Corruption, Integrity and the Law: Global Regulatory Challenges 9780367186500, 9781003008224

Table of contents :
Cover
Half Title
Series Page
Title Page
Copyright Page
Table of Contents
List of contributors
Part I Introduction
Chapter 1 The global anti-corruption framework: Lights, shadows and prospects
Where were we?
The global anti-corruption framework and its sources
Negative measures
Positive measures: the limits of responsibilisation
Looking forward: critique and recommendations
Conclusions
References
Part II Criminal justice: international and national frameworks
Chapter 2 The fight against international corruption: A call for a global approach in corporate criminal liability law and procedure
Introduction: The need for a global approach in corporate criminal liability law
The international conventions against corruption: lights and shadows
Corporate criminal liability in light of international conventions against corruption and the Italian experience
Contrasting international corruption through corporate criminal liability: the issues at stake
Some proposals to improve efforts to fight internal and international corruption
References
Chapter 3 What role does competition law have to play in the prosecution of financial crime in the UK?
Introduction
The LIBOR scandal and competition law in the UK
UK prosecutions following the LIBOR scandal
Competition law in the UK: Is it relevant to the financial crime of benchmark rate fixing?
Competition law measures following the LIBOR scandal
Competition legislation introduced following the LIBOR scandal
The future of competition law enforcement of financial crime in the UK
Conclusion
References
Chapter 4 The fight against corruption in the Italian legal system between repression and prevention
The relentless changes to the anti-corruption system in Italy
Corruption offences: positive changes and persistent critical issues
The most recent tools introduced to ‘wipe out corruption’: new exemption provisions and new means of assessing the commission of offences
Whistle-blowing and the ‘culture of legality’
Conclusion
References
Part III The escape from criminal law: deferred prosecutions agreements and financial sanctions
Chapter 5 Corruption, regulation and the law: The power not to prosecute under the UK Bribery Act 2010
Introduction
The problems of national prosecution of companies
The shift from old to new governance
Regulatory Actions
The UK Bribery Act 2010
Section 7 and Deferred Prosecution Agreement (DPA)
Reasonable Doubts about DPAs
Conclusion
References
Chapter 6 Justice deferred is justice denied?: The jury’s out
Introduction
Deferred prosecution agreements in the United States of America
Background to deferred prosecution agreements in the United Kingdom
Deferred prosecution agreements in the United Kingdom
Conclusion
References
Chapter 7 Deferred prosecution agreements and the restorative justice paradigm: Justice restored or corporate cop out?
Introduction
Restorative justice
Deferred prosecution agreements
Discretion
Contractual agreement
Collateral consequences
Compliance procedures: the question of reintegration and rehabilitation
Conclusion
References
Chapter 8 Financial sanctions as a weapon for combatting grand corruption
Introduction
Misappropriation sanctions in context
Misappropriation sanctions as a response to grand corruption
Issues particular to misappropriation sanctions in connection with legal challenges
The appropriateness of continuing reliance on misappropriation sanctions
Conclusions
References
Part IV Information as evidence: whistle-blowing
Chapter 9 Keep the canaries singing: Are whistle-blowers in Nigeria adequately protected?
Introduction
Legislation and corporate governance protection in Nigeria
Results to date
Weaknesses of legislative protection in Nigeria
Other hurdles to combatting corruption
Conclusion
References
Chapter 10 Vulnerabilities, obstacles and risks in reporting financial crimes: Conundrum of whistle-blowers
Introduction
SwissLeaks case
LuxLeaks case
Conclusion
References
Part V Information as integrity: bank secrecy and non-financial reporting
Chapter 11 ‘Follow-ing the money’ ten years on: Transparency and the fight against banking secrecy
Introduction
Historical and geopolitical drivers of offshore financial centres, banking secrecy and tax havens
The UK: the creation of an ‘imperial’ network of offshore financial centres
Contemporary OFCs, tax havens and secrecy jurisdictions
Transparency, information sharing and the battle against ‘uncooperative jurisdictions’
Creating a tax haven in plain sight: the City of London and its ‘dependencies’
Conclusion
References
Chapter 12 Information, power and the fight against tax havens
Introduction
Defining tax havens
Information and the fight against tax evasion
Power in global governance
Conclusion
References
Chapter 13 The communication of non-financial information according to the Directive 2014/95/EU as an instrument for the promotion of corporate integrity in Europe
Introduction
The Directive and its implementation
The impact of the Directive on the management of undertakings
The duty of disclosure of non-financial and possible interferences with and criminal law
Conclusions
References
Part VI Beyond ethical codes: reshaping culture and values
Chapter 14 The fight against and prevention of corruption: The case of Switzerland and implications for Swiss firms with business activities abroad
Context
The state of research on corruption and anti-corruption programs
The present study: research questions, methodology and characteristics of the responding firms
General findings on the level of corruption experienced by Swiss firms while doing business abroad
Predictors of bribe request for Swiss firms
Swiss firms and the perception of corruption
Investments in anti-corruption measures: reaction to corruption incidents?
Strengths and limitations
Discussion
Conclusion
Funding
References
Chapter 15 The practice of anti-corruption and integrity of government: On the moral learning side of the story
Introduction
From anti-corruption to integrity
A toolkit from behavioural science
Towards installing a moral learning process
Concluding remarks
References
Chapter 16 Ethical integration in EU law: The prevailing normative theories in EGE opinions
Introduction
Ethics in EU law
EGE as a paramount protagonist within the European Commission: History, institutional structure and opinions
Major findings
Concluding remarks and outlook
References
Index

Citation preview

Corruption, Integrity and the Law

Globalisation has opened new avenues to corruption. Corrupt practices are proliferating not only within national borders but across different countries. Despite many national and international anti-corruption bodies and strategies, corruption far from being eradicated. There is an urgent global demand for a better understanding of corruption as a phenomenon and a thorough assessment of the existing regulatory remedies, towards the establishment of more effective (and possibly uniform) anti-corruption measures. Our previous collection, Corruption in the Global Era (Routledge, 2019), analysed the causes, the sources, and the forms of manifestation of global corruption. An ideal continuation of that volume, this book moves from the analysis of the phenomenon of corruption to that of the regulatory remedies against corruption and for the promotion of integrity. Corruption, Integrity and the Law provides a unique interdisciplinary assessment of the global anti-corruption legal framework. The collection gathers top experts in different felds of both the academic and the professional world – including criminal law, EU law, international law, competition law, corporate law and ethics. It analyses legal instruments adopted not only at a supranational level but also by different countries, in the attempt of establishing an interdisciplinary and comparative dialogue between theory and practice and between different legal systems towards a better global promotion of integrity. This book will be of value to researchers, academics and students in the felds of law, criminology, sociology, economics, ethics as well as professionals – especially solicitors, barristers, businessmen and public servants. Nicholas Ryder is a professor in Financial Crime, Head of Research and Head of the Global Crime, Justice and Security Research Group at Bristol Law School, University of the West of England, Bristol, UK. Lorenzo Pasculli is Associate Head of School for Research at Coventry Law School and an associate of the Centre for Financial and Corporate Integrity at Coventry University, UK. He is also a visiting professor at Nebrija University, Spain.

The Law of Financial Crime Series Editor: Nicholas Ryder

Available titles in this series include: The Financial Crisis and White Collar Crime – Legislative and Policy Responses A Critical Assessment Edited by Nicholas Ryder, Jon Tucker and Umut Turksen Countering Economic Crime A Comparative Analysis Axel Palmer The Global Anti-Corruption Regime The Case of Papua New Guinea Hannah Harris Financial Crime and Corporate Misconduct A Critical Evaluation of Fraud Legislation Edited by Chris Monaghan and Nicola Monaghan Corporate Liability for Insider Trading Juliette Overland Corruption in the Global Era Causes, Sources and Forms of Manifestation Lorenzo Pasculli and Nicholas Ryder Counter-Terrorist Financing Law and Policy An analysis of Turkey Burke Uğur Başaranel and Umut Turksen Integrity and Corruption and The Law Global Regulatory Challenges Edited by Nicholas Ryder and Lorenzo Pasculli For more information about this series, please visit: www.routledge.com/Th e-Law-of-Financial-Crime/book-series/FINCRIME

Corruption, Integrity and the Law Global Regulatory Challenges

Edited by Nicholas Ryder and Lorenzo Pasculli

First published 2020 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2020 selection and editorial matter, Nicholas Ryder and Lorenzo Pasculli; individual chapters, the contributors The right of Nicholas Ryder and Lorenzo Pasculli to be identifed as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identifcation and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record has been requested for this book ISBN: 978-0-367-18650-0 (hbk) ISBN: 978-1-003-00822-4 (ebk) Typeset in Galliard by Deanta Global Publishing Services, Chennai, India

Contents

List of contributors PART I

Introduction 1 The global anti-corruption framework: Lights, shadows and prospects

viii

1 3

LORENZO PASCULLI AND NICHOLAS RYDER

PART II

Criminal justice: international and national frameworks

15

2 The fght against international corruption: A call for a global approach in corporate criminal liability law and procedure

17

MARIA LUCIA DI BITONTO AND GAETANO GALLUCCIO MEZIO

3 What role does competition law have to play in the prosecution of fnancial crime in the UK?

36

DIANA JOHNSON

4 The fght against corruption in the Italian legal system between repression and prevention

54

DEBORA PROVOLO

PART III

The escape from criminal law: deferred prosecutions agreements and fnancial sanctions 5 Corruption, regulation and the law: The power not to prosecute under the UK Bribery Act 2010 SHAHRZAD FOULADVAND

69 71

vi

Contents

6 Justice deferred is justice denied?: The jury’s out

89

AXEL PALMER

7 Deferred prosecution agreements and the restorative justice paradigm: Justice restored or corporate cop out?

113

DARREN MCSTRAVICK

8 Financial sanctions as a weapon for combatting grand corruption

127

ANNA BRADSHAW

PART IV

Information as evidence: whistle-blowing 9 Keep the canaries singing: Are whistle-blowers in Nigeria adequately protected?

143 145

ALISON LUI AND SOJI APAMPA

10 Vulnerabilities, obstacles and risks in reporting fnancial crimes: Conundrum of whistle-blowers

161

ALISON LUI AND UMUT TURKSEN

PART V

Information as integrity: bank secrecy and nonfnancial reporting

183

11 ‘Follow-ing the money’ ten years on: Transparency and the fght against banking secrecy

185

ELENA BLANCO AND MIGUEL JOSE ARJONA SANCHEZ

12 Information, power and the fght against tax havens

206

STUART MACLENNAN

13 The communication of non-fnancial information according to the Directive 2014/95/EU as an instrument for the promotion of corporate integrity in Europe MARCO CRISTIANO PETRASSI

219

Contents vii PART VI

Beyond ethical codes: reshaping culture and values

241

14 The fght against and prevention of corruption: The case of Switzerland and implications for Swiss frms with business activities abroad

243

GIANG LY ISENRING

15 The practice of anti-corruption and integrity of government: On the moral learning side of the story

268

JULIEN TOPAL

16 Ethical integration in EU law: The prevailing normative theories in EGE opinions

286

MATTHIAS PIRS AND MARKUS FRISCHHUT

Index

311

Contributors

Soji Apampa, Co-founder of the Integrity Organisation Soji Apampa is a co-founder of the Integrity Organisation (established in 1995). He has been actively involved with the designing, resourcing and supervision of programme implementation that has helped to make the strategy of ‘empowering people, their transactions, systems and institutions against corruption’ relevant in Nigeria. At Integrity, he was one of the initiators of the Convention on Business Integrity (CBI), a project launched in Lagos in 1997 to promote ethical business practices, transparency and fair competition in both the private and the public sectors. He is an International Governance Expert specialising in corporate and political governance. He holds a Master’s degree in Governance and Finance from Liverpool John Moores University, having received a Bachelor of Engineering (Hons) degree in Civil and Structural Engineering from the University of Sheffeld, UK. He is also a 2008 Fellow of the Africa Leadership Initiative West Africa (the Aspen Institute, Aspen, Colorado). In 2008, he was appointed to the International Working Group of the UN Global Compact on the 10th Principle (anti-corruption). Soji recently led efforts to fundraise for, develop and deploy a Corporate Governance Rating System (CGRS) launched in November 2014, which today forms a prerequisite for listing on the new Premium Board of the Nigeria Stock Exchange and a factor in its tradable Corporate Governance Index. His working experience covers training, research, consulting and management in the private and public sectors, and civil society. His research interests span across corporate governance, corporate control mechanisms, independent feedback mechanisms and the use of governance indexes for corruption prevention. Mr Apampa has led various political economy studies (over the last ten years) for a number of donor-funded programmes at both federal and state levels in Nigeria. His working experience covers training, research, consulting and management in the private and public sectors, and civil society. Miguel J. Arjona-Sánchez, Lecturer in Constitutional Law, University of Granada, Spain Dr Arjona teaches Spanish and European public and constitutional law at the University of Granada, Spain. He has been active in local politics and in the student union since his university years. He was appointed Director of Sports and Sports Infrastructure on Granada Borough Council. He ran a company in the renewable

Contributors ix energy sector in Madrid from 2007 to 2011. In 2011, he decided to change career and began a PhD at the University of Granada with a long research stay at Bournemouth University on the movement of capital in the European Union. After obtaining his PhD in law, he took a post at the University of Granada. He is currently working on two books: one about the Euro and the logic that has presided over the freedom of capital movement in the European Union until it set the Monetary and Financial Union, and a second one dedicated to fnancial globalisation, in which he analyses the role of Eurodollars, tax havens, rating agencies and shadow banking. Dr Arjona regularly carries out research stays in the United Kingdom and has been invited to conferences in Brazil, Germany, the United Kingdom and the United States. Elena Blanco, Associate Professor of International Economic Law, Bristol Law School, University of the West of England, Bristol Elena Blanco is an associate professor of international economic law at the Bristol Law School, University of the West of England (UWE). Her work sits at the intersection between public and private international law, and revolves around coloniality, post-capitalism, regulation of TNCs and the linked climate, environmental and democracy crises of neoliberal globalisation. Her research is centred around issues of distributive, social and environmental justice in the context of access to natural resources; the colonial roots of and alternatives to the current and pernicious version of neoliberal globalisation, and the multiple but ultimately linked trajectories of privilege and exclusion that led to the current environmental, economic and social crises. The transnational corporate actor, as the epitome of the neoliberal global techno-capitalist order and its ability to transcend regulatory control, is central to her research. She has published in regularly in international journals and authored the leading texts Globalisation and Natural Resources Law and Spanish Law and Legal System. Anna Bradshaw, Partner, Peters & Peters Anna is a partner in the business crime team at Peters & Peters Solicitors LLP in London, where she specialises in fnancial crime and economic sanctions with a particular emphasis on cross-border and multi-jurisdictional issues. She is regularly instructed to advise and represent individuals and corporates on a range of compliance-related issues as well as in connection with investigations conducted by law enforcement authorities in the United Kingdom and overseas. She is also experienced in bringing administrative and legal challenges to asset freeze designations by the United Nations and the European Union. She holds a doctorate in anti-money-laundering regulation from the University of Westminster, where she was a part-time visiting lecturer before going into private practice. Maria Lucia Di Bitonto, Associate Professor of Criminal Procedure Law, University of Camerino Maria Lucia Di Bitonto, qualifed full professor of criminal procedure law, is now associate professor of criminal procedure law in Italy at the University of Camerino (an ancient Italian university founded in 1336), where she is also a

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Contributors

member of the faculty board of the PhD School in Legal and Social Sciences and where she was the Director of the second-level Master’s course in workplace safety law and procedure. In addition, she is an adjunct professor of criminal procedure law and of corporate criminal law and procedure in the Luiss ‘Guido Carli’ Law Department in Rome, where she teaches prison and post-conviction procedure law and where she was the coordinator of the criminal procedural law course in the School of Specialization for Legal Professions. Maria Lucia Di Bitonto has been an auditor for the evaluation of the quality of the research, appointed by the Italian National Agency for the evaluation of the university system and research (ANVUR). Currently, she is a member of the Advisory Board of the Sofa Legal Science Network (SLSN) at the University of Sofa ‘St. Kliment Ohridski’, a member of the Global Integrity Research Network (GIRN), and a member of the editorial board of the journal Cassazione Penale, included in the ANVUR list of rank-A reviews. She has written extensively on several topics of criminal procedure. In particular, her studies are focused on criminal evidence, public prosecution, human rights and criminal procedure, pre-trial detention, defensive investigations, the defendant’s right to be silent, criminal proceedings against corporations, due process of law and corporate criminal liability. On these issues, she has published four monographs, more than 130 articles and papers in collective volumes and law journals) and participated in seminars and conferences at Italian and European universities. Shahrzad Fouladvand, Lecturer in International Criminal Law, Sussex Law School, University of Sussex Shahrzad Fouladvand is a lecturer in international criminal law at the University of Sussex. Her research focuses on two forms of transnational crime: human traffcking and corruption. In particular, she is interested in the ways in which these two wrongdoings are interrelated. She uses responsibilisation and network analysis approaches in her research. Her work also raises issues about the extent to which co-operation is possible or desirable with criminal justice agencies tainted by corruption, whether outside the EU or within it. Her research is centred on evidential problems relating to human traffcking and the relationship between human traffcking and corruption, with a particular focus on Albania. Markus Frischhut, LLM, Jean Monnet Professor, Management Center Innsbruck, Austria Markus is the Jean Monnet Professor for EU law, ethics and values and study coordinator of EU law at Management Center Innsbruck, Austria. He held the Jean Monnet Chair on EU and Ethics from 2016 to 2019. He currently holds the Jean Monnet Chair of ‘EU Values & DIGitalization for our CommuNITY (DIGNITY)’, kindly co-fnanced by the European Commission under Erasmus+. His research and publications focus on EU law, the application of EU law in national law, EU health law and the relationship between EU law, ethics and values. His book, The Ethical Spirit of EU Law, analyses the relationship between

Contributors xi EU law and ethics for the frst time and is available via open access on the website (https://jeanmonnet.mci.edu). Markus has been an invited guest speaker to EU institutions, guest lecturer at international universities (Bergen, Madrid, London, Seoul), and also a guest speaker at many international conferences. He is a member of the European Association of Health Law, the International Forum of Teachers/UNESCO Chair in Bioethics, and a member of the Global Integrity Research Network (GIRN) at Coventry University. Gaetano Galluccio Mezio, Criminal Law Counsel in Rome Dr Gaetano Galluccio Mezio is a criminal law counsel in Rome. He has been contracted professor in Criminal Procedure Law during the academic years 2016/17 to 2018/19 at the Law Department of Luiss ‘Guido Carli’ University of Rome. He holds a PhD from the School of Advanced Studies of Camerino University and has been visiting researcher at Columbia Law School during the spring and fall semesters of 2013. A member of the Global Integrity Research Network (GIRN), he authored many publications on different matters of criminal procedure law. Amongst them, it is worth mentioning his essays on evidence, fundamental rights of corporations involved in criminal proceedings and witness testimony in appeal trials. Recently, he published his frst monograph, Diritto e Procedura Penale degli Enti negli USA (Cedam, 2018), a comparative analysis of corporate criminal law and procedure in the United States. Giang Ly Isenring, Senior Researcher, Swiss Department of Home Affairs, Section Criminality and Criminal Justice Following the completion of her Master’s degree in economics at the University of Geneva and her doctorate in criminology and criminal justice at the University of Lausanne, Giang Ly was a visiting scholar at Northeastern University in Boston, where she was involved in several projects on corruption, terrorism fnancing and white collar crime, working together with Prof Dr Nikos Passas. For the last ten years, Giang Ly has had a career as a researcher in the feld of corruption and fnancial crime at the Universities of Zurich and St-Gallen. She has been conducting several surveys in business crime and corruption on the behalf of the mentioned universities. In 2010, she also served as an advisor for the UNODC on the project of Business Crime Survey in Europe as well as other projects related to fnancial crime in Spain (University of Malaga). Giang Ly has published a book and several articles on white collar crime in both French and English. She was also advisor for several dissertations of students of the universities of Zurich and St-Gallen on topics related to fnancial crime and corruption. Giang Ly is member of the European Society of Criminology and the American Society of Criminology where she has been presenting her work and research yearly. Currently, Giang Ly works at the Swiss Department of Home Affairs in the section of Criminality and Criminal Justice and deals not only with corruption issues but also with delinquency of adults and minors in general.

