Economic Crime: Law Enforcement

John Penrose Excerpts

Thursday 7th July 2022 Commons Chamber

[Kevin Hollinrake (Thirsk and Malton) (Con)]

I beg to move,

That this House notes that economic crime costs the UK economy at least £290 billion per year; recognises that law enforcement agencies are significantly under-resourced to deal with the scale of the problem and can be unwilling to properly enforce existing laws; is concerned at the fragmented nature of the enforcement landscape; and calls on the Government to bring forward an economic crime enforcement strategy that allows for a significant increase in resource to expand and restructure the fight against economic crime, including money laundering and fraud.

I thank the Backbench Business Committee for granting this important debate and the right hon. Member for Barking (Dame Margaret Hodge), who has worked closely with me on this issue. Too often in this place, we talk about legislation and not implementation. As the motion says,

“economic crime costs the UK economy at least £290 billion per year”—

probably a lot more than that—and our agencies are “significantly under-resourced” and “fragmented”.

I would like to say that things will get better, but actually they will get much worse. That is not a criticism of the Government or any of our agencies, although there are criticisms to be levelled; the reality is that things are moving so quickly in this space and in the ability of organised criminals—people who deal drugs, traffic people across continents, fund terrorism, and steal assets from foreign jurisdictions and foreign nations —to move money around.

Let me set out an example of how easy this is becoming—these are all instances running through one platform. There is a hackers group called Lazarus, which is in effect a state-funded agency for North Korea that funds the North Korean weapons programme. There is also Hydra, a dark net drug dealing network, as well as Grandefex, which is run by organised criminals, and Russian Government agencies. The thing they all have in common is that they use a crypto-exchange platform called Binance, set up by a guy called Changpeng Zhao.

Reuters has investigated how those organisations used Binance to move money around totally anonymously between 2017 and 2021. Until 2021, this was regulated by the Financial Conduct Authority, but still for this crypto -exchange, which moved bitcoins and lots of other currencies totally anonymously for those enterprises —for those funding terrorism and other nefarious enterprises —all people needed to do in order to register an account was to enter an email address. That was all people needed to do. There were no “know your customer” checks, no “know your client” checks and no ID requirements. People just had to enter an email address, which could easily be a fake one, and the money was moved around totally anonymously.

The owner of the organisation, Mr Zhao, said as recently as 2020, when speaking to his own staff, that he was driven by one thing and one thing only: growing his enterprise. This platform has now been banned in the UK as a regulated activity, but that does not stop UK people actually using it, because that is obviously how the internet works. He told his staff to “do everything” to increase market share, and spoke about “know your client” checks as being “unfortunately a requirement”.

The investigation by Reuters found that £2.35 billion was moved around in this way for nefarious ends, but a couple of billion pounds is just scratching the surface when we know that the amount of money washing through the UK is in the hundreds of billions of pounds. The UK plays a key role in this, and it is a role that we must acknowledge, and we must take responsibility for clamping down on this. We are getting nowhere near doing so at the moment.

We know that roughly 40% of our crime is economic crime, yet only 0.8% of our resources in man hours are dedicated to tackling economic crime, so there is a huge disparity. I think it is fair to say that the figure of £290 billion a year is a conservative estimate. It represents about 14.5% of our GDP as a cost to the UK economy, yet the application of resources to it adds up to 0.04% of GDP. There is a massive gulf in the cost to society and to this nation, as well as in many other ways. It is not just a financial cost, of course. As I say, there is drug dealing, people trafficking and all the things we are trying to tackle, yet money goes out through the backdoor to all these illegal enterprises.

Action Fraud reports on the impact on individuals, and I think that all of us, as constituency MPs, deal with individuals who have had money stolen from their accounts through things such as authorised push payment fraud. Action Fraud is not the most fit for purpose organisation on the planet. Anybody who has used it knows that the information just goes into a black hole, which is what Action Fraud is. It is going to be reformed, but just changing something’s name does not make it work. However, according to Action Fraud’s figures, £2.35 billion a year goes in that kind of small-scale fraud, which damages our constituents and small businesses directly.

[John Penrose (Weston-super-Mare) (Con)]

I congratulate my hon. Friend and the right hon. Member for Barking (Dame Margaret Hodge) on bringing this important debate to the House. Does he agree that to some extent our public debate about this is stuck in a 1980s time warp? We are all still talking about bobbies on the beat, when increasingly we need to have bobbies behind screens, patrolling digital highways rather than pavements. Without that, public trust in maintaining law and order and maintaining the credibility of the system will continue to be serious eroded.

