Financial crime and investigations

Brexit: Financial crime and investigation

We have considered the impact of the UK’s withdrawal from the EU on a number of financial crime and investigations topics. See below for further information.

The European Arrest Warrant and extradition

With the United Kingdom’s exit from the European Union, new arrangements now govern extradition arrangements between the UK and the EU. The UK is no longer part of the European Arrest Warrant (EAW) framework (so-called 'fast track' extradition) and new 'surrender arrangements' are now in place. These arrangements are set out in Title VII of Part 3 of the Trade and Cooperation Agreement between the UK and the EU. At a domestic level, the relevant provisions in the Agreement have been enacted through the European Union (Future Relationship) Act 2020.

The Extradition Act 2003 continues to provide the statutory framework for UK extradition. The new arrangements with the EU have resulted in changes to the Extradition Act but these are relatively limited as UK/EU extradition replicates in large part the relationship which existed under the EAW framework and the surrender arrangements between the EU and Norway and Iceland. In particular, the dual criminality provisions are almost identical to the EAW scheme with the Trade and Cooperation Agreement transposing the EAW 'Framework List' of offences for which dual criminality need not be proved.

We would note, however, that it is becoming clear that the provisions in relation to nationality are likely to have a significant impact on extradition from a number of EU countries. As of 5 March 2021, 12 EU states have triggered the exception to the requirement to surrender accused and convicted individuals on the grounds that the subject of a request is a national of the requested state (see Article 83(2) of the Trade and Cooperation Agreement). Those states include large EU states such as France and Germany. In short these 12 states will not extradite their own nationals to the UK, removing over half of the EU population from the ambit of the new UK/EU arrangements. There is no reciprocity in the UK’s approach - the UK has never operated extradition on the basis of nationality and it will continue to extradite to those countries which operate the nationality bar.

Like much of the post-Brexit arrangements, it is likely that extradition arrangements will change over time but for the moment, the process seems procedurally stable and any changes are likely to be some time in the future.

International cooperation

Broadly, the pan-European targeting of complex cross-border criminal activity is founded upon inter-governmental cooperation as much as it is upon specific EU law frameworks. Where this legal foundation remains unchanged, most importantly the European Court of Human Rights and the Council of Europe, cooperation and participation in these cross-border endeavours will continue.

EU crime agencies

There are two EU agencies that explicitly require membership of the EU for participation: Europol, the EU police intelligence agency, and Eurojust, the coordinating network of EU prosecution agencies.

A negotiation will be required to establish a new legal foundation for the UK’s membership of, or cooperation with, these bodies. Issues of data protection in the sharing of intelligence information will also require resolution, as the UK will be outside the EU regime following Brexit.

But it is unlikely that either the UK or the EU will want to see any reduction in cooperation in investigating criminal activity and it can be expected that a relatively early resolution of these issues will be found. Other non-EU states, such as the USA, Canada, Australia and Norway, have developed relationships with Europol and, with its geographical proximity, it seems very likely that the UK will too.

Mutual legal assistance

The UK can offer judicial assistance to any country or territory in the world, regardless of the existence of an agreement providing a framework for such assistance. The only stipulation is that if there is such an agreement, any request be made within the framework provided.

The European Union based its framework of cooperation on a protocol negotiated by the Council of Europe. Consequently, the UK will be able to rely upon this pre-existing agreement, as the UK’s membership of the Council of Europe remains unchanged.

However, this protocol does not provide the specific mechanisms or detail that was created under the European Union framework. For example, the European Investigation Order (EIO), seeks to allow the transfer of evidence through a single instrument prescribing detailed methods for gathering evidence.
The Regulations introduced by the UK in 2017 to implement the EIO (Criminal Justice (European Investigation Order) Regulations 2017) were revoked on the UK’s withdrawal from the EU, albeit that orders issued prior to the withdrawal will remain to be complied with.

Whilst some detail for the process of mutual assistance is provided under the 1978 protocol, the impact of Brexit will be for subsequent requests from, and of, EU members to become ad hoc and the outcomes less predictable.

This may lead to delays and potentially inconsistent treatment of requests for mutual legal assistance. The ultimate solution is likely to be a bi-lateral treaty between the UK and the EU, as the UK has had with China since the beginning of 2016.

Money laundering

The UK implemented the provisions of the Fifth Money Laundering Directive in January 2020 but, following Brexit, will be required to implement the provisions of future money laundering Directives. For example, changes will not made to UK legislation as a result of the Sixth Directive which required EU Member States to implement its provisions by 3 December 2020.

Having said that, we expect that the UK will continue to make changes to our regime to be in line with EU standards. This is because the provisions of EU legislation flow from recommendations made by the Financial Action Task Force, a global inter-governmental body.

Given the UK’s strong position on money laundering regulation in the past and in particular the UK’s approach to gold plating of EU requirements, it is unlikely that the UK will want to fall behind international standards (albeit that any changes that will need to be made in the UK are likely to be minimal).