xii

Contributors

Diana Johnson, Solicitor and Senior Lecturer in Competition Law and Financial Crime, Bristol Law School, University of the West of England, Bristol Diana Johnson is a solicitor and Senior Lecturer on the LLB at UWE Bristol. She has a particular interest in the use of competition law to enforce fnancial crime, with a particular focus on benchmark rate manipulation cartels. Diana is currently undertaking research as part of a PhD which examines how competition law was used in the United States and the European Union rather than in the United Kingdom in response to the 2012 fnancial crisis. Diana has worked in the European Commission’s Directorate-General for Competition and in an international law frm in Brussels advising clients on competition law. In addition to this, whilst practising as a corporate lawyer in Osborne Clarke, Bristol, Diana advised clients on transactions including corporate restructurings, management buy-outs, AIM fotations and company sales and purchases. She has published various papers on competition law and fnancial crime. Alison Lui, Reader in Corporate and Financial Law at Liverpool John Moores University (LJMU) Dr Alison Lui is a reader in corporate and fnancial law at Liverpool John Moores University (LJMU). Alison obtained her LLB (European Legal Studies) from the University of Bristol. She holds an LLM (Corporate and Commercial Law) at the London School of Economics and a doctorate degree from the University of Liverpool. Alison qualifed as a solicitor and practised commercial law before joining LJMU. She teaches a number of business-related modules on the LLB and LLM programmes. Alison’s research interests are predominantly in fnancial regulation and corporate governance. Alison is a Max Planck Fellow; Inner Temple Academic Fellow; Churchill Fellow; LJMU Early Career Fellow and has won several LJMU research grants. She has published a monograph with Routledge, various book chapters and many peer-reviewed articles in top journals such as the Northern Ireland Legal Quarterly, Information and Communications Technology Law, Journal of Banking Regulation and Journal of Financial Regulation and Compliance. In particular, her monograph is listed as one of the best banking law books and one of the best-selling banking law books of all time: https://www.routledge.com/law/posts/13691. Alison has presented papers at top universities and organisations such as the World Bank; Wharton School of Management, University of Pennsylvania; INSEAD; Max Planck Institute; Cambridge; Bristol; Warwick; the Inner Temple. Alison has been interviewed by the BBC for her insight into Employment and Intellectual Property matters. In 2018 and 2019, the House of Commons Treasury Select Committee Digital Currency Inquiry and the Automation and Work Inquiry accepted her written evidence.

Contributors xiii Stuart MacLennan, Associate Professor of Law and Research Development Director at Coventry Law School, Associate Member of the Centre for Financial and Corporate Integrity at Coventry University Dr Stuart MacLennan is associate professor of law and research development director at Coventry Law School, and an associate member of the Centre for Financial and Corporate Integrity. Stuart completed his undergraduate degree (LLB(Hons)) at the University of Edinburgh, his Master’s degree (LLM) at the Glasgow Graduate School of Law and his PhD at Trinity College, University of Dublin, where he won a prestigious Arthur Cox research scholarship. Stuart also completed the Diploma in Legal Practice (the Scottish solicitors’ qualifcation) at the University of Edinburgh. Stuart was previously an advisor on European and External Affairs in the Scottish Parliament, before going on to teach at Trinity College, University of Dublin and the China-EU School of Law. Stuart has published extensively in the felds of taxation and European Union law – focusing, in particular, on corporate tax avoidance and evasion, and tax competition in the European Union and beyond. Stuart has also prepared a number of pieces of evidence for parliamentary committees and commissions of inquiry. Stuart is a researcher on the multi-million pound ‘PROTAX’ project funded by the EU. Darren McStravick, Lecturer in Criminal Law, Contract Law and Remedies and Restitution at the School of Law, Social and Behavioural Sciences, Kingston University London Darren McStravick is a lecturer in criminal law, contract law and remedies and restitution at the School of Law, Social and Behavioural Sciences, Kingston University London. He holds an LLB and LLM in human rights and criminal justice from Queens University Belfast and a PhD from Dublin City University entitled The Irish Restorative Reparation Panel and the Search for Community. Idealised Rhetoric or Practical Reality. As part of this doctoral research, he explored restorative justice practices and theory in adult-based offender reparation panels based in Dublin and surrounding areas. He has worked as a researcher with the Northern Ireland Law Commission, has collaborated with Thames Valley Metropolitan Police on increasing the visibility of restorative justice principles and procedures for crime victims, and has completed a number of restorative justice and policing reports for the Association of Criminal Justice and Research Development. His research focuses on the paradigm of restorative justice and the nature of community within criminal justice discourses. It also focuses on fnancial crime, the nature of deferred prosecutions and the relationship with restorative justice-based principles and procedures. In particular, he is interested in the practical and theoretical nature of the community paradigm. Principally, as part of the Irish based research, a practical community was identifed through geographical community service providers, and volunteer and lay member participation. Furthermore, a newly identifed theoretical ‘meso-community of care,

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Contributors

concern and accountability’ was also identifed within panel case management procedures. This was represented by way of a case-specifc, victim-aware, welfare-themed discourse and rehabilitative and re-integrative principled approach to solving criminal disputes by traditionally macro-level, secondary stakeholders such as police and probation service representatives, and reparation programme actors. Such a welfare-themed, relational response to offending behaviour within this particular ‘meso-community’ was novel in that panel processes did not allow for close friends and family members to attend in support of participating offenders and victims. This has raised issues regarding the working practices of both professional criminal justice actors and community-based agencies within restorative justice models. Axel Palmer, Visiting Lecturer, Bristol Law School, University of the West of England, Bristol Axel Palmer (BSc LLM PhD FRSA FCIB FCIM) has more than 40 years’ experience working in banking and fnance with frst-hand knowledge of the vicissitudes of the economic cycle, including the 1990s recession and the 2008 fnancial crisis. In addition to other roles with a major UK bank, Axel was a head of debt management, dealing with corporate clients facing fnancial diffculties with outcomes ranging across the spectrum of restructuring to insolvency through receivership, administration and liquidation. In this role, Axel was a member of an industry working party advising government on insolvency legislation. Axel was then a head of litigation for the bank’s wholesale banking division, dealing with major UK and international cases to trial in various jurisdictions. Drawing upon his experiences, Axel’s PhD in law from the University of the West of England – Countering Economic Crime – has provided the springboard for further research into fraud, bribery and corruption. Lorenzo Pasculli, Associate Head of Coventry Law School (Research), Associate of the Centre for Financial and Corporate Integrity at Coventry University and Visiting Professor at Nebrija University, Spain Lorenzo is Associate Head of School for Research at Coventry Law School and an associate member of the Centre for Financial and Corporate Integrity (CFCI) at Coventry University, where he is the founding director of the Global Integrity Research Network (www.girnweb.com). Lorenzo is also a visiting professor at Nebrija University in Madrid (Spain) and a sessional lecturer at Imperial College London. His main research interest is the globalisation of crime and justice, with a particular focus on transnational and systemic corruption and the role of science and technology in the globalisation of crime and the law. He has authored many publications, including the award-winning book The Measures of Prevention of International Terrorism and Criminal Traffcking (2012). With Nicholas Ryder, he has co-edited the book Corruption in the Global Era: Causes, Sources and Forms of Manifestation (2019). He is a member of the editorial board of the Journal of Ethics and Legal Technologies (JELT). At Coventry Law School,

Contributors xv Lorenzo teaches, amongst other subject, criminal law, international criminal law and international business law. At Imperial College, he teaches law and professional ethics for science and technology and confict, crime and justice. Prior to his appointment at Coventry University, Lorenzo has been a senior lecturer at Kingston University and an Adjunct Professor at the University of Padua. For his research, he visited many institutions both in the United Kingdom, such as Oxford University and Queen’s University Belfast, and overseas, such as Columbia University (New York), Fordham University (New York), Florida International University (Miami), and Bahçeşehir Üniversitesi (Istanbul). He is a Fellow of the Westminster Abbey Institute and a Fellow of the Royal Society of Arts. Marco Cristiano Petrassi, partner at SZA Law Firm, Milan Dr Marco Cristiano Petrassi is an Italian qualifed lawyer operating in the feld of corporate and commercial law. After having gained a PhD in private law at Università Roma Tre, he gradually moved his professional and academic interests towards commercial and corporate law. As an adjunct professor, he taught international law and business ethics in the Faculty of Economics of the UCSC of Piacenza; he was also instructor of private law in the Faculty of Law of the UCSC of Milan. More recently, he was a member of the group entrusted by the NIBR (Italian Network Business Reporting) to draft the guidelines on the non-fnancial reporting by Italian B-Corps. Currently, he is a partner in the SZA law frm in Milan. Matthias Pirs, Advisor to the Austrian Council for Research and Technology Development Matthias Pirs is a scientifc advisor to the Austrian Council for Research and Technology Development. His current research focuses on the societal and ethical implications of developments from science and new technologies in the course of growing digitization. Prior to this appointment, he has served during the Austrian Presidency of the Council of the European Union. He holds a Master’s in strategic management from the Management Center Innsbruck and a postgraduate Master of Laws from Kingston University London (UK). In addition to his studies, he has been engaged in research revolving around the role of ethics in EU law at the Management Center Innsbruck and has been a member of the Integrity Research Group at Kingston University London (UK). As of 2019, he has been appointed as a member of the Global Integrity Research Network at Coventry University (UK). Debora Provolo, Researcher, University of Padua Debora Provolo is a researcher (Ricercatrice) in Criminal Law (qualifed to perform the functions of associate professor) at the University of Padua (Italy), where she criminal law and economics and criminology and criminal policy and where she has also taught criminal law in the Digital Forensics module. She holds a doctorate in legal sciences: Italian and comparative criminal law, awarded by the

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Contributors

University of Turin in 2006. She is a member of the editorial board of the Padova University Press’s series JusQuid; she is also a member of the editorial boards of the journal Responsabilità Medica. Diritto e Pratica Clinica and of the Journal of Ethics and Legal Technologies (JELT). She has authored many publications, including the monograph L’Identità Genetica nella Tutela Penale della Privacy e contro la Discriminazione [Genetic Identity in the Penal Protection of Privacy and against Discrimination] (2018). Her main research interests are fnancial crime law, criminal law and new technologies, privacy and criminal bio-law. She is a member of the Global Integrity Research Network. Nicholas Ryder, Professor in Financial Crime, Bristol Law School, University of the West of England, Bristol Nicholas has been a professor of fnancial crime at the University of the West of England, Bristol since 2013. He previously taught at the University of Glamorgan where he was awarded a PhD. His research has been commissioned by the Economic and Social Research Council (ESRC), LexisNexis Risk Solutions, the City of London Police Force, ICT Wilmington Risk & Compliance, the France Telecom Group and the European Social Fund. Between 2015 and 2018, he was the Co-I for the Centre for Research and Evidence on Security Threats. His main research interests are in fnancial crime (especially money laundering, market manipulation and terrorism fnancing) and he has published widely in these areas. He is the co-author of Market Manipulation and Insider Trading: Regulatory Challenges in the United States of America, the European Union and the United Kingdom (2019); The Financial War on Terror: A Review of Counterterrorist Financing Strategies since 2001 (2015); The Financial Crisis and White Collar Crime: The Perfect Storm? (2014); Money Laundering an Endless Cycle? A Comparative Analysis of the Anti-Money Laundering Policies in the USA, UK, Australia and Canada (2012) and Financial Crime in the 21st Century: Law and Policy (2011). He is the co-editor of Corruption in the Global Era: Causes, Sources and Forms of Manifestation (2019); editor of The Financial Crisis and White Collar Crime: Legislative and Policy Responses (2017); Fighting Financial Crime in the Global Economic Crisis: Policy, Trends and Sanctions (2014) and editor of White Collar Crime and Risk: Financial Crime, Corruption and the Financial Crisis (2018). He is also the co-author of The Law Relating to Financial Crime in the United Kingdom (2016) and Commercial Law: Principles and Policy (2012). He is the series founder and editor for Routledge’s The Law of Financial Crime and has published numerous scholarly articles on fnancial crime. He is an invited contributor to symposia at the Law Commission; Royal United Services Institute for Defence and Security Studies; PWC, UK Finance, European Society of Criminology, Chartered Institute of Internal Auditors, Chartered Institute of Institutional Auditors Fraud and Forensics, the Wales Fraud Forum, the Centre for European Legal Studies, the Bar Association of Commerce, Finance and Industry and the Institute of Advanced Legal Studies. He has been asked to consult on numerous fnancial crime matters for the media including Bloomberg News, the BBC, CNBC, the Sunday Times and the Wall Street Journal. In terms

Contributors xvii of subject areas, he teaches fnancial crime and regulation (LLB) and international fnancial crime (LLMs). He is a member of the University’s Academic Board, the Honorary Degrees Committee, Chair of the Law Schools Research Committee, head of the Global Crime, Justice and Security Research Group and the Head of Research in Bristol Law School. He is also the director of the Financial Crime Research Network at the University of the West of England and a member of the Global Integrity Research Network. Julien Topal (PhD), Consultant at RE|THINK|ACT and Governance& Integrity Julien Topal is a philosopher who seeks to help (public) organizations to improve on their ethical decision-making, moral learning, integrity risk prevention and, more broadly, organisational integrity. He is owner of RE|THINK|ACT and co-director of the Belgian branch Governance & Integrity, an international boutique frm specializing in developing integrity systems within organizations. Julien holds a PhD from the European University Institute in Florence, Italy, and worked at a range of academic institutions before turning to consultancy. In his spare time, he writes articles, most particularly on the intersection of moral learning and behavioral ethics. Umut Turksen, Professor in Law and Deputy Director of the Centre for Financial and Corporate Integrity, Coventry University Umut Turksen is interested in the practical application of the law in innovation, societal security and development. He has published several articles and books on fnancial crime, whistle-blower protection and international arbitration. He has provided consultancy and training to prestigious international businesses and government projects. These include technical assistance programmes to multinational corporations (e.g. France Telecom, Orange, Equas Ltd, Wilmington Plc.) and international organisations (e.g. Commonwealth Environmental Investment Forum, NATO, EUROPOL), professional development training to lawyers and to EU-funded projects (e.g. CEPOL, Securities, MUTRAP III, PROTAX). Prof Turksen is currently leading an EU H2020 project, PROTAX (www.protax-project.eu), which aims to provide solutions for the prevention and prosecution of tax crimes. He is also an advisor to the H2020 project, COFFERS, which aims to address defciencies and opportunities for upgrading in tax law, tax policy development, tax administration and enforcement at the EU level and across member states. He can be contacted at: [email protected].

Part I

Introduction

1

The global anticorruption framework Lights, shadows and prospects Lorenzo Pasculli and Nicholas Ryder

Where were we? Our previous book, Corruption in the Global Era (Pasculli and Ryder, 2019a), aimed at improving our understanding of the global causes, means, forms of perpetration and effects of corruption through an interdisciplinary dialogue between academics and practitioners, taking advantage also of the partnership between the Financial Crime Research Network (FCRN) at the University of the West of England and the Global Integrity Research Network (GIRN) at the Centre for Financial and Corporate Integrity (CFCI) of Coventry University. This volume complements those studies by focusing on global and local regulatory responses to corruption. It is not a handbook or a commentary, but a research book aimed at advancing the still limited assessment of the effectiveness of anti-corruption laws (cf. Isenring, Chapter 14) and enriching the scarce British literature on corruption and fnancial crime (cf. Ryder, 2018a: p. 247). Many of the authors are practitioners and the approach is still interdisciplinary: different felds of the law (criminal law, tax law, European law, corporate law, competition law), and issues in ethics, criminology, restorative justice, governance and political philosophy are covered. The perspective is international and comparative. The book explores not only international regulations but also their implementation in different countries, such as the United Kingdom (UK), the United States (US), Italy, Switzerland, Luxembourg and Nigeria. This chapter brings together the fndings of this book and formulates recommendations for future policies and research. One of its purposes is precisely to coordinate such fndings with those of our previous research. Therefore, remands to our own works are not self-congratulatory but necessary to avoid reiterating arguments and references already expressed elsewhere. In the frst section of this chapter, we will outline the sources of the current global anti-corruption framework and their limits. In the second section, we will illustrate the shortcomings of negative anti-corruption measures, while in the third, we will analyse positive measures. In the fourth section, we will articulate some recommendations. Finally, we will draw our conclusions.

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The global anti-corruption framework and its sources National and international anti-corruption laws and agencies are not yet integrated into a proper global system. Some distinctive common features concerning both the sources and the contents of such laws and agencies allow us to defne them as a global anti-corruption framework (cf. Harris, 2018). To cope with the transnationality of corrupt practices (Pasculli and Ryder, 2019b: pp. 7–10), the global anti-corruption framework largely relies on the mechanisms of harmonisation and cooperation. Many international and regional conventions,1 now largely harmonised and superseded by the United Nations (UN) Convention against Corruption (UNCAC),2 and soft law instruments oblige or encourage member states to adopt increasingly uniform anti-corruption measures (cf. Di Bitonto and Galluccio Mezio, Chapter 2, in this book; Provolo, Chapter 4; Bradshaw, Chapter 8; Lui and Turksen, Chapter 9; Lui and Turksen, Chapter 10). The transversality of transnational corruption (Pasculli and Ryder, 2019b: p. 10) suggests to include within the anti-corruption framework also instruments that, while not directly related to corruption, regulate sectors exposed to corrupt practices or forms of criminality connected to corruption offences, such as the OECD Common Reporting Standard (OECD, 2018: see Blanco and Arjona Sanchez, Chapter 11), the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters3 (MacLennan, Chapter 12), the EU Parliament Resolutions on Corporate Social Responsibility4 and the EU Directive on the disclosure of non-fnancial information5 (Petrassi, Chapter 13).

1 Notably, the OECD Convention on Combating Bribery of Foreign Public Offcials in International Business Transactions adopted by the Negotiating Conference on 21 November 1997; the African Union Convention on Preventing and Combating Corruption adopted by the Heads of State and Government of the African Union on 12 July 2003; the Arab AntiCorruption Convention adopted by the League of Arab States on 21 December 2010; the Inter-American Convention against Corruption adopted by the Organization of American States on 29 March 1996; the Convention on the Fight against Corruption involving Offcials of the European Communities or Offcials of Member States of the EU Adopted by the Council of the European Union on 26 May 1997 [1997] OJ C195/1; the Council of Europe Criminal Law Convention and Civil Law Convention on Corruption, respectively adopted by the Committee of Ministers on 27 January 1999 (ETS No. 173) and on 4 November 1999 (ETS No. 174). 2 Adopted with General Assembly resolution 58/4 of 31 October 2003. 3 Developed jointly by the OECD and the Council of Europe in 1988 and amended by a new Protocol in 2010. Available at: https://dx.doi.org/10.1787/9789264115606-en [Accessed 17 August 2019]. 4 European Parliament resolution of 6 February 2013 on corporate social responsibility: accountable, transparent and responsible business behaviour and sustainable growth (2012/2098(INI)) [2016] OJ C24/28 and European Parliament resolution of 6 February 2013 on Corporate Social Responsibility: promoting society’s interests and a route to sustainable and inclusive recovery (2012/2097(INI)) [2016] OJ C24/33. 5 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-fnancial and diversity information by certain large undertakings and groups. Text with EEA relevance [2014] OJ L330/1.