[Kevin Hollinrake]

That is absolutely right. My hon. Friend has much experience and expertise in this area as the former Government anti-corruption champion. He is absolutely right that we are tackling this in an analogue way in a digital era, and that we need to look at it completely differently. This is about enforcement and resources, and understanding the scale of the problem and meeting that with the right scale of response. However, we also need to look at legislative areas, because there are things we could do to make sure we get a better bang for our buck from our enforcement agencies, rather than just have more and more people, and I will talk about some other measures shortly.

On my hon. Friend’s point, at the moment 0.8% of our police and enforcement agencies’ time is spent tackling economic crime. Of the 20,000 new police officers who are going to be recruited, 725 are going to be dedicated to economic crime. That is better, but it is still only 3.6% of that cohort, so he is absolutely right. Her Majesty’s inspectorate of constabulary says that 90% of cases of economic crime are not even looked at, which is shocking.

The FCA is responsible for controlling money laundering in our financial organisations. Most of this runs through financial organisations—not just through the likes of Binance, which are shadowy enterprises—and I will talk about our main institutions in a moment. For money laundering purposes, the FCA regulates 22,000 organisations, which is a huge number, of which 5,000 are defined as high-risk organisations for money laundering. Last year it did 200 checks—only 200 out of those 5,000—and some of those were desktop checks, for money laundering. I would argue that we are never going to be able to tackle this just by having more and more people, although we do need more people.

This is not just about Binance. I am sure that, sooner or later, we will catch up with Binance. At some point in time, it will be banned, fined or something. In particular, the German regulators and the US enforcement agencies are on to it. Binance is based in the Cayman Islands, as Members might imagine. This is about our UK institutions as well.

If we look at our banks, we see that they have a horrendous record. HSBC was fined £1.4 billion for facilitating money laundering for Mexican drug cartels—the Escobars of this world—in 2012. That was a £1.4 billion fine, and it was fined another £64 million in 2021 for facilitating money laundering offences. In 2019, Standard Chartered was fined £840 million in the US and £102 million in the UK. In 2021, MT Global was fined £23 million by Her Majesty’s Revenue and Customs for money laundering offences. NatWest was fined about £260 million this year, which was the first ever corporate criminal prosecution by the FCA. I welcome the fact that this year is the first time this has ever happened for historical money laundering offences. UBS has had the biggest ever fine—£3.2 billion by the French authority in 2019.

Danske Bank has facilitated £200 billion of money laundering offences, but it has not been fined yet. This has been identified, and it will be fined for the £200 billion of Russian money coming out of Russia and being spread around the world, with it all going through small banks in Estonia via Danske Bank—horrendous. We talk about how Putin funds his invasion of Ukraine. He does so by keeping a coterie of people around him who are stealing Russian assets and making him—there is no doubt about this—the wealthiest person in the world. However, we are facilitating this, because UK companies are involved in the shell companies moving that money around.

I could cite other examples of economic crime from my involvement with the all-party parliamentary group on fair business banking. Criminal fraud at Lloyds HBOS was proven in 2017, and the cover-up associated with that is an utter disgrace. We are yet to see the Dobbs review, which later this year should identify the scale of the cover-up by Lloyds of what went on at HBOS. We have also seen the problems with Royal Bank of Scotland’s Global Restructuring Group, which devastated tens of thousands of businesses, in effect by defrauding businesses of their assets. On all those occasions, all those businesses ever got was a fine. Not a single senior executive in any of those cases has gone to jail. What we need is personal liability or this stuff will just be seen as a cost of doing business. That is the reality.

--- Later in debate ---

[Sir Robert Neill (Bromley and Chislehurst) (Con)]

I congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) and the right hon. Member for Barking (Dame Margaret Hodge) on securing the debate, and on the reports produced by their all-party parliamentary groups on fair business banking and on anti-corruption and responsible tax. Much of the debate so far has focused on what might be termed high-level and high-profile international and economic crime. I understand that, and I will touch on it briefly, but then I want to move on.

In relation to those very high-level matters, we definitely need to do more to tighten the rules on money laundering. I agree that the Bill that became the Economic Crime (Transparency and Enforcement) Act 2022 was much improved in the course of its passage, and we should certainly seek to tighten and improve the provisions of the second Bill when it comes before the House.

