, or negligence on the part of the company or partnership), the company or partnership has a defence if it can show that it had reasonable prevention procedures in place (or that in the circumstances it was not reasonable to expect it to have any prevention procedures). The government is under a statutory duty to publish guidance about such prevention procedures.
• Associated person. This could be an employee, agent, subsidiary, or a person who “otherwise performs services” on behalf of the company or partnership. The net is therefore cast widely.
• Size of organisation. Only companies and partnerships that are “large organisations” may be liable for failure to prevent fraud. These meet at least two of three conditions in relation to the preceding financial year: (i) average turnover of more than GBP 36 million; (ii) total balance sheet of more than GBP 18 million; and/or (iii) an average number of employees in excess of 250. There are detailed provisions about how these conditions are to be calculated.
• Penalty. Failure to prevent fraud would be an either-way offence, i.e., triable either on indictment before a judge and a jury in the Crown Court or triable summarily before a magistrates’ court, at the defendant’s option. The maximum penalty is an unlimited fine.
• Further reading. We have recently published our blog post “A further expansion of the UK corporate crime enforcement toolkit.” The blog post also summarises some amendments to the bill that have recently been proposed in the House of Lords.

Money Laundering

New AML rules in the EU. On 19 April 2023, the European Parliament approved its negotiating mandate for proposals to reform the EU’s policies on anti-money laundering and countering the financing of terrorism (AML/CFT). The draft legislative acts – including a new directly effective AML regulation and a revised (sixth) money laundering directive – foresee new due diligence rules for businesses to verify customers’ identity, what they own and who controls them, and grant people with a legitimate interest (e.g., journalists, civil society organisations, and higher education institutions) access to beneficial ownership registers (following the EU Court of Justice’s judgment in C-37/20 Luxembourg Business Registers, which had declared unlimited access rights to beneficial ownership information to be a serious interference with the fundamental rights to respect for private life and to the protection of personal data, and hence unlawful).

The legislative acts would also create a novel EU Anti-Money Laundering Authority (“AMLA”) with supervisory and investigative powers to enforce the rules consistently. In March, the Parliament had voiced support for lower thresholds for beneficial ownership, to 15% plus one share (rather than the current 25%), or voting rights, or other direct or indirect ownership interest. In higher-risk companies (e.g., in extractive industries), the threshold might be set as low as 5% plus one share.

Tougher AML rules in Singapore. The city state will be introducing new criminal offences of (i) rash (reckless) and (ii) negligent money laundering, under amendments to the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act 1992 approved by Parliament on 9 May 2023. For these offences, proof of knowledge or reasonable grounds to believe that the transferred funds relate to criminal proceeds is not required. The new offences are expected to come into force towards the end of the year.

Whistleblowers & ABC

New whistleblower protections in the EU. Key new protections under the EU’s Whistleblower Directive (Directive (EU) 2019/1937) must be implemented by 17 December 2023. While the protections also bind companies with 250 or more employees, smaller companies of more than 50 employees will also need to comply. The protections include (i) the setting up of internal reporting channels enabling workers to report breaches of EU law in relation to public health, environmental protection, product safety, financial services, and data protection; and (ii) legal protections against retaliation.

1MBD. There have been global developments in the allegations against Malaysia’s sovereign wealth fund, 1MBD. Swiss prosecutors have indicted two individuals in relation to a fake joint venture; and in the U.S., rapper Pras Michel has been convicted of charges relating to attempts to get the US DOJ to terminate an investigation (the trial made headlines due to actor Leonardo di Caprio taking the stand as a witness).

First Tokyo Olympics convictions. The Tokyo District Court has convicted three managers of former office attire company Aoki Holdings of paying bribes to a member of the Olympic Organising Committee. The sentences were suspended.

Case law updates

Jarkesy v. SEC. The U.S. Supreme Court may soon have to decide whether the use of administrative law judges by the U.S. Securities and Exchange Commission (“SEC”) is constitutional. The Supreme Court already decided in April 2023, in Axon Enterprise v FTC and SEC v. Cochran, Nos. 21–86 and 21–1239, that the SEC’s in-house administrative law enforcement process does not displace the jurisdiction of U.S. federal district courts. If the Supreme Court finds against the SEC again, it is likely that the U.S. securities landscape will change significantly. The SEC has jurisdiction not only over domestic issuers, but also over foreign entities in certain circumstances.