The global anti-corruption framework 5 Leaving the ultimate implementation of anti-corruption measures to nationstates, through the mechanisms of harmonisation and cooperation, does not allow to appropriately address the truly global causes and forms of manifestation of corruption. International anti-corruption instruments are often too generic to have a real impact (Di Bitonto and Galluccio Mezio, Chapter 2). For example, the vagueness of the UNCAC’s provisions on whistle-blowing6 allows states like Switzerland to refrain from implementing adequate regulatory protections (Lui and Turksen, Chapter 9). The fragmentariness and multiplication of anti-corruption instruments hinder interpretation and implementation (Di Bitonto and Galluccio Mezio, Chapter 2). Moreover, different states fulfl obligations of harmonisation and cooperation differently. Some states may lack resources and capacity, as it happens in many developing economies, such as Nigeria (cf. Lui and Apampa, Chapter 10). Others may lack the political will to implement anti-corruption measures that frustrate national interests (or those of governing elites). The reluctance of Switzerland and Luxemburg to accept international standards on tax transparency and whistleblowing is an example (Blanco and Arjona Sanchez, Chapter 11; Lui and Turksen, Chapter 9). Some states may even refuse to become a party to an international instrument or they might withdraw from it, with an impact on anti-corruption – as in the case of Brexit (cf. Pasculli, 2019a and 2019b).

Negative measures The contents of the global anti-corruption framework can be divided into negative and positive measures (cf. Pasculli, 2012). Negative measures aim to prevent and respond to corruption by restricting the rights and liberties of individuals and entities (e.g. criminal law and international sanctions). Positive measures aim to resolve the causes of corruption by promoting values of integrity through a range of initiatives to support individuals and organisations in the fair and lawful pursuit of their rights and interests and in the development of virtuous practices (e.g. codes of conduct, corporate social responsibility, education, training and information). The studies in this book reveal that the anti-corruption framework is unbalanced towards negative measures and that these are ineffective and insuffcient. Negative measures can have, at best, retributive or deterrent effects, but they can never resolve the cultural, socio-psychological and political causes of corruption, as identifed in our previous studies (Pasculli and Ryder, 2019a, 2019b; Pasculli, 2019b).

Criminal law: the escape from punishment As a social phenomenon, corruption goes beyond criminal conduct and covers also illegal or merely unethical behaviours (cf. Topal, Chapter 15; Pasculli and Ryder, 2019b; Ellis and Whyte, 2016; Whyte, 2015; Beetham, 2015), such

6 Article 33.

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as, for instance, tax avoidance (cf. Blanco and Arjona Sanchez, Chapter 11 and MacLennan, Chapter 12). Nevertheless, as international conventions defne corruption as a set of criminal offences,7 criminal law occupies a prominent place in anti-corruption (cf. Di Bitonto and Galluccio Mezio, Chapter 2; Johnson, Chapter 3; Provolo, Chapter 4). The fndings of our studies confrm that traditional national criminal justice is incapable to both retribute and prevent transnational corruption. First, criminal law and justice remain essentially local. Defnitions of corruption offences vary from state to state and even internally the complexity of corrupt behaviours may mislead prosecutors in identifying the most appropriate offence (Johnson, Chapter 3). Territorial jurisdictional limits make the investigation of transnational crime and the apprehension and prosecution of transnational offenders very diffcult (cf. Fouladvand, Chapter 5; Di Bitonto and Galluccio Mezio, Chapter 2). Second, corruption is committed in such secrecy that it is often very hard for state authorities to even detect it unless whistle-blowers or companies report misconduct (Lui and Apampa, Chapter 10; Lui and Turksen, Chapter 9). Third, many corruption offences are committed or orchestrated by corporations. The obligation set by UNCAC8 to establish the liability of legal persons for corruption offences helped overcome the anachronistic principle societas delinquere et puniri non potest (Di Bitonto and Galluccio Mezio, Chapter 2; Provolo, Chapter 4), but the prosecution of corporations is still hindered by ‘almost insurmountable’ diffculties (Fouladvand, Chapter 5), such as impervious evidence-gathering; ineffective sentencing or social collateral damages; the risk of relocation of companies with consequent loss of employment and tax revenues (see Fouladvand and Palmer, Chapters 5 and 6). Deferred prosecution agreements (DPAs) adopted by states such as the US, the UK, Australia, Canada and Argentina to respond to such diffculties and improve corporate compliance and minimise future crime risks (Fouladvand, Chapter 5; Palmer, Chapter 6, McStravick, Chapter 7) are still highly problematic (cf. Grasso, 2016: p. 396; Ryder, 2018a: p. 250). DPAs can become a way for corporations to ‘buy their way out of prosecution’ (Fouladvand, Chapter 5), thus frustrating justice (cf. Palmer, Chapter 6), retribution and deterrence (Ryder, 2018a: p. 262). The risk is that DPAs turn into an easy institutionalised escape from punishment. Such an escape becomes absolute when the abdication to corporate prosecution is not compensated by the prosecution of individual offenders (employees, managers or executives). National authorities are often incapable or reluctant to prosecute the executives responsible for fnancial crimes (Fouladvand, Chapter 5; Ryder, 2018a), not only because of the shortcomings of national criminal justice (Palmer, Chapter 6), but also because dubious political considerations, well exemplifed by the full pardon granted by the US President Donald Trump to Conrad Black (Fouladvand, Chapter 5).

7 Cf. UNCAC, articles 15 to 25. 8 Article 26.

The global anti-corruption framework 7

Sanctions: the escape from criminal law An almost opposite reaction to the ineffectiveness of national criminal justice is the imposition of restrictive sanctions – such as asset freeze or travel bans – on targeted individuals or organisations involved in transnational grand corruption (Pasculli, 2019a: p. 218; Bradshaw, Chapter 8). Sanctions are imposed by international organisations such as the UN (Pasculli, 2012) or the WTO (cf. Manacorda and Grasso, 2018; Grasso, 2019a) and by states, either in implementation of international obligations or autonomously (Bradshaw, Chapter 8; cf. also Smith and Dawson, 2018). Despite their contents are analogous to criminal sentences, sanctions do not comply with principles and safeguards of criminal law and justice, international human rights law, and the rule of law (cf. Bradshaw, Chapter 8; Pasculli, 2019a: p. 219). They can become, therefore, a shortcut to ‘punish’ transnational offenders when gathering evidence and bringing them to trial would be impossible or to pre-emptively neutralise individuals deemed to be somehow dangerous (amplius, Pasculli, 2012). The escape from the constraints of criminal law, however, is not a guarantee of effectiveness (cf. Ryder, 2018b and 2015; Pasculli, 2015): research suggests not only that sanctions have a minimal deterrent effect, but also that they can unintendedly increase corruption (Biersteker et al., 2013; Kamali et al., 2016).

Positive measures: the limits of responsibilisation The international anti-corruption framework does promote the harmonisation of various positive measures. The UNCAC dedicates an entire chapter9 to a broad range of policies to promote the principles of the rule of law, societal participation, proper management of public affairs and property, integrity, transparency and accountability.10 The EU has also become more proactive in obliging member states to adopt measures to prevent corruption and fnancial crimes (cf. Ryder, 2012: pp. 32–35; Petrassi, Chapter 13). As a result, many states – such as, for instance, Italy (Provolo, Chapter 4) – have started adopting positive measures. The positive prevention of corruption (and fnancial crime in general: Ryder et al., 2014) largely relies on the ‘responsibilisation’ of corporations and nonstate organisations through the imposition of duties to control corruption risks (Fouladvand, Chapter 5). These even include the duty to prevent bribery (Fouladvand, Chapter 5, with regard to the UK) or other criminal offences (cf. Di Bitonto and Galluccio Mezio, Chapter 2, with regard to Italy). Codes of conducts11 are one of the most popular positive measures adopted by private frms (cf. Isenring, Chapter 14) and national institutions (cf. Provolo, Chapter 4; Petrassi, Chapter 13; Lui and Apampa, Chapter 10). A distinctive feature of the positive

9

Chapter II, ‘Preventive Measures’, which acts as a counterpoint to Chapter III, ‘Criminalization and Law Enforcement’. 10 Article 5. 11 Articles 8 and 12(2)(a).

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anti-corruption model is the role attributed to information as a means to promote integrity. The need to increase corporate transparency is causing an expansion of business reporting obligations beyond mere fnancial reporting. The best example is the European Directive 2014/95/EU, which requires large public-interest companies to release a non-fnancial statement containing information on their development, performance, position and the impact of their activity on environmental, social and employee matters, human rights and corruption (cf. Petrassi, Chapter 13). Information is also crucial to prevent tax avoidance and evasion. International instruments such as bilateral agreements, the OECD Common Reporting Standard (OECD, 2018) and the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters set obligations on tax information exchange (Blanco and Arjona Sanchez, Chapter 11; MacLennan, Chapter 12). Another important issue regarding information is whistle-blowing. The UNCAC12 requires state parties to ‘consider’ adopting measures to protect whistle-blowers and the European Parliament has recently adopted a legislative resolution on the proposal for a detailed directive on whistle-blowing.13 Unfortunately, corporate compliance with corruption control duties is still limited, as demonstrated by Isenring’s empirical fndings (Chapter 14). This might depend either on the lack of suffciently stringent legal obligations or on ineffective enforcement due to inadequate sanctions and controls (an example of which is the above-mentioned shortcomings of national criminal justice). Moreover, corporate responsibilisation is not enough. While it can help remove motivations and opportunities of corruption (so-called proximate causes: Pasculli, forthcoming 2020), an intervention on the deepest socio-economic causes of corruption (so-called remote causes: ibid.) is also required. With many such causes rooted in global developments (Ryder and Pasculli, 2019b), it might be diffcult, if not impossible for individual states to intervene effectively. Even serious national efforts can be undermined by countervailing global fnancial, regulatory, commercial trends initiated by multinational corporations and media.

Looking forward: critique and recommendations The global anti-corruption framework suffers from the same paradox of any other international regulation against global crime: despite the causes and forms of manifestation of such crime depend on global developments, there are no truly global institutions capable of controlling them. Instead, the ultimate implementation of anti-corruption measures is still left to nation-states, through the

12 Article 33. 13 European Parliament legislative resolution of 16 April 2019 on the proposal for a directive of the European Parliament and of the Council on the protection of persons reporting on breaches of Union law (COM[2018]0218 – C8-0159/2018 – 2018/0106[COD]). P8_TA-PROV(2019)0366 Protection of persons reporting on breaches of Union law ***I. Available at: http://www.europarl.europa.eu/doceo/document/TA-8-2019-0366_EN.ht ml [Accessed 21 August 2019].

The global anti-corruption framework 9 mechanisms of harmonisation and cooperation. But states are physiologically unable to punish corporations and individuals and resolve the global causes of corruption. The ideal solution would be the establishment of a global system of crime prevention and criminal justice with its own enforcement and prevention agencies. Unfortunately, the jealous preservation of the axiom of national sovereignty, recently exasperated by rampant nationalism and populism, prevents this from being a viable solution in the short term. Nevertheless, the globalisation of law and justice does not have to (and cannot) happen by suddenly stripping unwilling states of their sovereignty and imposing global institutions on them. In fact, such globalisation is already happening through the slow but inexorable evolution of familiar devices, such as harmonisation, cooperation and soft-law (cf. Twining, 2009; Walker, 2014 and 2017; Ziccardi Capaldo, 2016). In the short term, it is necessary to facilitate and coordinate such evolution to achieve, in the long term, the transformation of international law into a proper global system of law and justice.

Strengthening harmonisation, cooperation and judicial globalisation The studies in this book prove that, despite their limits, harmonisation and cooperation are producing signifcant regulatory changes worldwide. However, a substantial rationalisation and systematisation of international anti-corruption sources and agencies should be carried out urgently, to avoid duplications and ambiguities. Obligations of harmonisation and cooperation, especially concerning positive measures, should be more extensive and precise. A reform of the UNCAC is advisable. Better and more comprehensive mechanisms to monitor and enforce the national implementation of international anti-corruption law must be in place. International organisations should promote any initiative – from conferences to visiting and exchange programmes – to facilitate the global circulation of judicial practices (so-called ‘judicial globalisation’: Slaughter, 2000 and 2004: pp. 66–103; Flaherty, 2006; Pasculli, 2012: pp. 156–158).

Towards a globally harmonised system of positive prevention Current positive measures mostly address the proximate causes of corruption but neglect remote ones. Amongst these, anomie plays a central role (Durkheim, 1897; Passas, 2000; Pasculli and Ryder, 2019b). Corruption is rooted in the unrestrained desires for fnancial gain, social status and material success nurtured by neoliberal discourses, which states systematically fail either to control or to satisfy by providing legitimate means to achieve them. This creates socio-psychological strains that encourage individuals to engage in corrupt behaviours to pursue their private gain (cf. Pasculli and Ryder, 2019b: pp. 15–16; Pasculli, 2019b). In the lack of a ‘global government’ to address such issues directly, various initiatives can be adopted at international and national levels. The harmonisation of positive measures initiated by the UNCAC must continue and expand, so as to address also the remote causes of corruption relying on ongoing research which should be specifcally

10 Lorenzo Pasculli and Nicholas Ryder commissioned by international organisations. More effort should be made to remove inequality within and between states and to understand and intervene on the links between corruption and economic development, human rights, democratisation and citizen empowerment. It is also necessary to curb unrealistic expectations determined by excessive cultural stress on materialistic goals. This requires a profound international refection on and harmonisation of the ethical values upon which the globalising law should be founded. The gradual ‘ethicalisation’ of the EU law (Frischhut, 2019), also fostered by the work of the European Group on Ethics in Science and New Technologies (Frischhut and Pirs, Chapter 16), might provide a model for analogous processes at a global level. States and international institutions should actively promote alternative cultural goals of self-achievement based on the ultimate, fundamental value of the human person, such as human rights and liberties and the values that are instrumental to protect them, such as integrity, transparency, accountability, legality, solidarity, sustainability, inclusivity, etc. This should be achieved primarily through education, training and information campaigns. In this respect, traditional ethical training might be not enough. Building on previous research (Topal, 2017; Pasculli, 2019a), Topal (Chapter 15) suggests installing moral learning processes within governmental organisations (but the suggestion could be expanded to corporate entities) to improve the way individuals cope with ethical dissonances and prevent self-justifcations which can lead to the normalisation of corrupt practices (Topal, Chapter 15; Pasculli and Ryder, 2019b: p. 14). It is also worth exploring the effectiveness of positive sanctions (Pasculli, 2019a: p. 225) to reward lawful behaviour and promote ethical values, rather than merely protecting them. Financial rewards can be problematic as they might nurture anomic strains, but there are many valid alternatives, such as individual or organisational accolades in recognition of honest practice, whitelists of virtuous companies (cf. Grasso, 2019b), and scoring mechanisms to assess the integrity of employees for appraisal and promotion.

Reforming criminal law and international sanctions Until a global criminal justice system will emerge, it is essential to restore the certainty of punishment. A better international harmonisation of rules and principles of prosecution and sentencing of corporations and individuals responsible for corporate crimes is required (cf. Di Bitonto and Galluccio Mezio, Chapter 2). International law should orient prosecutorial discretion in cases of serious fnancial crimes to prevent impunity motivated by personal or political convenience and provide common criteria for resorting to DPAs and guidance on their possible contents so as to maximise their restorative and responsibilising effects (cf. McStravick, Chapter 7). An international refection on sentencing is also required to prevent convictions from becoming purely symbolic statements with no substantial impact on the offenders, be their corporations or individuals. International law should also defne the relationship between criminal punishment of corporations and regulatory/administrative sanctions to avoid unfair duplication of penalties (ne bis in idem).

The global anti-corruption framework 11 International sanctions should be used as a temporary, emergency and last resort measure to avoid military intervention and prevent imminent conficts or gross human right violations (which might well include forms of global criminality). They should always comply with the basic safeguards of fundamental individual rights and liberties – according to the principles stated by the European Court of Justice in the famous Kadi cases.14 In any case, their employment against global crime should be acknowledged as a transitional measure until a global system of criminal justice is established, and should never become an excuse for states to neglect the duty to improve their criminal justice systems (cf. Bradshaw, Chapter 8) or to cooperate with other countries in criminal matters.

Conclusions The study of corruption as a global crime and the assessment of the current global anti-corruption framework reveal that radical paradigm shifts are required. It is necessary to rethink corruption as a phenomenon that goes beyond mere criminality and is rooted in developments that go well beyond the individual and the state. It is necessary to rethink criminal law. National criminal justice is ineffective, punishment is insuffcient. Research and broad social interventions, harmonised and coordinated at an international level, are required to promote the cultural and societal conditions for integrity and legality. It is necessary to rethink the current structures of politics and power (cf. MacLennan, Chapter 12) and, particularly, the dogma of national sovereignty and, as a consequence, the role and discretion of nation-states in the fght against global corruption. But, most of all, it is necessary to rethink the values upon which we are founding our globalising societies. More generally, the study of global corruption reveals how antiquated and dysfunctional the traditional paradigms of law and power can be in dealing with global issues, even beyond corruption. Fresh new approaches, based on scientifc evidence and research, are necessary to reshape old legal categories and frameworks into the tools of the slow, quiet but inexorable globalisation of criminal law and justice. Researchers from all over the world can play a major role in this. And they should.

References Beetham, D. (2015). Moving beyond a narrow defnition of corruption. In: D. Whyte, ed., How Corrupt is Britain. London: Pluto Press, pp. 41–46. Biersteker, T., Eckert, S.E., Tourinho, M. & Hudáková, Z. (2013). The Effectiveness of the United Nations Targeted Sanctions: Findings from the Targeted Sanctions Consortium (TSC). Geneva: TSC. Available from: https://repository.graduateins

14 Joined cases C-402/05 P and C-415/05 P Yassin Abdullah Kadi and Al Barakaat International Foundation v Council of the European Union and Commission of the European Communities [2008] ECR I-06351 and the joined cases C-584/10 P, C-593/10 P and C-595/10 P European Commission and Others v Yassin Abdullah Kadi [2013] ECLI:EU:C:2013:518.