We also need to do more about corporate criminal responsibility and liability. The issue referred to by my hon. Friend the Member for Thirsk and Malton relates to what, in law, is called the identification test. It concerns the mens rea, or guilty knowledge, of the “controlling mind and will” of a company, and the requirement to identify that controlling mind and will—a term which, in practice, has tended to mean only a very small cadre of senior managers, which makes it impossible to make the company liable for acts carried out by anyone who is other than part of that controlling mind and will, the very tight-knit group at the top who may be carrying out fraudulent acts for or on behalf of the corporate entity. The system is different in other jurisdictions, including the United States, and reform in that regard would be helpful and sensible. As the right hon. Member for Barking pointed out, it has proved easier in practice to prosecute small companies than to prosecute large ones, because the management structures of the large companies are often more diffuse, and under the current law it is therefore harder to identify those who constitute the controlling mind and will.

An extension of the duty to prevent offences would also be wise, and the Law Commission has recommended it in relation to fraud, but I think we should be open to going further. My one caveat, which I think the Law Commission flags up in its options paper which it published month, is that there is not always an exact analogy between health and safety at work offences and fraud offences. To convict for fraud, there has to be the additional element of dishonesty, either knowledge or “connivance”—a term that it often used—and, of course, dishonesty is not always a requisite element of the offences under the Health and Safety at Work etc. Act 1974. A distinction may need to be drawn, and I think we have not gone as far as we could have. I am not saying that we cannot look at this, but I think it is important to bear that distinction in mind.

[John Penrose]

Would my hon. Friend care to venture an opinion on the Law Commission’s recommendations concerning the potential for fixing the “controlling mind” legislation and legal approach? Could that be improved sufficiently to provide a decent alternative to the “failure to prevent”, or is it fundamentally unfixable, and would such a path therefore not lead to success?

[Sir Robert Neill]

The Law Commission often offers a sensible way forward, and I urge the Government to adopt those recommendations and try to implement them swiftly. This involved considerable work and a great deal of expertise and advice, and I see no reason for us not to move on the “controlling mind” test quite quickly, even if we needed to look a little further at the “duty to prevent” test. Neither of those is unfixable. They offer a sensible way forward in relation to the “controlling mind” test”, and I hope the Government will act.

The other matter I want to raise in respect of larger-scale frauds is the work of the Serious Fraud Office. It certainly involves controversy, and there are some issues to which the SFO needs to respond in relation to the conduct of certain cases. I hope very much that we will see the full publication of Sir David Calvert-Smith’s report on one of those cases. On the other hand, to its credit, with a staff of 250-odd, the SFO has secured for the Consolidated Fund, through payments under deferred prosecution agreements—of which there are now 12—the recovery of some £1.6 billion. If a modest percentage of that were ringfenced, and, rather than going back to the Treasury, were held and reinvested in the budget of the SFO and allied crime-fighting agencies, that would be a massive step forward in providing it with the resources with which to deal with serious international and corporate crime.

In one of the cases that we spoke about recently when the Justice Committee visited the SFO, the disclosure material involved some 1.9 million documents. Dealing with those is a massive task. The SFO could invest in more artificial intelligence for searching documents. There are some legal complexities surrounding that, but it is doable, and is already done in commercial civil litigation. However, it is necessary to invest in it. If some of that money from the deferred prosecution agreements were ringfenced and reinvested, it would be money very well spent.

Having spoken about those large-scale matters, I hope that we will not forget that there is a great deal of “small-scale” fraud—small-scale in the global picture, that is, but very big and important to the victims of fraud. The Justice Committee recently conducted a number of hearings on fraud in the justice system. The message of the evidence we heard from Victim Support was “Do not think that fraud is a victimless crime, which is all too easy to do”. That view was supported by the Association of Police and Crime Commissioners, which reported that some 74% of fraud victims were emotionally impacted by the crime. At the very least, someone will feel that they have been made an idiot of; more often, they will have lost what may be a small sum of money for a bank, but is a lot of money to them. They will feel vulnerable thereafter, almost betrayed. So this is not a victimless crime, and we should never allow it to be thought to be so. This is coming from the people who have been talked to because they have reported the offence of fraud. There are estimated to be 3.7 million incidents of fraud but according to Her Majesty’s inspectorate of constabulary and fire and rescue services, the majority of them are not reported. We need to do a lot more on that everyday fraud.