Turkiye Halk Bankasi A. S., aka Halkbank v US (US Supreme Court, No. 21–1450). Halkbank is majority-owned by the Turkish state. It was charged in 2019 with various counts of fraud, money laundering, and sanctions breaches, all relating to transactions with Iran, which is under heavy US sanctions. Halkbank sought to rely on the Foreign Sovereign Immunities Act (“FSIA”), claiming that it was an instrumentality of the Turkish state and as such immune from prosecution in US courts. Halkbank was unsuccessful before the district court, the appeals court, and finally before the US Supreme Court. The courts also considered the scope of the general grant of criminal jurisdiction under 18 U.S.C. § 3231.^[1] Only if 18 U.S.C. § 3231 applied would the court need to consider whether FSIA operated to grant immunity to Halkbank.

In a majority opinion authored by Associate Justice Kavanaugh, the Supreme Court held on 19 April 2023 that:

1. The District Court had rightly asserted jurisdiction under 18 U.S.C. § 3231 in respect of the Halkbank prosecution. The wording of the statute was sufficiently broad to capture even foreign states and their instrumentalities.

2. The Supreme Court therefore considered whether the general grant of jurisdiction was subject to FSIA, and found that it was not. FSIA does not confer sovereign immunity in respect of criminal prosecutions. Instead, FSIA’s reach is limited to civil proceedings only. The Supreme Court based its reasoning in large part on the absence in FSIA of explicit references to criminal proceedings.

However, there is one caveat. The Supreme Court remanded the matter back to the appellate court (the Second Circuit Court of Appeals) to decide whether there might be a common-law (as opposed to statutory) immunity from prosecution for state instrumentalities, an issue the Supreme Court did not decide or consider at length.

Percoco v US (No 21-1158). The US Supreme Court (Justice Alito) held that the federal wire fraud offence was not applicable to a private person with influence over decision-making in government, on the basis that the person deprived the public of some “intangible right of honest services”, which the Supreme Court regarded as too vaguely formulated. And in Ciminelli v US (No 21-1170), the US Supreme Court (Thomas J) held that wire fraud applied only to traditional property interests, rather than to intangible interests such as the right to control commercially valuable information.

Sanctions

• Criminalisation of EU sanctions. The Council of the EU has adopted a negotiation position (a key step in the legislative process) on the criminalisation of EU sanctions breaches. At present, EU sanctions are implemented at member state level and member states decide the penalties, which can be criminal and/or civil or administrative. If adopted, the new directive would require member states to impose “dissuasive” criminal penalties for EU sanctions breaches, with minimum requirements (including in relation to aggravating factors) set out in the directive. Separately, the Council has also adopted a negotiation position on asset confiscation due to an EU crime, such as sanctions breaches. 
• EU’s 11th Russia sanctions package. On 23 June 2023, the EU adopted its 11th package of Russia-related sanctions. The measures include (among others):
  • Additional designations of some 100 individuals and companies;
  • A new anti-circumvention tool, whereby sales, supplies, transfers and exports to certain third countries deemed at high risk of sanctions circumvention may be prohibited;
  • Tighter import and export restrictions, e.g., in relation to dual-use goods;
  • A transit ban for certain goods through the Russian Federation.
• US and EU’s enhanced sanctions cooperation. The US Treasury Department released a press statement on 16 May 2023, following meetings between OFAC and EU Commission officials in Brussels. While the press statement is vague on detail, there seems to be a strong focus on enforcement and avoiding sanctions compliance evasion: “Multilateral implementation maximizes effectiveness of sanctions and minimizes unintended costs and eases the compliance burden for the general public.” A key example of prior close US-EU cooperation in the sanctions sphere is the implementation of the crude oil ban.
• G7 summit. Sanctions also featured prominently during the meeting of G7 nations in Hiroshima. Further tightening, especially of enforcement and evasion, is expected.
• BIS incentives for companies to self-report. On 28 April 2023, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) issued new guidance imposing higher penalties for violations identified by the company during internal investigations, but that were consciously not disclosed. The guidance also establishes new incentives to encourage companies and individuals to report and disclose suspected export control violations by third parties. These include mitigation of future liability for companies and financial rewards for individuals.
• First forfeiture order. In February 2023, a US federal court granted a forfeiture order over US$ 5.4 million owned by Konstantin Malofeyev, who is subject to US sanctions relating to Russia. The US government has now confirmed that the money will be used to assist in efforts to rebuild Ukraine. The forfeiture order was made in response to a sanctions breach by Mr Malofeyev.
• Russian countermeasures. On 25 April 2023, Russian President Vladimir Putin signed Decree No 203, which is in effect a countermeasure in response to sanctions imposed on Russia. Under the decree, the Russian government may effectively place property belonging to legal or natural persons from “unfriendly states”^[2] into interim administration. This applies to moveable goods and properties, securities, and property rights.