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titute.ch/record/287976/fles/effectiveness_TCS_nov_2013.pdf [Accessed 19th August 2019]. Durkheim, É. (2002, frst publ. 1897). Suicide: A Study in Sociology. Transl. by Spaulding, J.A. and Simpson, G.A. London and New York: Routledge. Ellis, D. & Whyte, D. (2016). Redefning Corruption: Public Attitudes to the Relationship between Government and Business. Centre for Crime and Justice Studies Briefng, p. 15. Available from: www.crimeandjustice.org.uk/publicat ions/redefning-corruption [Accessed 19th August 2019]. Flaherty, M.S. (2006). Judicial globalization in the service of self-government. Ethics & International Affairs, 20, pp. 477–503. Frischhut, M. (2019). The Ethical Spirit of EU Law. Cham: Springer. 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. Grasso, C. (2019a). Corruption in World Bank-fnanced development projects: a phenomenon-focused examination. In: L. Pasculli & N. Ryder, eds., Corruption in the Global Era: Causes, Sources and Forms of Manifestation. Abingdon: Routledge, pp. 258–276. Grasso, C. (2019b). Anti-corruption corporate white list: a further step towards the establishment of good corporate citizenship? The Corporate Social Responsibility and Business Ethics Blog. Available from: https://corporatesocialresponsibilityblo g.com/2019/08/05/white-list/ [Accessed 16th September 2019]. Harris, H. (2018). The Global Anti-Corruption Regime: The Case of Papua New Guinea. Abingdon: Routledge. Kamali, T., Mashayekh, M. & Jandagh, G. (2016). The impact of economic sanctions on corruption in target countries: a cross country study. World Scientifc News, 45(2), pp. 276–291. Available from: www.worldscientifcnews.com [Accessed 19th August 2019]. Manacorda, S. & Grasso, C. (2018). Fighting Fraud and Corruption at the World Bank: A Critical Analysis of the Sanctions System. Cham: Springer. OECD. (2018). Standard for Automatic Exchange of Financial Information in Tax Matters: Implementation Handbook. Paris: OECD. Available from: https ://www.oecd.org/tax/exchange-of-tax-information/implementation-handboo k-standard-for-automatic-exchange-of-fnancial-information-in-tax-matters.pdf [Accessed 15th August 2019]. Pasculli, L. (2012). Le Misure di Prevenzione del Terrorismo e dei Traffci 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 fnale sull’emerso diritto della prevenzione criminale negative. In: S. Bonini, L. Busatta, & I. Marchi, eds., L’eccezione nel diritto. Trento: Editoriale Scientifca, pp. 319–360. Pasculli, L. (2019a). Brexit, integrity and corruption: local and global challenges. In: L. Pasculli & N. Ryder, eds., Corruption in the Global Era: Causes, Sources and Forms of Manifestation. Abingdon: Routledge, pp. 212–232. Pasculli, L. (2019b). Seeds of systemic corruption in the post-Brexit UK. Journal of Financial Crime, 26(3), pp. 705–718. Pasculli, L. (forthcoming 2020). Foreign investments, the rule of corrupted law and transnational systemic corruption in Uganda’s mineral sector. In: R. Leal-Arcas & J. Wouters, eds., Trade, Investment and the Rule of Law. London: Edward Elgar.

The global anti-corruption framework 13 Pasculli, L. & Ryder, N. (eds.) (2019a). Corruption in the Global Era: Causes, Sources and Forms of Manifestation. Abingdon: Routledge. Pasculli, L. & Ryder, N. (2019b). Corruption and globalisation. Towards an interdisciplinary scientifc understanding of corruption as a global crime. In: L. Pasculli & N. Ryder, eds. Corruption in the Global Era: Causes, Sources and Forms of Manifestation. Abingdon: Routledge, pp. 3–23. Passas, N. (2000). Global anomie, dysnomie, and economic crime: hidden consequences of neoliberalism and globalization in Russia and around the world. Social Justice, 27(2), pp. 16–44. Ryder, N. (2012). Money Laundering: An Endless Cycle? A Comparative Analysis of the Anti-Money Laundering Policies in the United States of America, the United Kingdom, Australia and Canada. Abingdon: Routledge. Ryder, N. (2015). The Financial War on Terrorism: A Review of Counter-Terrorist Financing Strategies Since 2001. Abingdon: Routledge. Ryder, N. (2018a). ‘Too scared to prosecute and too scared to jail?’ A critical and comparative analysis of enforcement of fnancial crime legislation against corporations in the USA and the UK. The Journal of Criminal Law, 82(3), pp. 245–263. Ryder, N. (2018b). Out with the old and… in with the old? A critical review of the fnancial war on terrorism on the Islamic State of Iraq and Levant. Studies in Confict & Terrorism, 41(2), pp. 79–95. Ryder, N., Turksen, U. & Hassler, S. (eds.) (2014). Fighting Financial Crime in the Global Economic Crisis. Abingdon: Routledge. Slaughter, A.M. (2000). Judicial globalization. Virginia Journal of International Law, 40(4), pp. 1103–1124. Slaughter, A.M. (2004). A New World Order. Princeton: Princeton University Press. Smith, B. & Dawson, J. (2018). Magnitsky legislation. Briefng Paper. No. 16, July 2018. Topal, J. (2017). Installing a moral learning process: integrity beyond traditional ethics training. Integrity in Brief Series. Available from: https://www.law.colu mbia.edu/sites/default/files/microsites/public-integrity/installing_a_moral _learning_process.pdf [Accessed 8th October 2019]. Twining, W. (2009). General Jurisprudence: Understanding Law from a Global Perspective. Cambridge: Cambridge University Press. Walker, N. (2014). Intimations of Global Law. Cambridge: Cambridge University Press. Walker, N. (2017). The shaping of global law. Transnational Legal Theory, 8(3), pp. 360–370. Whyte, D. (2015). Introduction: a very British corruption. In: D. Whyte, ed., How Corrupt is Britain. London: Pluto Press, pp. 1–37. Ziccardi Capaldo, G. (2016). The Pillars of Global Law. London and New York, Routledge.

Part II

Criminal justice: international and national frameworks

2

The fght against international corruption A call for a global approach in corporate criminal liability law and procedure Maria Lucia Di Bitonto1 and Gaetano Galluccio Mezio2

Introduction: The need for a global approach in corporate criminal liability law The fght against internal and international corruption is a fundamental aspect of the political action of countries interested in promoting not only the broadest protection of human rights but also civil, economic and social progress.3 Indeed, there is no doubt that high levels of internal corruption result in malfunctioning democracy and democratic institutions. In particular, the proliferation of corruption, on the one hand, determines a low standard of protection of fundamental rights and freedoms, and, on the other hand, reduces the ability of a legal system to ensure optimal conditions for the development of the capitalist economy (Cantone, 2018). It is apparent that these factors can hinder the progress of the social community and undermine the country’s credibility and competitiveness in the global arena. Jurists, social scientists in general and policymakers of market economy countries unanimously agree on the need to elaborate common policies aimed at combating the phenomenon of international corruption (see Hess and Dunfee, 2000; Del Vecchio and Severino, 2014; Hough, 2017). These policies would work alongside national measures adopted by each legal system to tackle internal

1 Author of paragraphs nos. 1 and 3. 2 Author of paragraphs nos. 2, 4 and 5. 3 As recently observed by the president of the Italian National Anti-Corruption Authority, Mr Raffaele Cantone, during his speech at the Austral University of Buenos Aires, as part of the conference The Criminal Crime to the Phenomenon of Corruption, the World Bank has recently calculated that in corrupt countries a business grows, on average, 25% less than a company operating in a context with low levels of corruption. In this regard, see Cantone, 2018.

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corruption and they would be an essential means to protect international competition and free trade and, ultimately, to foster economic growth and development.4 In light of the globalisation of markets and the ever-increasing integration and fnancialization of economies (as demonstrated by the recent fnancial crisis of 2008–2012), it is undeniable that international corruption is a factor which seriously contributes to distortion of competition between States and companies having a transnational dimension. Competitors operating in the global market tend to emulate each other. This creates a cascade effect which can lead them to overcome (or, if necessary, circumvent) the barriers posed by national regulatory frameworks and to adopt the development models, the company processes and, more generally, the business strategies which are deemed to grant a competitive advantage on the basis of a mere cost-beneft analysis. Competitors emulate such commercial practices or organisational and behavioural models regardless of the fact that their conduct does not strictly comply with the standards established by national legislation or supranational sources of hard and soft law in order to ensure the fair management of economic processes and to limit corrupt practices. Therefore, the issue at hand has undoubtedly an impact not only on international politics and relations between States but also on the governance of economic trends, which are likely to affect the future of individual companies and consumers and to infuence (by directing) the development models of entire business sectors and areas of civil life. When considered as a practice resulting into an unlawful competitive advantage for companies or economic actors operating in the world stage, international corruption is one of the major obstacles to the exercise of individual and economic liberties and political rights, as well as a serious threat to the integrity of the markets, the protection of competition in the global economy and the fair development of free trade. The starting point of the reasoning outlined in this chapter is thus that the main targets of international corruption are the integrity of the competitive mechanism and, in a wider perspective, the proper functioning of the global economy. As a consequence, the purpose of the following refections is to emphasise the urgent

4 The importance of such an approach clearly emerges from the incipit of the OECD Foreign Bribery Report 2014: ‘Corruption, and the perception of corruption, erodes trust in governments, businesses and markets. In the aftermath of the greatest fnancial crisis of our time, we need to rebuild that trust more than ever before. Corruption also undermines growth and development. On the one hand, businesses forego innovation and competitiveness by participating in bribery. On the other hand, individuals within governments divert funds meant for the promotion of the well-being of the people to be used for their own personal gain. By ending impunity and holding corrupt people to account, we can begin to restore faith in our institutions and industries’ (OECD, 2014). In this regard, see Mauro, 1995; Brademas and Heiman, 1998; Carlin et al., 2006; Fisman and Svensson, 2007; Johnson et al., 2011; Shirazi, 2011.

The fght against international corruption 19 need to concentrate all the efforts to fght corruption on establishing a framework of shared rules in the feld of corporate criminal liability. Only such an approach, at least within the context of the democratic countries having a market economy and governed by the rule of law, could actually implement the existing law enforcement tools, as it would increase the possibility for national judicial systems to prosecute and hold large economic organisations with complex structures and operating in international markets responsible for their misconduct. Indeed, it should not be overlooked that these entities, especially those of larger dimensions and those operating in different countries, are the main protagonists of corruption practices in the global arena. It is just because of the leading role played by the earlier-mentioned organisations in the economy that they are most exposed to the risk of being disadvantaged by unfair competitive practices (such as those deriving from the use of corruptive methods by competitors). It follows that they could easily decide to resort to the same expedients, either with a view to flling a competitive gap which might otherwise jeopardise the very existence of their organisation or, in turn, with the aim of gaining advantages that could improve the company’s position in the international market. In other words, the various forms of corruption are mostly carried out within companies, corporations and other legal entities. Therefore, the main reason for the introduction of corporate criminal liability is precisely the need to provide effective means of combating economic crime (Beale, 2009). Indeed, corporate criminal liability changes corporations’ approaches to fghting corruption and promotes a new culture within these complex structures (De Maglie, 2002). One of these is the social antidote to corruption, which consists in spreading best practices in the business community in accordance with criminal law. It is necessary that companies and corporations consider abiding by laws and regulations as the standard way of doing business and corporate criminal liability is a crucial instrument to achieve this goal and compel companies and corporations to become those primarily responsible for combating corruption.

The international conventions against corruption: lights and shadows The transnational dimension of corruption and the need for policies common to the various jurisdictions explain the tendency of the different countries to design at an international level common normative instruments for the strengthening of international judicial cooperation.5

5 In this regard, see Hess and Dunfee, 2000; Mongillo, 2012; Del Vecchio and Severino, 2014; Hough, 2017.

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The result of the examination of the main international conventions is a complex picture made of lights and shadows.6 One of the main positive aspects that must be highlighted is the progressive refnement of a notion of international corruption (taking into account the peculiarity of international law instruments) which is broad enough to include all the most alarming phenomena emerged as a result of criminological studies and the experience of legal practitioners and law enforcement agents (Centonze and Dell’Osso, 2013). In particular, the complex work to accurately defne and select the conducts to be punished deserves appreciation. This process began with the analysis of the criminological constants of the socalled international grand corruption, mainly consisting of the granting of sums of money or other benefts towards, or by, local intermediaries of the corrupting company or foreign subsidiaries (Mongillo, 2016). Crucial efforts have also been made to defne the concept of ‘public offcial’ as the counterpart of the corruptor in the stipulation of the illicit deal in which the crime consists. Leaving aside the aspects strictly related to substantive criminal and international law, it is worth noting that there is a general consensus in the scholarly community that the work done in drafting and stipulating the main international conventions on the subject has managed to establish with suffcient precision and detail the objective pursued by the international law enforcement campaign (Manacorda, 2018). This strategy has also been enhanced by including among the commitments undertaken in the main international instruments the criminalisation of behaviours which, although not directly included within the concept of corruption, are ancillary or instrumental to this unlawful practice, such as money laundering, false accounting, market abuse, fctitious assignment of assets and tax offences.

6 Among the numerous international conventions, special attention should be paid to the following: the Convention against Corruption, adopted by the General Assembly of the United Nations on 31 October 2003 with Resolution n. 58/4 of 31 October 2003 and opened to all parties for signature from 9 to 11 December 2003 in Merida; the OECD Convention on Combating Bribery of Foreign Public Offcials in International Business Transactions, adopted by the negotiating conference on 21 November 1997, the related documents and further recommendation by OECD. With regard to regional conventions, mention should be made of the following texts: the Convention of 26 May 1997 (drawn up on the basis of Article K.3[2][c] of the Treaty on European Union) on the Fight Against Corruption Involving Offcials of the European Communities or Offcials of Member States of the European Union; the Council Framework Decision 2003/568/JHA of 22 July 2003 on Combating Corruption in the Private Sector; the Council Act of 26 July 1995 drawing up the Convention on the Protection of the European Communities’ Financial Interests and further Protocols; the Inter-American Convention Against Corruption adopted on 29 March 1996; the African Union Convention on Preventing and Combating Corruption signed on 11 July 2003. In this regard, see Boswell, 1996, 1997; Posadas, 2000; Henning, 2001; Kubiciel, 2009; Wouters et al., 2013; Del Vecchio and Severino, 2014.

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However, bearing in mind the extreme complexity and variety of the phenomenon, the following aspects are generally considered (at least in countries outside the European Union [EU]) to be the main shortcomings of the currently existing conventions: a somehow abstract wording of the legal provisions; the vagueness of the commitments mutually undertaken by the signatory States; the lack of procedural instruments or of suffciently detailed commitments regarding international judicial cooperation. Moreover, one cannot fail to share the widespread scepticism expressed by many scholars with respect to the proliferation of international conventions on the subject. The overlapping of contents and provisions does not necessarily render global policies against international corruption more incisive or make the repressive actions carried out by national authorities against such forms of transactional crime more effective. In addition to the potential faws outlined earlier, mention should be made of the lack (outside the limited area of countries belonging to the Schengen Treaty and the EU framework) of adequate instruments for the protection of the socalled international ne bis in idem, namely the right of the target (both physical persons and collective bodies) of an indictment in a case of international corruption not to be subjected to multiple proceedings conducted by judicial authorities of different countries regarding the same historical fact. As judicial experience teaches, the risk of a violation of the international ne bis in idem principle seems particularly high, if not even ‘endemic in certain situations, such as the conducting of business through an international joint venture’ (Mongillo, 2016: p. 1328). Despite the underlined weaknesses, there is no doubt that, by drafting and signing the relevant international conventions, those countries (representing some of the largest developed economies in the world) have shown to be aware of the urgent need to fght corruption. In fact, their signing has not only represented a signifcant expression of a precise political will but has also promoted the refnement of the criminal law concepts and notions that are essential to properly frame the phenomenon under consideration. Furthermore, it has stimulated the elaboration of increasingly accurate socio-criminological studies on the subject, often sponsored by primary supranational institutions. In brief, the undertaking of more or less binding international commitments with respect to the implementation of internal regulations is certainly a decisive step forward in the creation of strategies to contain international corruption.

Corporate criminal liability in light of international conventions against corruption and the Italian experience The focus on corporate criminal liability as a key element of the strategy to fght international corruption must be acknowledged as one of the main merits of the drafters of the current international instruments. On the basis of these considerations and of the recent judicial experience, it can be said that this approach has proved to be far-sighted.

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Indeed, international provisions and legal instruments adopted within the EU framework have strongly encouraged the progressive introduction in many Roman-Germanic (or, more generally, civil law) legal systems of different models of corporate liability whereby the responsibility of the corporation depends on the commission of specifc crimes, in its interest or to its advantage, by a corporate agent or an employee in the exercise of business activity (De Maglie, 2005). Commitments made at an international level to adopt joint policies against international corruption have therefore been combined with national instances and academic debates on the need to hold corporations liable for certain crimes committed within the company (Musella, 2013), and have thus contributed to overcoming the traditional, and yet anachronistic, societas delinquere et puniri non potest principle (De Maglie, 2011). The combination of these factors has driven national legislators to take the political initiative to overcome the reluctance rooted in the continental legal tradition and has led to the adoption of innovative models of corporate liability designed to offer judicial authorities more incisive instruments of repression, especially in international corruption practices (Del Vecchio and Severino, 2014). This reform process (favoured by national academic communities even though legislative initiative was triggered by the need to comply with the instruments of international or EU law) has allowed national systems with a stronger continental tradition to develop a system of sanctions essential to fght against those forms of national and international crime which are more closely related to the extremely dynamic economic phenomenon and entrepreneurial reality (Fiorella, 2012). Such an innovation adopted in many criminal justice systems has benefted far more areas than that of international corruption (Gobert and Pascal, 2011). This is what happened in Italy. In this case, the introduction of an innovative and original model of ex crimine responsibility of legal entities (Paolozzi, 2006) was politically motivated (as punctually stated in the Delegating Law of 29 September 2000, No. 300) by the need for Italy to comply with the rules of the European Convention Against Corruption Involving Offcials of the European Communities or of the Member States of the European Union and the OECD Convention Against Corruption of Foreign Public Offcials in International Economic Transactions. Before this legislative initiative, given the personal/individual nature of criminal responsibility (art. 27 of the Italian Constitution), the Italian system categorically excluded that legal entities could commit crimes. The main idea underlying this position was that criminal responsibility must involve a human being, because it requires a psychological connection between the crime and the personal will, a guilty intent, and also because the concept of punishment assumes that the person punished has to suffer the consequences of the criminal act in their body and mind.7 Furthermore, punishing companies has long been seen as a danger

7 In this regard, see the classic essay by Professor John Coffee, ‘No soul to damn: No body to kick’ (Coffee, 1981).

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that could unjustly affect third parties, like shareholders, stockholders or workers, who are often not directly involved in the crimes committed by the partners of the company (Coffee, 1981). In 2001, legislative decree n. 231, 8 June 2001 (henceforth, l.d. n. 231/2001) found those balances unacceptable, and introduced the corporate criminal liability system.8 That decree, indeed, established which legal persons could be held responsible for a crime, which crimes are attributable to them, and which punishments can be applied to them. The frst challenge that the drafters had to face was to make the decree an easily acceptable instrument for the various actors of the legal system (judges, clerks, attorneys, etc.); indeed, crime-related corporate responsibility was called ‘administrative’ (Padovani, 2004), and it was established for a limited range of crimes (i.e., bribery, corruption and fraud). Nevertheless, the carefully chosen liability labelling raised serious doubts as to the juridical nature of such a responsibility. This question has been discussed a great deal, and the debate is still ongoing. The majority of Italian criminal law scholars believe that it is necessary to recognise the criminal nature of this form of responsibility (De Maglie, 2002). Therefore, henceforth, it is preferable to qualify the Italian crime-related model of corporate liability simply as ‘corporate criminal liability’. According to the Joint Sections of the Italian Supreme Court of the Cassation (SS.UU., 24th April 2014, Espenhahn), since the new model of corporate liability introduced by the l.d. n. 231/2001 includes basic principles of both criminal and administrative law, it constitutes a ‘third category’ of liability.9 According to art. 5 of l.d. n. 231/2001, the corporation may be punished only if there is a link between the corporation itself and the person who committed the crime. The mentioned provision establishes what the link consists of and the two objective elements on which it depends. The ratio legis of these links is that corporations can be held responsible because they were not organised enough to prevent their agents from committing crimes (Magliocca, 2016). That said, art. 5, l.d. n. 231/2001 lists two objective elements in corporate criminal liability (Presutti and Bernasconi, 2018). Par. II establishes that only two kinds of employees who commit crimes can determine a company’s liability: (a) the chief executive offcer, directors or general managers; (b) any person under the direction or supervision of the earlier-mentioned individuals. The same paragraph also provides that the corporation can be held responsible only if the crime perpetrated by a corporate agent has been committed in the interest, or to

8 Further readings about the Italian system in Gobert and Mugnai (2002) and De Maglie (2011). 9 Cass. Pen., Sez. Un., 24th April 2014, n. 38343. Cassazione Penale. (2014). 426. With comment by Summerer: La pronuncia delle Sezioni Unite sul caso Thyssen Krupp: Profli di tipicità e colpevolezza al confne tra dolo e colpa (Summerer, 2014).