A number of amendments to the Money Laundering Regulations 2017 were made to address the impact of Brexit. The amendments, which were implemented on exit day, made a number of changes, reflecting the fact that, for example, the UK is now a 'third country' (ie outside of the EEA) and references to customers based in other EEA jurisdictions were modified.

Financial sanctions

The UK now operates an autonomous sanctions regime using provisions set out in the Sanctions and Anti-Money Laundering Act 2018 (the Act). The Act allows the UK to implement UN resolutions and to make separate financial sanctions (as well as other sanctions), and to designate individuals and entities under those sanctions outside of the EU framework. The first financial sanctions, the Global Human Rights regime, made under the Act were adopted by the UK in July 2020.

Prior to withdrawal from the EU, UK nationals and corporates were required to comply with EU sanctions along with the corresponding UK sanctions which put in place penalties for breaches and a licensing framework. Newly adopted EU sanctions will no longer apply in the UK. EU sanctions already in place prior to the date of withdrawal have been 'on-shored' into UK regulations (for example, see new UK sanctions regimes for Libya and Venezuela). Whilst the UK measures are similar to the prior EU regulations (and corresponding UK measures) there are some differences, most notably between the individuals and entities designated by the UK and EU respectively and to the operation of the licensing regime under the Act.

The Office for Financial Sanctions Implementation (OFSI) continues to publish a Consolidated List of designated persons albeit that the list now only includes individuals and entities designated under UN resolutions and UK sanctions. OFSI has also published guidance on the UK financial sanctions regime and on a number of specific regimes including Russia.

Going forward, it is likely that the UK and EU sanctions regimes will be broadly aligned, although the UK will have the ability to take a swifter approach. This was the case in 2020 when, although the EU adopted a global human rights regime similar to the UK, it did not occur until five months after the UK’s own measures were implemented.

Brexit’s impact is likely to be felt most in relation to policy. Post-Brexit, the UK has no formal input into the designation of EU sanctions targets or the formulation of EU sanctions policy. In the past, securing the required unanimity from Member States has often depended on strong support from the UK. Its absence from discussions may result in weaker measures being introduced by the EU.

Weaknesses in EU sanctions could prompt the UK to introduce more stringent measures of its own. However, the impact of any such measures is likely to be limited without wider support from the EU, or perhaps the US. It seems likely though, given their close trade, political and geographic ties, that the UK will continue to push for the use of robust restrictive measures within the EU, albeit now from the side-lines.

Read our article on Overview of UK financial sanctions regime post Brexit for further information on this topic.

Competition investigations

The European Commission has responsibility for ensuring that competition in the EU internal market is not distorted. Any investigations initiated by the European Commission prior to the end of the transition period on 31 December 2020 will remain within the European Commission’s jurisdiction. EU competition law will also continue to apply to UK companies trading in the EU.

Investigations with a UK nexus will be subject to the parallel jurisdiction of the UK’s competition watchdog, the Competition and Markets Authority (CMA), rather than being dealt with solely at EU level. As a result, businesses should expect additional complexity as well as increasing administrative and financial burdens. In the long term there may also be certain policy areas (eg excessive pricing, or block exemptions for certain vertical agreements) that the Commission and the UK start to diverge on, meaning parallel investigations cannot necessarily be tackled using the same strategy.

Both the CMA and the Commission have wide ranging powers to detect, investigate and sanction infringements of competition law.

While the Commission will no longer be able to conduct dawn raids on companies’ UK premises, we expect relevant information is likely to be passed to the CMA for assistance. Similar considerations apply with respect to raiding the homes of staff members where a serious breach of EU law is suspected.

Note also that the Commission can continue to address information requests to entities incorporated or located in the UK. In fact, the Commission has a long track record of investigating and fining non-EU entities.

Beyond the general cooperation obligation in the Trade and Cooperation Agreement (TCA), we expect that the future relationship between the CMA and the Commission will be set out in separate, more detailed arrangements, such as a memorandum of understanding, on how to eg share confidential information and manage parallel investigations.

An additional point to note is that global company executives and other members of senior management also face an increased risk of personal sanctions in the UK for serious infringements of competition law. Director disqualifications have become an increasingly popular enforcement tool. In addition, the UK’s criminal cartel offence (not replicated at EU level) could lead to fines for individuals, or even imprisonment. Pre-Brexit, larger cartel cases tended to be investigated at EU level only; Brexit and the TCA have made parallel cartel investigations (with more ramifications for individuals in the UK) more likely.

One important point to note in respect of EU competition investigations is the limits to legal privilege that will be recognised by the Commission.

Privilege only applies to communications with external, not in-house, lawyers. But, more importantly, privilege only applies to communications with lawyers entitled to practice within an EU Member State.

The Commission has at times indicated that it would be prepared to extend this to lawyers practising outside the EU, but this has not happened.

Having now left the EU and with no contrary provision made in the TCA, communications from UK lawyers are susceptible to seizure and review by the Commission.