Privilege corner

Al Sadeq v Dechert [2023] EWHC 795 (KB). In this important recent decision, the King’s Bench Division of the High Court of England and Wales (Murray J) considered various aspects of the law of privilege, in particular the scope of litigation privilege and of the crime/fraud exception.

• Facts: A former employee of a UAE state-owned investment fund brought civil proceedings against a UK law firm that had acted for the fund, claiming breaches of the UAE constitution, UAE criminal law, and human rights. This related to the employee’s conviction in the UAE of various fraud offences related to his work at the fund (for which the law firm had acted). The employee objected to the law firm’s approach to privilege in its disclosure. The court disagreed with the claimant on all counts.
• Crime/fraud exception: Given the fundamental importance of privilege, the crime/fraud exception would only arise in exceptional circumstances, in respect of communications or other documents that are either criminal or fraudulent in themselves, or that further a criminal or fraudulent purpose. Merely “reporting on” criminal or fraudulent matters was insufficient for the exception.
• Scope of legal advice privilege: Where lawyers were engaged to carry out investigations work, it could be fairly assumed that their engagement included investigatory work and related legal advice and assistance, falling within a “continuum of legal service” to which privilege was in principle applicable.
• Scope of litigation privilege: Neither principle nor policy limited litigation privilege (which protects communications with third parties for the dominant purpose of ongoing or reasonably contemplated adversarial legal proceedings) to parties to litigation. A non-party to litigation – such as a victim of fraud – could rely on litigation privilege where they had a “sufficient interest” in the litigation, such that they would seek legal advice and communicate with third parties (such as witnesses and experts) for this purpose.
• Redactions: The court confirmed prior cases to the effect that, where privileged and non-privileged information in a single document is so mixed up that redacting the privileged parts becomes impracticable or unfeasible, the balance would be in favour of withholding the document in its entirety. Otherwise, the document should be redacted, and there is no requirement for the redacted (privileged) part to be severable from the non-redacted part.

You may also like our recent blog post “Mind your privilege: recent developments in the law of privilege”, in which we consider recent global developments in the law of privilege and how they impact investigations. The blog post considers important recent decisions from the United States (In re Grand Jury, 143 S. Ct. 543 (2023) (per curiam), discussed in our most recent newsletter), the European Union (C-694/20 Orde van Vlaamse Balies and others v Vlaamse Regering, on the scope of privilege protections under EU law), and the United Kingdom (Al Sadeq v Dechert LLP [2023] EWHC 795 (KB) above; Scottish Legal Complaints Commission v Murray [2022] CSIH 46 on the constitutional status of privilege in English and Scottish law; Jinxin v Aser Media Pte Ltd [2022] EWHC 2856 on the privilege status held on third-party computers and servers). 

[1] 18 U.S.C. § 3231 confers subject-matter jurisdiction on US federal district courts over “all offenses against the laws of the United States.”
[2] Russia’s list of “unfriendly states” includes the EU, US, and UK; in the APAC region, Australia, Japan, Micronesia, New Zealand, Singapore, South Korea, and Taiwan.