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the advantage, of the corporation itself. By ‘corporation interest’ the legislator means that the offence must be directed to producing a more favourable condition for the corporation (this requirement can be deemed fulflled only after an ex ante ascertainment). The expression ‘corporation advantage’ implies that the crime must provide a moral or economic objective beneft, potential or material, to the corporation (this element can be considered satisfed only after an ex post ascertainment). Given that corporations can be punished only if they fail to organise themselves in such a way as to prevent the commission of crimes, art. 6 and art. 7, l.d. n. 231/2001, defne the subjective element required to hold the corporation liable, differentiating it with regard to top managers and individuals under their direction or supervision. However, the relevant provisions were drafted according to an original legislative technique. Indeed, when the law draws a distinction among the different subjects, it does not establish when the corporation can be found guilty; rather, it describes what prevents the corporation from being held responsible for the offence committed by its members (Belluta, 2018). In other words, the law describes two different situations which prevent the corporation from being found criminally responsible for offences committed by its agents. These two situations provide two distinct legal exonerating circumstances for the legal entity accused of a crime and they are differently shaped depending on the distinct role of the corporate agent who is suspected of having committed the crime. In particular, there are two rules: one concerns the author of the offence who is a member of corporate top management; another regarding the case in which the author is a person under the direction or the supervision of corporate top management. Generally, in cases of crimes committed by a corporation’s agent, there can be no corporate criminal liability if the corporation adopted and effectively carried out protocols specifcally designed to prevent the commission of the type of criminal offence that occurred. To put it differently, the corporation is not guilty if its organisation has a solid structure – preventing directors, managers and workers from committing crimes – in place (Villani, 2016). The frst kind of subjective element is defned as follows (art. 6, l.d. 231/2001): when the author of a crime is a ‘top manager’ (i.e., director, manager, CEO, etc.), the corporation can be found innocent if it demonstrates that: (1) effective preventive compliance programs have been adopted and applied to prevent crimes; (2) a special control committee, with full supervisory authority, has been set up within the organisation to check and monitor the effciency of compliance programs; (3) the crime was committed because top managers fraudulently evaded the preventive compliance programs; and (4) there was no omission or negligence in controls, checks and audits carried out by the committee. Top management usually expresses corporate policy, so they are fully identifed with the organisation. If a top manager commits a crime, it is likely that the

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organisational structure was not implemented well enough to prevent it. This is the reason why if the top manager is guilty, the corporation is likely to be guilty too. Nevertheless, if the company has fulflled all of the conditions listed earlier, criminal liability can be excluded. The second kind of subjective element is defned as follows (art. 7, l.d. 231/2001): (a) when the author of a crime is an employee who is subject to the direction or the supervision of a top manager, the corporation is guilty only if the crime was committed because a top manager violated his/her duty to direct and supervise the subordinate, and the corporation didn’t adopt, apply or implement compliance programs to prevent the crime; (b) when the author of a crime is a low-level employee, there is no criminal responsibility if the corporation adopted, applied and implemented effective compliance programs to prevent the crime. Regarding crimes committed by both high- and low-level employees, art. 6 and art. 7 of the legislative decree establish that compliance programs must be effective. The effectiveness of a compliance program depends on periodic checks regarding the implementation of the program itself and on the presence of a disciplinary penalty system which punishes workers and managers (both mid- and top level) who don’t observe the organisational protocols established to prevent crimes. A key aspect of corporate criminal responsibility law is that the power to prosecute and punish legal entities has been devolved to criminal courts (Di Bitonto, 2012). It follows that proceedings against corporations and other legal entities are governed by ordinary Italian criminal procedure rules. These rules, though, have been modifed, considering the need to adapt rules designed as part of a procedural system conceived for people to another procedural system destined to be applied to corporations. This aspect strongly supports the view whereby entity liability is a part of the criminal system, representing, in particular, a sub-system within Italian criminal law and procedure. Therefore, this sub-system must be confronted with leading Italian criminal law principles (Belluta, 2018; Renzetti, 2017): the legality principle (the law establishes which legal persons are the object of the 2001 reform, which crimes are attributable to the company and which penalties are to be applied against it); the principle of one’s own liability (that provides punishment against the corporation in relation to its own behaviour and not in relation to actions of others); the principle of culpability (the corporation can only be punished if found culpable and the required culpability consists in the fact that the same corporation was not properly organised to avoid the crime). In order to favour the gradual acceptance of the reform by legal actors within the Italian system and to limit the impact of this new model of responsibility, the decree also provides that only the crimes specifcally listed therein can trigger corporate criminal liability (so-called predicate offences). At its inception, the crime list was very short but included internal and international corruption. Later, various reforms gradually included in the list a wider range of crimes, making it reach a high level of complexity. For example, at present, companies can be held responsible for: fnancial crimes; market abuse; terrorism; mafa crimes;

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fraud involving money, credit cards and revenue stamps; slavery; female genital mutilation [sic]; environmental crimes; involuntary manslaughter; and serious or very serious personal injuries committed in violation of workplace safety laws protecting against personal injury. With regard to punishment, the Italian system includes a strong combination of sanctions that can effectively counteract corporate crimes (Guerrini, 2006). First of all, there are fnancial penalties, whose application is based on a quota system. Moreover, art. 9 l.d. n. 231/2001 envisages different types of penalties, such as debarment and seizure. There are various forms of debarment, such as the prohibition to carry out specifc activities or business, or to contract with public authorities, the suspension or withdrawal of authorisations, licenses or permits and the ban on advertising. Sanctions provided for corporate criminal liability can be applied to corporations temporarily or permanently (if the corporation shows no willingness to comply with the law). In the case of temporarily applied sanctions, the judge has no discretion: once the conditions for their application are satisfed, penalties have to be imposed. However, in the case of permanently applied sanctions, the judge must evaluate whether their application is necessary or not. Instead of imposing the disqualifying sanctions on corporations, if the continuation of the business activity is crucial to ensure law and order or to respond to employment needs or to avoid a serious prejudice to the community or relevant repercussions on employment, the entity’s governance can be taken over by a commissioner. The judge defnes both the duties and the authority of the commissioner, who is responsible for revising the corporation’s organisational structure. The commissioner must also implement adequate compliance programs to prevent crimes from recurring in the future. Even though the path of ex delicto responsibility is certainly still bumpy – mainly due to the lack of preparation and reluctance of some public prosecutor’s offces to trigger the new model of responsibility and, more generally, due to the diffculties in adapting the traditional rules and procedural guarantees to this new procedural context – there is no doubt that the introduction of the legislative decree n. 231/2001 marked a major breakthrough in the recent history of the Italian criminal justice system. Despite the many problems that still need to be addressed or solved, several years since the introduction of the new regulation the Italian judicial authority has fnally acquired intervention tools which are incomparably superior to the pre-existing ones. They can indeed be used not only in internal and international corruption cases but also against all the most alarming crimes usually committed by collective bodies and, therefore, gradually included by the legislator in the catalogue of the offences that can make the entity incur responsibility. As clearly shown by the Italian experience, the political will to intensify the efforts to fght international corruption through compliance with international treaties can prove to be a fundamental factor in stimulating crucial improvements of national criminal justice systems. The force of such a reform process

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can undermine well-established dogmatic positions and encourage rethinking of the traditional criminal law categories in order to best tackle the new challenges posed by contemporary society. These challenges, as is well known, include the spread of transnational criminal phenomena, among which corruption is the most blatant example and, to some extent, even the subtlest category.

Contrasting international corruption through corporate criminal liability: the issues at stake On the basis of what has been illustrated so far, there seems to be no reason to doubt that to make a decisive step forward in the fght against international corruption it is necessary to concentrate on the implementation of the various forms of collective responsibility of companies and other legal entities operating in the frenetic ecosystem of the globalised and interconnected economy. It has already been pointed out that large international corporations are the main actors of the global economy and, therefore, it is most likely that they can easily lay the foundations for the spread (and, depending on size and/or the organisational complexity, for the concealment) of insidious and pervasive corruptive practices. Moreover, it is important to be aware that the imperative objective to improve the standards of transparency and integrity of major international economic operators can reasonably be achieved exclusively by shaping an integrated model of responsibility, along the lines of the most up-to-date forms of corporate criminal liability. This model should tend to involve such macro-structures in the activity of prevention, identifcation and contrast to modern forms of proft crimes and, more broadly, should contribute to promote the culture of legality in carrying out business activities in those organisational contexts. It should not be overlooked that one of the most positive effects of globalisation is the standardisation of organisational criteria and behavioural models common to large enterprises (especially multinational ones). This can undoubtedly encourage a refection on the problematic profles and the exegetical diffculties arising from those criteria and models that would hopefully lead to possible solutions common (at least in part) to the national legal systems in which large economic organisations operate. However, it may at the same time favour the spread of insidious emulation behaviours tending to promote illegal practices. In order to discourage these regrettable phenomena, the earlier-mentioned standardisation therefore requires the elaboration of common international strategies against corruption in large companies, that is to say the creation of a harmonised model of responsibility. This perspective appears even more desirable if considered in light of the carrot and stick approach (De Maglie, 2002), which is typical of the common law system, but is now largely widespread also in the continental area. This approach implies a regulatory strategy based on a conception of the responsibility of the legal entities having the clear purpose of leading the collective body subject to

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proceedings to comply with the relevant laws and regulations as rapidly as possible (namely, within a timeframe that is compatible with the frenetic evolution of the dynamic contemporary economy). Without neglecting the specifcities of single national laws, we can say that this objective is generally pursued from the preliminary investigation phase, through the establishment of a complex mechanism of incentives and sanctions aimed at stimulating self-reporting, cooperation with the investigative authorities and the consequent (even radical) reshaping of the organisation and of the business processes affected by the crime. These steps are spontaneously taken by the investigated corporation or legal person with the purpose to have the charges dropped by the prosecutor or the different public body entitled to the power to waive prosecution, or at least to settle the case at the pre-trial stage. In support of what has just been argued we can recall the interesting (but not exempt from criticism) practice of deferred and non-prosecution agreements, which has largely been adopted overseas (in particular, in the United States of America).10 But, as shown by the Italian situation, the models spread across the European continent seem to pursue the same result (Ceresa-Gastaldo, 2017). In particular, they incentivise the investigated corporation to cooperate with judicial authorities in order to obtain in exchange the possibility to stipulate agreements granting the early defnition of criminal proceedings. The required cooperation of the corporation usually involves the adoption of reparative, restorative and compensatory measures, together with the introduction, the updating or the effective execution of compliance programs (Galluccio Mezio, 2018). As noted earlier, many efforts have already been accomplished by international conventions to defne the criminal law categories needed to fght corruption and, therefore, to identify the criminal misconducts deserving to be punished. Thanks to the signifcant progress made in international forums, the time is ripe to take a step forward that, leaving aside the defnitional issues, aims to render the response to the phenomenon more effective. This objective frstly should be pursued by decisively committing to the implementation (preferably by means of a multilateral approach) of agreements aimed at ensuring judicial and international police cooperation (namely, at ensuring the full functioning of the already existing investigative and repressive instruments). In addition, a serious work should be done towards the progressive harmonisation, above all in the feld of international corruption, of the models of corporate responsibility lying upon crimes committed by their employees or agents in the interest or advantage of the corporation. As shown by the Italian experience, such an approach can rapidly favour the overcoming of outdated ideological schemes and the harmonisation of national legislations. The outlined approach can also promote a stronger joint action to fght against corruption (and, considered with perspective, susceptible to extend

10 In this regard, Barkow and Barkow, 2011; Garrett, 2014, 2015, 2017; Bourjaily, 2015; Arlen and Kahan, 2017.

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29

to other sectors of intervention), as well as provide an opportunity for a thorough rethinking of domestic policies, starting from those on economic crimes. Having established the urgency to take such actions and having recognised that some international conventions already indicate corporate criminal responsibility as a fundamental component of the fght against corruption, it is now paramount to identify the main obstacles preventing the creation of an effcient system of international judicial and police cooperation in this specifc area (Del Vecchio and Severino, 2014). We have preliminarily observed that the fght against international corruption shall pursue concrete results instead of simply reaffrming already developed general principles or concepts. We will discuss three problematic aspects on which a particularly serious refection is needed. Specifcally, reference is made to the need to overcome barriers hindering the full development of best practices in the feld of judicial cooperation and international police, which mainly lie in the controversial criminal nature of the forms of corporate responsibility in different legal systems, especially within continental Europe; the diffcult international enforcement of precautionary measures and sanctions applied to multinational corporations; and the failure to set up systems that are able to ensure the effcient resolution of jurisdictional conficts. However, efforts to improve the effectiveness of judicial cooperation must go hand in hand with an increased protection of the fundamental rights of the collective subjects investigated or prosecuted. The strengthening of safeguards appears all the more necessary in a supranational context where repressive and preventive systems are strongly combined. Also, it should be carefully managed, bearing in mind two key elements: the improvement of the presumption of innocence of the accused entity and the recognition to the corporation prosecuted of the right not to be subjected to multiple proceedings in different countries in relation to the same act of corruption. International law can play a fundamental role in promoting the two outlined paramount guidelines (the removal of obstacles to international cooperation and the enhancement of safeguards), especially in the non-European area.

Some proposals to improve efforts to fght internal and international corruption Once outlined, the prior objective of strengthening international judicial and police cooperation in ascertaining the responsibility of legal persons accused of corruption, it should be noted that to achieve this challenging goal it should frst be clarifed the debated criminal nature of different forms of corporate responsibility. Indeed, as long as it remains controversial whether entity responsibility as envisaged in some European jurisdictions falls under criminal law, it will be hard to ensure the proper functioning of the already existing cooperative instruments or those that will hopefully be adopted to fght against international corruption both within and outside the EU area.

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Therefore, national legislators should be urged to unequivocally defne corporate responsibility as authentically criminal. This would also lead to extend to the legal entities the entire catalogue of rights and essential prerogatives granted by international law to persons subjected to criminal proceedings. As suggested by the Italian experience, reluctance to clearly recognise the criminal nature of the new system of responsibility is deeply rooted in the civil law tradition, which rests upon a strict understanding of the principle of personality of criminal responsibility, which led to the elaboration of the societas delinquere non potest principle. However, there is little doubt that qualifying in terms of criminal responsibility the liability model of corporations for crimes committed to their advantage or in their interest is the most suitable way to address this kind of corporate misconduct. This would also entail the application of criminal procedure rules governing the relations between the various national authorities involved in the investigation of conducts of international corruption, ensuring more effective investigative and police coordination and improved assistance in collecting evidence abroad. In addition, it is essential to create ad hoc instruments of international law granting the execution of precautionary measures and sanctions against legal entities within a justice system different from the one in which they were ordered. The multinational nature of the major organisational realities, which are the main targets of corporate criminal responsibility, requires mechanisms to impose the execution abroad of the entire catalogue of pecuniary sanctions, seizures or interdictory measures provided by different national legislations. It is almost intuitive that the transnational nature of corruption phenomena, especially in the feld of corporate liability, cannot be effciently fought without promoting the international recognition and execution of judicial orders, fnes and seizures. This is an objective that should be considered as an absolute priority, despite the extreme diffculty to ensure such a result in legal systems which, while providing corporate criminal liability, do not envisage incapacitating measures similar to those designed by the Italian law and by other Western countries. Setting up appropriate methods to prevent conficts of jurisdiction is another important step towards the creation of more integrated strategies against international corruption. There is in fact an urgent need to grant the full respect of the so-called international ne bis in idem principle. The insuffcient implementation of this principle can cause particularly severe consequences especially if a fnal judgement of conviction or acquittal has already been issued by the judicial authority of another State. The conduction of multiple proceedings for the same historical fact allegedly committed by the same person is not an infrequent situation. We must indeed consider not only the transnational or multinational character of the form of crime under analysis but also the progressive development, in accordance with the aforementioned international conventions, of national provisions envisaging international jurisdiction clauses for crimes of corruption committed, in whole or in part, abroad by individuals or companies.

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What we would like to underline is that the absence of adequate mechanisms for resolving conficts of jurisdiction and the scarce implementation of the international ne bis in idem principle can entail the following risks: on the one hand, it may impair the effciency of national judicial procedures (by encouraging forum shopping, which would seriously affect international cooperation practices); on the other hand, it may jeopardise the rights of the (natural or legal) person accused. The situation appears even more complicated if one takes into account the risk that non-criminal punitive proceedings (carried out by the regulatory and supervisory authorities responsible for the specifc business area in which the organisation operates) are conducted against the same entity already subjected to overlapping criminal proceedings. It must be clarifed that the outlined strategy has to avert the proliferation of proceedings relating to corruptive misconducts involving non-EU countries. Indeed, the EU legal framework already recognises the ne bis in idem principle and is endowed with mechanisms to deal with the situation in which concurrent proceedings may arise in different legal systems. These mechanisms, which can surely be improved, are based on the active involvement of Eurojust. Given this clarifcation, it is worth insisting on the fact that criminal studies and the recent judicial experience show that some of the most insidious forms of international corruption involve companies or business groups belonging to the most developed economies in the world and public offcials from non-EU countries that are often rich in natural and energy resources and have high corruption rates. The failure to set up an integrated system for the resolution of conficts of jurisdiction in non-EU countries remains, therefore, a particularly signifcant shortcoming. This issue could be addressed by providing in specifc international conventions the allocation of criminal proceedings on the basis of predetermined criteria, as recently envisaged by the Italian system in articles 746-bis and following of the criminal procedure code. We have so far emphasised the need to update the existing international provisions against corruption and suggested that their amendments should primarily focus on judicial cooperation, in particular in the area of corporate criminal liability. This would be the only chance to rapidly improve the effectiveness of the already existing instruments. As anticipated, there is also an urgent necessity to harmonise the protection of fundamental procedural safeguards, paying special attention to the presumption of innocence. In the wake of what has been established by almost all the international human rights conventions and recently stated in the mentioned EU directive, we cannot fail to underline that only within a suffciently effective system of fundamental freedoms it is possible that many different legal systems will accept truly effcient forms of judicial cooperation. For these reasons, the ascertainment of corporate criminal liability has to follow a legal procedure based on the same rules already protecting the fundamental

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rights of individual defendants, among which special prominence shall be given to the presumption of innocence. In other words, the criminal procedure rules applicable to corporate criminal liability proceedings have to ensure that the prosecuted or investigated collective body can adequately defend itself. Otherwise, the same effectiveness of the criminal liability model would be seriously undermined, given the abovementioned stick and carrot approach on which it is based. Indeed, the vast range of incentives offered to legal entities subject to prosecution in order to induce them to adopt certain virtuous behaviours (the implementation of corporate compliance programs aimed at preventing the risk of crime commission, the self-reporting practice and full cooperation with the judicial authority) can work only if corporations are granted a real opportunity to conduct an affrmative defence in the course of their proceedings. In particular, the accused corporation must at least have the chance to demonstrate its good faith and its compliance with the complex legal rules shaping the peculiar kind of responsibility it can incur. Only such an approach to corporate liability can reconcile the implementation of investigative and repressive tools needed to improve the fght against international corruption with the raising of the standards of protection of fundamental rights and procedural safeguards. Consequently, the regulation of corporate criminal liability should exclude that a burden of proof less demanding than that implied by the socalled B.A.R.D. rule can rest on the prosecutor or on the different national authority having an equivalent responsibility. Indeed, the prosecutor or equivalent body should remain charged with demonstrating beyond any reasonable doubt the terms of the illicit agreement in which corruption ultimately consists, together with the additional criteria by which the entity can be deemed liable for the crime committed in its interest or to its advantage by the corporate agent. It is in fact worth noting that there is a strict link between the effective respect of the presumption of innocence and the abovementioned rule governing the judicial judgement. Being at the foundation of modern legal systems, the existence of adequate instruments of protection of fundamental rights is an indispensable precondition for intense and fair cooperation between judicial and police authorities of different nationalities. This appears even more evident if considered in the context of the fght against international corruption, where the diffculties of proofng a bilateral illicit agreement between the main actors, which constitutes the core of the criminal misconduct, might lead the legislator or the interpreter to resort to probative shortcuts that are totally incompatible with the correct distribution of the onus probandi implied by the presumption of innocence. Nevertheless, it is absolutely necessary to resist this temptation, not only for the sake of the fundamental rights of the (individual or legal) person prosecuted but also in the name of a fair trial. The very credibility of the international fght against corruption depends on the strict observance of the principles constituting the identity of the liberal legal systems, as well as on the adherence to the ideas and the shared values that formed the basis for a wide consensus expressed by the international community to consider corruption as a common enemy to combat together.

The fght against international corruption 33

References Arlen, J. & Kahan, M. (2017). Corporate governance regulation through nonprosecution. The University of Chicago Law Review, 84, p. 323. Barkow, A.S. & Barkow, R.E. (eds.) (2011). Prosecutors in the Boardroom. New York: New York University Press. Beale, S.S. (2009). A response to the critics of corporate criminal liability. American Criminal Law Review, 46, p. 1481. Belluta H. (2018). L’Ente Incolpato. Diritti Fondamentali e ‘Processo 231’. Torino: Giappichelli. Boswell, N.Z. (1996). Combating corruption: are international institutions doing their job? American Society of International Law Proceedings International, 90, p. 98. Boswell, N.Z. (1997). An emerging consensus on controlling corruption. University of Pennsylvania Journal of International Economic Law, 18, p. 1165. Bourjaily, G. (2015). DPA DOA: how and why Congress should bar the use of deferred and non-prosecution agreements in corporate criminal prosecutions. Harvard Journal on Legislation, 52, p. 543. Brademas, J. & Heiman, F. (1998). Tackling international corruption: no longer taboo. Foreign Affairs, 77(5), p. 17. Cantone, R. (2018). Il contrasto alla corruzione: il modello italiano. Diritto Penale Contemporaneo. Available from: https://www.penalecontemporaneo.it/uploa d/4217-cantone2018a.pdf [Accessed 26 June 2019]. Carlin, W., Schaffer, M.E. & Seabright, P. (2006). Where are the real bottlenecks? A Lagrangian approach to identifying constraints on growth from subjective survey data. Center for Economic Reform and Transformation (CERT) Discussion Papers. DP06/04. Centonze, F. & Dell’Osso, V. (2013). La corruzione internazionale: Profli di responsabilità delle persone fsiche e degli enti. Rivista Italiana di Diritto e Procedura Penale, 1, p. 194. Ceresa-Gastaldo, M. (2017). Procedura penale delle società. 2nd ed. Torino: Giappichelli. Coffee, J. (1981). ‘No soul to damn: no body to kick’: an unscandalized inquiry into the problem of corporate punishment. Michigan Law Review, 79, p. 386. Del Vecchio, A. & Severino, P. (eds.) (2014). Il Contrasto alla Corruzione nel Diritto Interno e nel Diritto Internazionale. Padova: Cedam. De Maglie, C. (2002). L’etica e il Mercato: La Responsabilità Penale delle Società. Milano: Giuffrè. De Maglie, C. (2005). Models of corporate criminal liability in comparative law. Washington University Global Studies Law Review, 4(3), p. 547. De Maglie, C. (2011). Societas delinquere potest? The Italian solution. In: M. Pieth & R. Ivory, eds., Corporate Criminal Liability: Emergence, Convergence and Risk. Dordrecht: Springer, p. 225. Di Bitonto, M.L. (2012). Studio sui Fondamenti della Procedura Penale d’Impresa. Napoli: Editoriale Scientifca. Fiorella, A. (ed.) (2012). Liability ‘ex crimine’ of Legal Entities in Member States. Napoli: Jovene. Fisman, R. & Svensson, J. (2007). Are corruption and taxation really harmful to growth? frm level evidence. Journal of Development Economics, 83, p. 63. Galluccio Mezio, G. (2018). Diritto e Procedura Penale degli Enti negli USA. Padova: Cedam.

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Garrett, B.L. (2014). Too Big to Jail. Cambridge, MA: The Belknap Press of Harvard University Press. Garrett, B.L. (2015). The corporate criminal as scapegoat. Virginia Law Review, 101, p. 1789. Garrett, B.L. (2017). The public interest in corporate settlements. Boston College Law Review, 58, p. 1483. Gobert, J. & Mugnai, E. (2002). Coping with corporate criminality: some lessons from Italy. Criminal Law Review, August, p. 619. Gobert, J. & Pascal, A. (eds.) (2011). European Developments in Corporate Criminal Liability. Abingdon: Routledge. Guerrini, R. (2006). La Responsabilità da Reato degli Enti: Sanzioni e Loro Natura. Milano: Giuffrè. Henning, P.J. (2001). Public corruption: a comparative analysis of international corruption conventions and United States law. Arizona Journal of International & Comparative Law, 18(3), p. 793. Hess, D. & Dunfee, T.W. (2000). Fighting corruption: a principled approach. The C principles (combating corruption). Cornell International Law Journal, 33(3), p. 593. Hough, D. (2017). International approaches to tackling corruption: what works and what doesn’t? Frontiers of Law in China, 12(3), p. 339. Johnson, N.D., LaFountain, C.L. & Yamarik, S.Y. (2011). Corruption is bad for growth (even in the United States). Public Choice, 147, p. 377. Kubiciel, M. (2009). Core criminal law provisions in the United Nations convention against corruption. International Criminal Law Review, 9, p. 139. Magliocca, G. (2016). Il modello di amministrazione, gestione e controllo. In: C. Fiorio, ed., La Prova nel Processo agli Enti. Torino: Giappichelli, pp. 41–57. Manacorda, S. (2018). Noli me tangere? Un bilancio degli esiti applicativi nel contrasto alla corruzione internazionale. Rivista Trimestrale di Diritto Penale dell’Economia, 3–4, p. 528. Mauro, P. (1995). Corruption and growth. Quarterly Journal of Economics, 110(3), p. 681. Mongillo, V. (2012). La corruzione tra sfera interna e dimensione internazionale. Effetti, potenzialità e limiti di un sistema penale ‘multilivello’ dallo Stato nazione alla globalizzazione. Napoli: Edizioni Scientifche Italiane. Mongillo, V. (2016). La repressione della corruzione internazionale: costanti criminologiche e questioni applicative. Diritto Penale e Processo, 10, p. 1328. Musella, A. (2013). Corruzione internazionale, responsabilità delle società e modelli organizzativi di prevenzione del reato. Le Società, 11, p. 1206. OECD. (2014). OECD Foreign Bribery Report; An Analysis of the Crime of Bribery of Foreign Public Offcials. Paris: OECD Publishing. Available from: https://ww w.oecd.org/corruption/oecd-foreign-bribery-report-9789264226616-en.htm [Accessed 26 June 2019]. Padovani, T. (2004). Il nome dei principi e il principio dei nomi: la responsabilità “amministrativa” delle persone giuridiche. In: G. De Francesco, ed., La Responsabilità degli Enti: Un Nuovo Modello di Giustizia ‘Punitiva’. Torino: Giappichelli. Paolozzi, G. (2006). Modelli atipici a confronto. Nuovi schemi per l’accertamento della responsabilità degli enti [I]. Diritto Penale e Processo, 1, p. 108.

The fght against international corruption 35 Presutti, A. & Bernasconi A. (2018). Manuale della Responsabilità degli Enti. Milano: Giuffrè. Posadas, A. (2000). Combating corruption under international law. Duke Journal of Comparative & International Law, 10, p. 345. Renzetti, S. (2017). Il Diritto di Difesa dell’Ente in Fase Cautelare. Torino: Giappichelli. Shirazi, M.A. (2011). The impact of corruption on international trade. Denv. J. Int’l L. & Pol’y, 40(1–3), p. 435. Summerer, K. (2015). La pronuncia delle Sezioni Unite sul caso Thyssen Krupp. Profli di tipicità e colpevolezza al confne tra dolo e colpa. Cassazione Penale, 2, p. 490. Villani, E. (2016). Alle radici del concetto di ‘colpa di organizzazione’ nell’illecito dell’ente da reato. Napoli: Jovene. Wouters, J., Ryngaert, C. & Cloots, A.S. (2013). The international legal framework against corruption: achievements and challenges. Melbourne Journal of International Law, 14(1), p. 205.

3

What role does competition law have to play in the prosecution of fnancial crime in the UK? Diana Johnson

Introduction Over the past ten years the United Kingdom (UK) banking sector has shown itself vulnerable to infringements of competition law. This is due in part to the small number of large banks operating in the fnancial services sector, each of whom has a signifcant market share. This is an ideal situation for a criminal cartel to emerge. However, as Ball (2018) points out, no competition law was used in the UK to enforce the London Interbank Offered Rate (LIBOR) benchmark rate manipulation of 2012, although in the United States of America (US) and the European Union (EU) substantial fnancial penalties were imposed for the LIBOR manipulation using competition law rules. Gibbons (2014) argues that since mortgages, student loans, fnancial derivatives and other fnancial products often rely on the LIBOR as a reference rate, the manipulation of submissions used to calculate those rates can have signifcant negative effects on consumers and fnancial markets worldwide. In fact, it has been estimated that LIBOR is used to price trillions of pounds worth of mortgages, loans and other fnancial transactions, which demonstrates the impact and reach of the benchmark rate. This chapter will argue that regulatory changes since the LIBOR scandal of 2012 risk letting the competition law enforcement of fnancial crime slip between the two regulators – the Competition and Markets Authority (CMA) and the Financial Conduct Authority (FCA). Since April 2013 the FCA have regulated LIBOR (Bailey, 2017) and its primary function has historically been the regulation of the fnancial sector, rather than enforcing competition law in relation to fnancial crime. For instance, the fnes issued to banks by the FCA’s predecessor following the LIBOR crisis were pursuant to section 91 of the Financial Services Act 2012 and section 206(1) of the Financial Services and Markets Act 2000 rather than any competition law provisions. Since the LIBOR crisis however, the FCA has been given competition powers which it shares with the CMA. This chapter will focus on the role that competition law has to play, if any, in relation to the fnancial crime of benchmark fxing. The LIBOR scandal has attracted a great deal of literature and academic commentary, including Callaghan, Ullah, Edward, Hardiman, Madden, McClelland, Abramowitz and Sack (2013). However very little has been written about the

Competition law and fnancial crime 37 relationship between competition law and the regulation of benchmark rates. In considering this, this chapter considers three questions. Firstly, why competition law was not used in prosecuting any of the LIBOR perpetrators. Secondly, how effective are the legislative changes to the UK competition laws since the fnancial crisis. Finally, whether the measures taken since the LIBOR crisis to provide competition law enforcement powers to the fnancial services sector regulator are suffcient to regulate future fnancial crises should they occur, or whether further reform is needed.

The LIBOR scandal and competition law in the UK The LIBOR was established in 1986 and it is an important benchmark interest rate used in many fnancial contracts (Lox, 2008). LIBOR is prepared by reference to the average of submissions provided by 16 of the world’s largest banks, including Barclays, Citi, Deutsche Bank, JP Morgan Chase, HSBC, UBS and RBS (Abrantes-Metz et al., 2012). LIBOR was considered a good indicator of liquidity in the fnancial system, showing the willingness of banks to lend to one another. British Bankers’ Association (BBA) offcials previously insisted that LIBOR could not be manipulated (Davies, 2016), demonstrating that selfregulation by the banking industry was not a success. Self-regulation was earlier shown to fail in the banking scandals of the 1990s involving BCCI and Barings (Baxter, 1997). There are other fnancial benchmark rates used by banks, such as the Forex (the foreign exchange rate), ISDAfx, the Euro Interbank Offered Rate (EURIBOR) and oil and gold benchmarks, many of which have been subject to allegations of manipulation (Frino et al., 2018). For instance, three UK traders were recently accused of a conspiracy to manipulate the foreign currency exchange spot market (US Department of Justice, 2018), although all charges were ultimately dismissed (Miller, 2018). A further example of a different benchmark manipulation relates to the attempted manipulation of the ISDAfx benchmark by several international banks including Barclays Bank, Citibank, Goldman Sachs and the Royal Bank of Scotland. By February 2017, the US Commodity Futures Trading Commission (USCFTC) had imposed $570 million in penalties for attempted manipulation of the ISDAfx benchmark (USCFTC, 2018a). In the latest ISDAfx benchmark manipulation case, the Bank of America NA was ordered to pay a fne of $30 million (USCFTC, 2018b). These cases of benchmark rate-fxing show that the LIBOR scandal of 2012 was not a one-off and that the rewards of rate-fxing for banks and individual employees within banks are too great a temptation for them. Uniquely, this chapter considers the LIBOR scandal through the lens of competition law. Previous commentators, such as Callaghan and Ullah (2013) have focussed on the regulatory framework used in the UK, rather than the competition laws used in the EU and US, in connection with LIBOR offences. This chapter will argue that the UK government could have achieved successful criminal prosecutions if the regulator had used competition law to prosecute banks and traders for LIBOR fxing offences. It is imperative that the UK government

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ensures that a robust system of competition law is in place and that the relevant UK competition law regulators are encouraged to use it to prevent benchmark rate-fxing and thereby ensure competitiveness of the banking industry.

UK prosecutions following the LIBOR scandal In the UK, the banks and individuals involved with the LIBOR rate fxing faced substantially lower fnes than they did when prosecuted under antitrust and competition law by US and EU regulators; see Ball (2018). This section critically analyses how different the outcome could have been in the UK if competition law had been used to enforce the LIBOR rate fxing, instead of the charge of conspiracy to defraud, brought by the Serious Fraud Offce (SFO). In the UK, three banks were fned by the FCA’s predecessor, the Financial Services Authority (FSA), in 2012 or 2013 for breaches to the FSA’s ‘Principles for Businesses’ in relation to LIBOR benchmark manipulation. Barclays Bank Plc was fned £59.5 million by the FSA in 2012, discounted by 30% from £85 million due to Barclays’ agreement to settle at an early stage of the FSA’s investigation (Financial Services Authority, 2013a). By comparison, Barclays was fned US$160 Million by the US Department of Justice (US Department of Justice, 2012) and US$200 million by the Commodity Futures Trading Commission (US Commodity Futures Trading Commission, 2012) in the US in relation to its LIBOR reporting in the US. Other banks who were fned by UK authorities in connection with LIBOR rate fxing were Swiss bank UBS AG, fned £160 million, and the Royal Bank of Scotland plc, fned £87.5 million (Financial Services Authority, 2013b, c). There were no criminal prosecutions of banks in the UK, unlike in the US (see US Department of Justice, 2015), in relation to the LIBOR fxing accusations. If the criminal cartel offence contained in the Enterprise Act 2002 had been used by the UK competition regulator to prosecute banks, the impact of criminal proceedings being taken against them is likely to have had a markedly more signifcant deterrent effect on the banks (Ryder, 2018). Although no criminal prosecutions were made in the UK against banks, unlike in the US (US Department of Justice, 2015), criminal proceedings were taken against some of the individual traders involved in benchmark rate fxing. On 6 July 2012 the UK’s SFO launched a criminal investigation into LIBOR manipulation (Serious Fraud Offce, 2019). The investigation resulted in charges being brought against 13 individuals, not banks, of whom only one, Tom Hayes, a former derivatives trader at both UBS and Citigroup in Tokyo, was found guilty. Hayes was convicted on eight counts of conspiracy to defraud in relation to the manipulation of the Japanese Yen LIBOR between 2006 and 2010. He was sentenced to 14 years imprisonment on 3 August 2015 (Serious Fraud Offce, 2017), although this was reduced to 11 years upon appeal in December 2015.1

1 R v Tom Hayes [2015] EWCA Crim 1944.

Competition law and fnancial crime 39 There were a further four convictions and eight acquittals relating to LIBOR manipulation in the UK (Serious Fraud Offce, 2017). All thirteen defendants in the UK were charged with conspiracy to defraud. The high level of acquittals and low amount of convictions show that there was an abject failure in the UK to prosecute the LIBOR rate manipulation that caused so much harm in the UK and contributed to the global fnancial crisis. Why did the SFO prosecute these individual traders accused of manipulating the US Dollar and Yen LIBOR for conspiracy to defraud when there was the alternative option of taking criminal proceedings for breach of the cartel offence pursuant to UK competition law? Possibly this decision to prosecute for conspiracy to defraud rather than to use the cartel offence was made because the common law offence of conspiracy to defraud carries the longer maximum sentence of 10 years, rather than up to 5 years for the cartel offence, although there could be other reasons for the decision. Ball surmises that there must have been ‘policy reasons for a lack of antitrust action by the competition authorities, with the notable exception of the European Commission, and a reluctance to allow private antitrust enforcement’ (Ball, 2018). This will be considered in more detail below.

Competition law in the UK: Is it relevant to the fnancial crime of benchmark rate fxing? In the UK, the most relevant competition laws to the LIBOR scandal and fnancial crime are the rules relating to restraint of trade, including the cartel offence contained in the Enterprise Act 2002 and the abuse of a dominant market position in the Competition Act 1998. Therefore, this chapter will focus on these two areas. UK competition law relating to restraint of trade and the abuse of a dominant market position closely mirrors the wording used in Articles 101 and 102 of the Treaty on the Functioning of the European Union 2007 (TFEU). Chapter I of the Competition Act 1998 is the UK equivalent of Article 101 of the TFEU. It prohibits agreements that restrict competition within the UK.2 In particular, the prohibition applies to agreements to fx prices, limit or control production, markets, technical development or investment, agreements to share markets or sources of supply and any agreements which unfairly discriminate or which make contracts conditional on unconnected additional obligations.3 Any agreement which is prohibited by Chapter I of the Competition Act 1998 is void.4 Additionally, the Enterprise Act 2002 provides that it is a criminal offence for individuals to engage in hard-core cartel activity.5 For the purposes of the criminal cartel offence, a hard-core cartel activity is an agreement (whether or not formal or legal) to do any of the following: fx prices, limit or prevent

2 3 4 5

Competition Act 1998, s. 2(1). Competition Act 1998, s. 2(2). Competition Act 1998, s. 2(4). Enterprise Act 2002, s. 188(1).

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production of a service or product, divide between at least two businesses the supply in the UK of a product or service, or bid-rigging arrangements.6 The criminal cartel offence appears particularly relevant to the actions carried out by the banks and individual traders during the LIBOR scandal as the exchange of insider information with a competitor bank, together with aligning exposure positions and planning transactions with one or more competitor is certainly likely to come within the defnition of a price-fxing cartel. The German Institute for Economic Research supports this by outlining a detailed cartel theory showing how an interbank lending rates cartel can be sustained by preemptive portfolio changes (Boot et al., 2019). Therefore, the criminal cartel offence looks particularly relevant both to the individuals prosecuted by the SFO7 and to the banks involved in the benchmark rate fxing. So why wasn’t the cartel offence used? The failure to successfully prosecute the LIBOR related crimes in the UK is in large part because the offence of conspiracy to defraud is extremely hard to prove, due to the diffculty in proving fraud. There is no fraud element in the cartel offence, so it is reasonable to assume that more successful prosecutions would have been made if the UK had used its competition law powers. In addition to the criminal cartel offence, there is another area of competition law which should have been pursued by the UK regulators seeking to enforce the LIBOR scandal. Chapter II of the Competition Act 1998 sets out the second key area of UK competition law that is relevant for this chapter. The provisions of the Chapter II prohibition are the equivalent of Article 102 of the Treaty on the Functioning of the European Union. The Competition Act 1998 s. 18(1) provides that any conduct on the part of one or more businesses that amounts to the abuse of a dominant position in a market within the UK is prohibited. In the context of the LIBOR manipulation, the Chapter II prohibition could be relevant because a bank is a business which operates typically in a market where there are small numbers of large banks, each of which have signifcant shares of the market and multiple opportunities for collusion. The Parliamentary Commission’s report (Parliamentary Commission on Banking Standards, 2013) into the UK banking sector post LIBOR supports this statement as it concluded that: Retail banking is characterised by high market concentration and substantial barriers to entry (…) this lack of competition (…) is an important reason why banks can sustain poor standards of conduct and do not seem to feel the same pressure to respond to reputational damage as would be the case in many other industries. The report went on to discuss the characteristics of an oligopolistic market as being a market dominated by a small number of businesses. In an oligopolistic

6 Enterprise Act 2002, s. 188(2). 7 See R v Tom Hayes, n. 1.

Competition law and fnancial crime 41 market, an individual business can infuence the market price. This means that businesses become interdependent and their interactions can be strategic. However simply being part of an oligopolistic market does not mean that banks are in breach of the Chapter II prohibition. It is only when a dominant market position is combined with abusive behaviour by that business, that competition law will be breached. The most relevant example of abusive behaviour contained in Chapter II is that of fxing prices,8 which appears to be highly relevant to the LIBOR manipulation of 2012. There are possible breaches of both Chapter I (including the criminal cartel offence) and Chapter II present from the LIBOR manipulations carried out by banks in the UK. However, no prosecutions were made by UK regulators using competition law. This was not the case in the US and EU where competition law was used. One possible reason for the UK not having used competition law for prosecutions was the perception or fear by the government and regulatory bodies that the banks were ‘too big to be allowed to fail’. This can be seen from part of the Parliamentary report into banking (Parliamentary Commission on Banking Standards, 2013), in which certain reasons were identifed in the report to explain why it is diffcult to allow banks to be put into insolvency in the same way as other companies. These reasons included the provision by banks of essential services, the destruction of value that insolvency brings to a business which can magnify creditor losses and the risk that disorderly failure can cause contagion: ‘Allowing one bank to fail in a disorderly way could spread panic among creditors of other similar institutions and cause a wider fnancial crisis’ (Parliamentary Commission on Banking Standards, 2013). These fears have led in the past to resistance to reform in the banking sector in the UK. Three key areas that prevent reform in the banking sector include: a pervasive attitude that ‘it’s all under control’; perception that reform would result in ‘risks to the competitiveness of the UK banking sector’; and reluctance to participate in ‘biting the hand that feeds us’ (Parliamentary Commission on Banking Standards, 2013). These views expressed in the Parliamentary report may now have changed however, given the legislative changes made in the UK post 2012 in favour of using competition law to enforce fnancial crime. These changes will be considered below.

Competition law measures following the LIBOR scandal Following the issue of the Final Notice to Barclays Bank by the FSA, the UK government appointed Martin Wheatley to prepare a report to review what reforms are required to the current framework for setting and governing LIBOR. Martin Wheatley, at the time of his appointment, was the Chief Executive designate of

8 Competition Act 1998, s. 18(2).

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the FCA. In particular he was tasked by the government with looking at: whether participation in the setting of LIBOR should become a regulated activity; the feasibility of using actual trade data to set the benchmark; and the transparency of the processes surrounding the setting and governance of LIBOR (HM Treasury, 2012a). This appeared to be an indication that the government intended to take white collar crime seriously. The then Chancellor of the Exchequer George Osborne MP stated that the report should also look into the adequacy of the UK’s civil and criminal sanctioning powers in relation to the prosecution of any future fnancial misconduct and market abuse relating to LIBOR. The fnal report was known as the Wheatley report (HM Treasury, 2012b). Each of the 10 proposals recommended by the report was accepted by the government (HM Treasury, 2012c). The increased regulation around the submission and administration of LIBOR is outside the scope of this chapter, which will focus instead on the legislative changes made to the competition law regime in the aftermath of the LIBOR crisis. These changes were made following the report of a Joint Select Committee, which was set up to establish an inquiry into professional standards in the banking industry. The Joint Committee was set up in July 2012 and was known as the Parliamentary Commission on Banking Standards (Banking Commission) (Parliamentary Commission on Banking Standards, 2013). The Banking Commission is more signifcant to competition law in the regulation of fnancial crime than the Wheatley report, because the Banking Commission considered and reported on the professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process, lessons to be learned about corporate governance, transparency and conficts of interests, and their implications for regulation and for Government policy and to make recommendations for legislative and other action (Parliamentary Commission on Banking Standards, 2013). The Banking Commission produced a report (Parliamentary Commission on Banking Standards, 2013) which contained a number of interesting observations about the reasons for the lack of competition law enforcement in the wake of the LIBOR crisis, such as Coyle’s signifcant comment that ‘regulators tend to regulate and they do not think about competition as a tool that they can use’ (Parliamentary Commission on Banking Standards, 2013). This certainly appears to have been the case in the UK’s response to the LIBOR benchmark fxing as the fnancial services regulator did not work with the competition law regulator, the OFT at the time, to consider the competition law implications of the LIBOR crisis, whilst other jurisdictions such as the US and EU affected by the LIBOR rigging successfully used their competition law powers to investigate and then prosecute the traders and banks involved. The Banking Commission’s report does appear to have infuenced the thinking of the UK government as, following its publication, a raft of competition legislation relating to the regulation of fnancial crime was introduced in the UK. This is looked at in more detail below.

Competition law and fnancial crime 43

Competition legislation introduced following the LIBOR scandal In total, three legislative acts affecting competition law in the fnancial services sector were passed by the UK government as a direct result of the LIBOR crisis. The frst, and most signifcant, Act was the Financial Services (Banking Reform) Act 2013, which conferred competition powers on the FCA. In particular, the Act inserted a new provision into the Financial Services and Markets Act 2000 which places an obligation on the FCA to consider, before using certain of its powers as fnancial regulator, whether its competition powers are more appropriate and, if so, to use them instead. This new competition objective is now one of the FCA’s three operational objectives and it makes the FCA one of the few fnancial regulators in the world with a core objective to promote competition (Financial Conduct Authority, 2019). This is a signifcant change of direction and policy, especially given that no competition law was used in the prosecution of any of the LIBOR perpetrators. The FCA’s new competition powers are to be used concurrently with those of the previously sole competition regulator in the UK: the Competition and Markets Authority (CMA) (Financial Conduct Authority, 2018b, c). Will these new competition powers address Colye’s above-cited concerns and increase the chances of the FCA using competition law to enforce perpetrators of a future benchmark rate fxing cartel in the UK? At the very least, this legislative change will force the FCA to justify its lack of use of competition law, if it instead relies on prosecuting for breaches of fnancial regulations as it did in the aftermath of the LIBOR crisis. The second legislative Act which affected competition law in the fnancial services sector following the LIBOR crisis was the Financial Services Act 2012, which changed the UK fnancial services regulator. The FSA, the fnancial services regulator at the time of the LIBOR scandal, was replaced by the Prudential Regulatory Authority (PRA) and the FCA. Now the key regulator of the fnancial services industry is the FCA, with power to prosecute fnancial crime. A third UK legislative change affecting the UK competition law regime following the LIBOR crisis was the Enterprise and Regulatory Reform Act 2013. Section 54 of this Act amended the concurrency provisions found in the Competition Act 1998 and abolished the Offce of Fair Trading and the Competition Commission, creating a single new regulator for competition. The CMA is now jointly responsible with the FCA for the enforcement of competition law in the fnancial services sector. Both of these relatively new regulators have had to learn how to work together in an effective manner over the last few years, in order to combat fnancial crime. In March 2012 the UK government decided that the principal competition authority (the CMA) and the nine sectoral regulators (including the FCA) should each retain their independence, rather than being merged into one central regulator applying competition laws across all sectors. The government set out its reasoning for this decision as: ‘This will continue to allow the integrated application of sectoral and competition law powers, the application of the sector

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regulators’ industry expertise and ongoing sector surveillance to competition cases’ (Department for Business Innovation and Skills, 2015). The Government gave a ‘strategic steer’ to the CMA at its launch on 1 October 2013, stating that the CMA ‘should work with sector regulators, including the Financial Conduct Authority for the fnancial services sector, to build up its sector capabilities and continuing to share competition expertise, including through joint enforcement work (within the legal framework), training and research’ (Department for Business Innovation and Skills, 2015). Then, in December 2015, the government issued a revised non-binding ‘strategic steer’ to the CMA setting out the government’s view that, in relation to the regulated sectors, the CMA should continue to focus on playing a leadership role with regulators that have competition powers, especially those that are new to the concurrency regime. The CMA should encourage those regulators to make greater use of their competition powers and to tackle anti-competitive actions in regulated markets. (Department for Business Innovation and Skills, 2015) It also confrmed that the CMA should build: ‘a strong dialogue with sector regulators using the UK Competition Network to ensure that the overall competition regime is coordinated and regulatory practices complement each other’. This concurrency of regulation between the CMA and the various sector regulators allows each sector regulator, including the FCA, to apply UK and EU competition law prohibitions on undertakings engaging in anticompetitive agreements or the abuse of a dominant market position and to conduct market studies in order to identify areas where the sector market is not working competitively for the beneft of consumers. How effective have these changes been so far? According to the CMA the concurrency arrangements have been working well, with signifcant progress being made across sectors (Competition and Markets Authority, 2018). In particular, the CMA’s annual report notes that almost all sector regulators who share competition regulatory powers with the CMA have launched competition cases since the concurrency arrangements started in 2014. Also, according to the CMA, since the FCA’s concurrent competition law powers became effective, the fnancial services sector has experienced a deepening of cooperation with the CMA, including through secondments (Competition and Markets Authority, 2018). In April 2017 the second fnancial services sector competition case was opened by the Financial Conduct Authority (Financial Conduct Authority, 2017c) and there have been various actions taken by the CMA to increase the volume and effectiveness of the Competition Act 1998 enforcement in regulated sectors, including sharing insights into the effective delivery of cases, assessing how to generate intelligence to launch new cases and more signifcant engagement between the CMA and sector regulators on resources and strategy at an early stage.

Competition law and fnancial crime 45 The CMA also states in its annual report on concurrency that there has been extensive policy and markets work across many of the regulated sectors, in particular there have been FCA market investigations on investment consultancy services and fduciary management services and on retail banking in the last couple of years (Competition and Markets Authority, 2018). It is also relevant to note that a leniency protocol has been published by the CMA which relates to cartels (Competition and Markets Authority, 2014). The leniency protocol includes provision for granting reduced penalties to companies who come forward with information on cartel activity and who then cooperate fully with any subsequent investigation. The frst company to apply for leniency can receive a 100% reduction in the penalty and successive applicants may receive deductions of up to 50%, depending on the added value of the material they provide. Individual informants may also receive a fnancial reward for information of up to £100,000. As cartels can be diffcult to detect, leniency applications play an important role in uncovering this illegal activity. See the CMA’s current leniency provisions (Competition and Markets Authority, 2014). The leniency provisions were in operation at the time of the LIBOR manipulation though, but none of the traders who were involved with, or aware of, the LIBOR benchmark rate fxing thought to use the leniency protocol. Perhaps because the fnancial reward isn’t set high enough, given the rewards a cartel will deliver to its members, but also perhaps because there is not enough awareness in the fnancial services sector of competition law or of these leniency provisions. These are aspects of the competition law regime that should be addressed to ensure that the whistle-blowing regime is more likely to be used for future benchmark rate fxing cartels in the UK. Before taking direct regulatory enforcement, the FCA must now consider whether enforcement under the Competition Act 1998 is more appropriate than taking enforcement action under its own regulatory powers (the ‘primacy’ of competition law for regulators, as provided for by the Enterprise and Regulatory Reform Act 2013). It remains to be seen whether these concurrency provisions, introduced following the LIBOR scandal in order to persuade UK regulators to use their competition law powers, will be suffcient to ensure that competition law is used in any future benchmark rate fxing cartel. A change in attitude, not just in law, to enforcement by the fnancial services regulator will be needed for the FCA to use the competition powers it now has.

The future of competition law enforcement of fnancial crime in the UK Since the LIBOR scandal, little research has been done on the effectiveness of the UK competition law regime in the regulation and enforcement of fnancial crime. In particular, the overlap of powers between the FCA and CMA in the enforcement of competition laws in the fnancial sector have only been in effect since April 2015 and have not been analysed extensively since the Financial Services

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Act 2012, the Financial Services (Banking Reform) Act 2013 and the Enterprise and Regulatory Reform Act 2013 came into force. Further research into and analysis of the recent use of competition law in the regulation and enforcement of fnancial crime in the UK may help the competition regulators in the UK prevent a further benchmark manipulation scandal in one of the other benchmark rates of the Forex, ISDAfx, oil and gold benchmarks. In order to consider the future of competition law enforcement of fnancial crime in the UK, the following two questions will now be considered: frstly, has enough regulatory and legislative change occurred to prevent or identify any future rate-fxing cartel in the UK earlier than occurred in the LIBOR case? Secondly, and possibly more importantly, given that the competition powers were available but not used at the time of the LIBOR crisis, has anything changed in the attitude of regulators in the fnancial services sector to ensure that the criminal cartel offence or other civil competition law offences, rather than the offence of conspiracy to defraud, is used to enforce the law and prosecute offenders of any future rate-fxing cartel? In relation to the frst part of the frst question; has enough regulatory and legislative change occurred to prevent a cartel starting in the fnancial services sector? In theory, the answer to this question is yes; the regulators can now make life much harder for fnancial institutions to collude by raising awareness of both competition law and fnancial regulation in order to put people off undertaking illegal activity. Much of this new regulation has come from proposals made in the Wheatley report, which are beyond the scope of this chapter. The increased regulation in the banking sector should make it harder for individual traders to manipulate the LIBOR (or other benchmark rate) submissions. However, bankers are risk-takers by nature and the gains are potentially extremely lucrative, so even making it harder to manipulate benchmark rates and to collude with other banks is unlikely to prevent another cartel being operated. Continuing with the frst question from a competition law perspective, could a similar cartel now be identifed if one was in existence now? Cartels are notoriously diffcult to spot and once identifed, they are extremely diffcult to prove. So the CMA relies on its leniency provisions, referred to above, where a whistleblower is encouraged to come forward with evidence of a cartel in return for immunity and a fnancial reward. However, it is questionable whether the reward for an individual whistle-blower as part of the CMA’s leniency policy is suffciently high to be a realistic incentive in the fnancial services sector. The leniency policy for cartels was in operation at the time of the LIBOR manipulation, but it was not used by a whistle-blower then and there is no reason to suppose that it would be used if another cartel was in existence now or in the future. The competition law regulators in the fnancial sector, the CMA and the FCA, should consider ways of increasing the profle and awareness of the leniency provisions amongst banks and their staff, as this may aid the notifcation of a cartel in the future. If the leniency regime is not likely to be used to identify a cartel in the fnancial services sector, then it becomes relevant to ask whether anything has changed in

Competition law and fnancial crime 47 the attitude of the regulators in the fnancial services sector to ensure that competition law will be used to investigate and enforce a potential LIBOR, EURIBOR, FOREX or other benchmark rate-fxing cartel. It is clear that without signifcant legislative and regulatory changes in the UK, the attitude of regulators in relation to using competition law to enforce fnancial crime would not have changed. The fact that no prosecutions were made under competition law once the LIBOR fxing was identifed and that only one individual trader was successfully prosecuted in the UK at all for the LIBOR scandal9 can be seen to have sent a message to banks that they can get away with benchmark rate fxing in the UK. This outcome is even clearer when compared to the penalties handed out in the US for LIBOR-related offences, Hillman (2015) states, ‘The difference in strength of the fnancial sanctions is stark; the US fnancial sanction was over three and a half times that of the UK fnancial sanction’. Without any signifcant legislative change post LIBOR, the failed LIBOR prosecutions by the FSA could have been seen to send a clear message to the banks and traders that fnancial crime in the UK is not looked upon with such severity as it is in the US. In the EU too, more banks were fned for their participation in LIBOR, EURIBOR of TIBOR (Tokyo Interbank Offered Rate) benchmark fxing, than in the UK. It is strange that the opportunity to prosecute using competition law was not taken up in the UK, especially in light of the fact that there is evidence in an Internal Audit Report of the FSA dated March 2013 that the then competition regulator in the UK, the Offce of Fair Trading, was aware of concerns over LIBOR rigging as early as November 2008 (Financial Services Authority, 2013d). According to the FSA’s Internal Audit Report the OFT was warned off investigating LIBOR in 2008 by the then FSA in an email dated 12 January 2009 from the CEO of the FSA to the Offce of Fair trading. It stated that: ‘At the present time, the FSA would not encourage a further investigation into LIBOR as the BBA has recently conducted its own review of the process and made some changes’. The email also stated that: ‘More importantly, we believe there may be fnancial stability implications of announcing an investigation at the present time, due to the LIBOR – OIS spread being such a key indicator of funding costs’ (Financial Services Authority, 2013d). Why was the Offce of Fair Trading warned off investigating LIBOR in 2009? The answer must relate to the reference to ‘fnancial stability’ in the FSA’s letter to the OFT. So much of our society depends on the banking system that drawing attention to any perceived defciencies in the way it is operating will always be politically charged as any suggestion that it is not functioning properly or fairly will affect perceptions of fnancial stability in the UK. This does not seem to have deterred the US or EU however, both of which jurisdictions used competition law to enforce the LIBOR and other benchmark rate fxing following the crisis.

9 R v Tom Hayes, n. 1.

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According to Jenkins and Bott (2017), one of the lessons of the crisis that began in 2007 is arguably that banks proved ‘too big to fail’ and that as a result, national governments bailed out their key fnancial institutions to prevent a systemic collapse. Evidence of this fear of a banking collapse can be seen in the 2013 report of the Parliamentary Committee on Banking Standards, where it states that the Parliamentary Commission was: ‘warned that over-zealous action to improve banking standards would damage the competitiveness of British banks and of the UK as a fnancial centre’ and that ‘measures which reduce London’s attractiveness to banks could result in wider damage to the economy’. Parliamentary Committee on Banking Standards (2013). Has this situation changed since the 2012 LIBOR crisis? The various legislative changes which have been made following the 2012 crisis suggest that the situation has changed, although whether suffciently or not is questionable. There has been a signifcant shift in legislative focus for the FCA in particular, towards using competition law in future in the fnancial services sector. Will the FCA’s new competition law enforcement powers change anything? Will it mean that the FCA is more likely to use its competition law to enforce future rate fxing in any benchmark rate, whether LIBOR, the FX, ISDAfx, Euribor or another? The answer to this will depend on a change in attitude by not just the FCA but also the CMA. The same concerns about the banks being too big to prosecute and the fear of how prosecutions of banks and traders will affect perceptions of fnancial stability will remain. However, without effective competition law enforcement, there can be no fnancial stability, so has enough been done to force the fnancial services regulator, the FCA to change its attitude? Only time will tell, but now the FCA will have to justify its actions if it does not use its competition law powers before any other regulatory powers it has.

Conclusion Lilico, director of Europe Economics, argued that: ‘there needed to be more focus on competition, and less on regulation, in improving banking standards’ (Parliamentary Commission on Banking Standards, 2013). Given the amount of legislative changes made since the LIBOR crisis it appears that the focus of the UK government has indeed shifted from fnancial regulation to competition law enforcement in the fnancial services sector. The FCA is also talking the talk when referring to its motivation for using its new Competition Act 1998 powers: in 2014 the Director of Competition at the FCA said ‘Get it right, and the benefts that fow through to consumers and frms (…) are potentially enormous’ (Jones, 2014). However, just because the FCA now has competition powers and speaks positively in public about its use and intended use of them, does not mean it will use them if future benchmark rate fxing cartels come to light. As set out above, the FCA’s predecessor did not want competition law to be used in the enforcement of LIBOR manipulation in 2009 and in its internal audit report the FSA states that it wrote to the OFT warning of fnancial stability implications of announcing

Competition law and fnancial crime 49 a competition law investigation into LIBOR at that time (Financial Services Authority, 2013d). Additionally, the Parliamentary Commission on Banking Standards stated in its report (Parliamentary Commission on Banking Standards, 2013) that competition economists had expressed concern about how seriously the FCA would take its competition remit. They were concerned in particular that the FCA would continue to use regulation rather than competition laws as its primary tool. But, as if to explicitly rebut those concerns, since obtaining its competition law powers following the LIBOR crisis, the FCA (2017a, 2018a, 2019) has published two Competition Annual Reports, given multiple speeches to the fnancial services industry about its powers, commenced a market investigation in the fnancial services sector (Financial Conduct Authority, 2017b) as well as a competition law case (Financial Conduct Authority, 2017c) using its new powers. To further bolster the use of competition law powers in the fnancial sector since the LIBOR crisis unfolded, the CMA, as part of its leadership role envisaged by the Government’s strategic steer, now has authority over the FCA in relation to competition law investigations into the fnancial sector The concurrency provisions allow the CMA, as part of its leadership role envisaged by the Government’s strategic steer, to take over cases from the relevant sector regulator mid-stream if necessary10 and the government has power to remove concurrency powers from sector regulators, the ‘nuclear option’11 if needed. Will the CMA use these powers if the FCA does not enforce a future benchmark rate fxing cartel? Or is there a risk that, as mentioned at the start of this chapter, competition law could slip between the two UK competition regulators? Instigating an investigation into potential competition law breaches in the banking industry is always likely to be a political, rather than a pure regulatory/ enforcement decision, because of the sheer size of the banking industry and its impact on the country’s international reputation and the everyday life of its citizens. However, it is reasonable, to assume that should the LIBOR (or another benchmark rate) be manipulated by a cartel in the future, that the scene has been set for the UK to follow the US and EU’s lead in enforcing the illegal behaviour using competition law. In fact, the UK government and regulatory authorities can take heart from the fact that the EU and US competition law enforcement does not appear to have signifcantly harmed the banking system in these jurisdictions in the medium or long term (Jenkins and Bott, 2017). In the meantime, it would be prudent for the UK competition regulators to take certain additional measures to bolster the cartel whistle-blowing system in order to increase the likelihood of future cartels being brought to their attention. In particular, the CMA and the FCA should consider ways of increasing the profle and awareness of the cartel leniency provisions amongst banks and

10 Competition Act 1998 [Concurrency) Regulations 2014, s. 8(1). 11 Enterprise and Regulatory Reform Act 2013, s. 52.

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their staff, with the aim of increasing the likelihood of an early notifcation of a cartel in the future. In addition, it would help to re-assess and re-set the fnancial reward offered to cartel whistleblowers, which doesn’t appear to be set high enough at present, given the rewards a cartel will deliver to its members. These are aspects of the competition law regime that should be addressed as a matter of urgency by the two competition regulators in the UK to ensure that the whistle-blowing regime is more likely to be used for future benchmark rate fxing cartels in the UK.

References Cases Fire & Police Pension Association of Colorado v Bank of Montreal et al. [2018]. 1:18cv-00342. Available from: https://www.courtlistener.com/docket/6260747/ fre-police-pension-association-of-colorado-v-bank-of-montreal/ [Accessed 2nd February 2019]. R v Tom Hayes [2015] EWCA Crim 1944.

Legislation Competition Act 1998 Competition Act 1998 (Concurrency) Regulations 2014 (SI 2014/536) Enterprise Act 2002 Enterprise and Regulatory Reform Act 2013 Financial Services Act 2012 Financial Services (Banking Reform) Act 2012 Financial Services and Markets Act 2000 Treaty on the Functioning of the European Union 2007

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Competition law and fnancial crime 51 Callaghan, V. and Ullah, Z. (2013). The LIBOR scandal: the UK’s legislative approach. Journal of International Banking Law and Regulation, 28(4), pp. 160–165. Competition and Markets Authority. (2014). Cartels: Come Forward and Apply for Leniency. Available from: https://www.gov.uk/guidance/cartels-confess-and-ap ply-for-leniency [Accessed 31st January 2019]. Competition and Markets Authority. (2018). Annual Report on Concurrency. London: Competition and Markets Authority. Davies, R. (18th April 2016). Ex-Libor chief accepted claim that rate could not be rigged, court told. The Guardian. [online] Available from: https://www.theguard ian.com/business/2016/apr/18/libor-trial-john-ewan-rate-could-not-be-rigged -court-told [Accessed 27th November 2019]. Department for Business Innovation and Skills. (2015). Government’s Response to the Consultation on the Strategic Steer to the Competition and Markets Authority. London: Department for Business Innovation and Skills. Available from: https ://assets.publishing.service.gov.uk/government/uploads/system/uploads/attac hment_data/fle/481040/BIS-15-659-government-response-governments-stra tegic-steer-to-the-competition-and-markets-authority.pdf [Accessed 8th February 2019]. Edward, C., Hardiman, P., Madden, M. & McClelland, J. (2012). Implications for commercial organisations of the global investigations into LIBOR. Banking Law Journal, 129(9), pp. 831–837. Financial Conduct Authority. (2017a). Competition Annual Report 2016/17. London: Financial Conduct Authority. Financial Conduct Authority. (2017b). FCA Makes Market Investigation Reference for Investment Consultancy Services. London: Financial Conduct Authority. [online] Available from: https://www.fca.org.uk/news/press-releases/fca-makes-marketinvestigation-reference-investment-consultancy-services [Accessed 8th February 2019]. Financial Conduct Authority. (2017c). FCA Issues First Statement of Objections to Four Asset Management Firms. London: Financial Conduct Authority. [online] Available from: https://www.fca.org.uk/news/press-releases/fca-issues-frststatement-objections-four-asset-management-frms [Accessed 8th February 2019]. Financial Conduct Authority. (2018a). Competition Annual Report 2017/18. London: Financial Conduct Authority. Financial Conduct Authority. (2018b). Competition Law. Available from: https:// www.fca.org.uk/about/promoting-competition/powers [Accessed 8th February 2019]. Financial Conduct Authority. (2018c). Our Approach to Competition. Available from: https://www.fca.org.uk/publications/corporate-documents/our-approach-c ompetition [Accessed 8th February 2019]. Financial Conduct Authority. (2019). Competition Annual Report 2018/19. London: Financial Conduct Authority. Financial Services Authority. (2013a). Final Notice to Barclays Bank Plc. London: Financial Services Authority. Financial Services Authority. (2013b). Final Notice to UBS AG. London: Financial Services Authority. Financial Services Authority. (2013c). Final Notice to The Royal Bank of Scotland. London: Financial Services Authority.

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Financial Services Authority. (2013d). Internal Audit Report: A Review of the Extent of Awareness Within the FSA of Inappropriate LIBOR Submissions. London: Financial Services Authority. Frino, A., Ibikunle, G., Mollica, V. & Steffen, T. (2018). The impact of commodity benchmarks on derivatives markets: the case of the dated Brent assessment and Brent futures. Journal of Banking and Finance, 95, pp. 27–43. Gibbons, K. (2014). Business as Usual for LIBOR? Journal of International Banking and Financial Law, 3, p. 194. Hillman, H. (2015). Current laws and potential enforcement measures. In: N. Ryder, U. Turksen & S. Hassler, eds., Fighting Financial Crime in the Global Economic Crisis. London: Routledge, pp. 189–228. HM Treasury. (2012a). Statement by the Chancellor of the Exchequer, Rt Hon George Osborne MP, on LIBOR. London: HM Treasury. Available from: https://ww w.gov.uk/government/speeches/statement-by-the-chancellor-of-the-excheq uer-rt-hon-george-osborne-mp-on-libor [Accessed 8th October 2019]. HM Treasury. (2012b). The Wheatley Review of LIBOR. London: HM Treasury. (PU1361). Available from: https://assets.publishing.service.gov.uk/governmen t/uploads/system/uploads/attachment_data/fle/191762/wheatley_review:l ibor_fnalreport_280912.pdf [Accessed 8 February 2019]. HM Treasury. (2012c). Implementing the Wheatley Review: Draft Secondary Legislation. London: HM Treasury. (PU1402). Available from: https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment _data/fle/191760/implementing_wheatley_review281112.pdf [Accessed 8th February 2019]. Jenkins, P. & Bott, I. (24th August 2017). What happened to the ‘too big to fail’ banks? Financial Times. [online] Available from: https://www.ft.com/conten t/0bd8f4d4-76de-11e7-a3e8-60495fe6ca71 [Accessed 27th November 2019]. Jones, D. (2014). The FCA′s New Competition Powers: What Do They Mean for the Financial Services Industry? London: Financial Conduct Authority. Available from: https://www.fca.org.uk/news/speeches/fca’s-new-competition-powerswhat-do-they-mean-fnancial-services-industry [Accessed 31st January 2019]. Lok, X. (2008). LIBOR and market disruption: the future of LIBOR. Journal of International Banking and Financial Law, 23(8), p. 421. Miller, R. (27th October 2018). Three traders not guilty of currency fx. The Times. [online] Available from: https://www.thetimes.co.uk/article/three-traders-n ot-guilty-of-currency-fx-09dlkbw7n [Accessed 31st January 2019]. Parliamentary Commission on Banking Standards. (2013). Changing Banking for Good. London: The Stationary Offce. Ryder, N. (2018). ‘Too scared to prosecute and too scared to jail?’ A critical and comparative analysis of enforcement of fnancial crime legislation against corporations in the USA and the UK. The Journal of Criminal Law, 82(3), pp. 245–263. Serious Fraud Offce. (2017). LIBOR Yen (Hayes). Available from: www.sfo.gov.uk/ libor-hayes/ [Accessed 8th February 2019]. Serious Fraud Offce. (2019). LIBOR. Available from: www.sfo.gov.uk/cases/liborlanding [Accessed 8th February 2019]. US Commodity Futures Trading Commission (USCFTC). (2012). CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Benchmark Interest Rates. Available

Competition law and fnancial crime 53 from: www.cftc.gov/PressRoom/PressReleases/pr6289-12 [Accessed 8th February 2019]. US Commodity Futures Trading Commission (USCFTC). (2018a). CFTC Orders The Royal Bank of Scotland to Pay $85 Million Penalty for Attempted Manipulation of U.S. Dollar ISDAFIX Benchmark Swap Rates. Available from: https://www.cft c.gov/PressRoom/PressReleases/7527-17 [Accessed 31st January 2019]. US Commodity Futures Trading Commission (USCFTC). (2018b). CFTC Orders Bank of America, N.A. to Pay $30 Million Penalty for Attempted Manipulation and False Reporting of U.S. Dollar ISDAFIX Benchmark Swap Rates. Available from: https://www.cftc.gov/PressRoom/PressReleases/7794-18 [Accessed 2nd February 2019]. US Department of Justice. (2012). Barclays Bank PLC Admits Misconduct Related to Submissions for the London Interbank Offered Rate and the Euro Interbank Offered Rate and Agrees to Pay $160 Million Penalty. US Department of Justice 12-815. Available from: https://www.justice.gov/opa/pr/barclays-bank-plc-admits-misc onduct-related-submissions-london-interbank-offered-rate-and [Accessed 8th February 2019]. US Department of Justice. (2015). Five Major Banks Agree to Parent-Level Guilty Pleas. US Department of Justice 15-643. Available from: https://www.justice. gov/opa/pr/fve-major-banks-agree-parent-level-guilty-pleas [Accessed 8th February 2019]. US Department of Justice. (2018). Three Former Traders for Major Banks Arraigned in Foreign Currency Exchange Antitrust Conspiracy. US Department of Justice 17-787. Available from: https://www.justice.gov/opa/pr/three-former-t raders-major-banks-arraigned-foreign-currency-exchange-antitrust-conspiracy [Accessed 31st January 2019].

4

The fght against corruption in the Italian legal system between repression and prevention Debora Provolo

The relentless changes to the anti-corruption system in Italy The current anti-corruption system in Italy is the result of a sequence of recent reforms. The most signifcant is certainly represented by Law No. 190 of 6 November 2012 (containing ‘Provisions for the prevention and punishment of corruption and illegality in the Public Administration’), which redefned the offences provided under the Italian Criminal Code and outlined an integrated system to fght corruption, in which administrative prevention tools support the traditional model of criminal punishment (Mongillo, 2019: p. 232). The 2012 reform (known as ‘Legge Severino’) originates from the need to strengthen the instruments to fght corruption, along parallel prevention and punishment lines, also in compliance with the obligations arising from international and supranational law, specifcally the UN Convention against Corruption of 2003 and the Strasbourg Convention on Corruption of 1999, instruments which have already been ratifed by Italy (respectively with Law No. 116 of 3 August 2009 and Law No. 110 of 28 June 2012). On the punishment side, the reform is an attempt, albeit not entirely successful, to align, insofar as possible, the relevant criminal provisions with the factual and criminological phenomenon of corruption, which has taken on an ‘all-encompassing’ nature, characterised by a very complex and detailed structure, both because it involves various institutional levels and because it is regulated by circuitous and sophisticated mechanisms that, in favouring the self-replication of offences, result in its systematic diffusion within the public administration (Cingari, 2012: pp. 79–81; Davigo and Mannozzi, 2007: p. 264; Forti, 2003: p. XV; Palazzo, 2015: pp. 62–66). A corruptive agreement involves, in addition to the corruptee and the corruptor, also other parties playing different roles: on the one hand, the political and administrative authorities of the State, tasked with regulating and ensuring complex corruption mechanisms, and acting as recipients of bribes paid by private persons; on the other hand, intermediaries in exchanges covered by the corruptive scheme (specifcally, ‘fxers’). Furthermore, corrupt public servants do not make a commodity out of a single act of offce, but are often ‘put on payroll’, meaning that they are unduly and systematically paid to be available at length to make use of their functions or powers in carrying out future

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actions under their offce or exert ‘infuence’ (Cingari, 2012: p. 90). The legislator attempted to take all this into account, introducing signifcantly innovative provisions from multiple standpoints, redrafting corruption offences, including a new offence of trading in infuence in the Italian Criminal Code, maintaining (unlike most European countries) the offence of extortion by a public offcial (‘concussione’) and introducing a separate offence of undue inducement to give or promise a beneft, providing for corruption among private persons, and fnally tightening the sentencing regime. A large part of the 2012 reform is aimed at strengthening administrative preventive measures (Cantone, 2017; Severino, 2016: pp. 640–641; Fiandaca and Musco, 2013: pp. 4–6); in addition to revisiting certain existing tools – such as, for example, the Code of conduct for employees in the public sectors, containing rules of conduct aimed at ensuring the quality of services, prevention of corruption and compliance with the constitutionally mandated duties of diligence, loyalty and impartiality – the legislator introduced, inter alia, provisions aimed at enhancing transparency in the decision-making process and supervision over tendering procedures, preventing potential conficts of interest through stricter rules on the incompatibility/ineligibility in appointments to public offces, as well as protecting whistle-blowers. However, the pivotal new feature of the reform is the establishment of the Italian Anti-Corruption Authority (ANAC), an independent administrative authority tasked with preventing corruption at a centralised state level (Cantone and Merloni, 2016; Nicotra, 2016), and providing for national anticorruption plans. The prevention plans in question, containing baseline elements of the overall prevention design as a ‘risk assessment’ process, have a twofold structure, a national plan (PNA), drafted by the ANAC, and one adopted by each public administration; both are valid for three years, but they must be updated each year. In brief, the plans map out risks, that is, by identifying internal and external factors that can facilitate instances of corruption and specifying organisational measures suitable to neutralise them. Drafting anti-corruption plans, as well as selecting a person responsible for preventing corruption (director/manager responsible for implementing the plan within a body or entity) are connected to the compliance system provided within the scope of liability of the legal entities under Legislative Decree 231/2001 (Cantone, 2018; Severino, 2016). ANAC’s supervisory functions for corruption prevention purposes were further strengthened through Law Decree No. 90/2014, converted into Law No. 114/2014. The subsequent Law No. 69/2015 (Mongillo, 2015; Cingari, 2015; Spena, 2015) tightened the punishment for actions that may be qualifed as corruptive in a broad sense, on the heels of recent and notorious judicial cases (Mose, Expo, Mafa Capitale, etc.), also introducing a series of substantive and procedural provisions for forced recovery of amounts unlawfully received by public offcials, as well as an extenuating circumstance aimed at encouraging post factum cooperation by the corruptee and corrupter who choose to collaborate with authorities. This latter measure rewards, by substantially decreasing the punishment, those who effectively contribute to limiting the effects of a criminal act, or provide decisive elements for establishing an offence or for identifying other persons

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responsible, thus reducing the very high ‘dark number’ of illicit trade of public acts of offce, above all due to the common interest of the parties in concealing the corruptive agreement and covering each other. The law has also increased the punishment provided for the offence of mafa-type association, given the proximity, as emerging from criminological surveys, between organised crime and white collar criminality rooted in politics and public administration (Caneppele and Calderoni, 2014; Center for the Study of Democracy, 2010; Gounev and Ruggiero, 2012). On a preventive level, the 2015 reform was limited to increasing ANAC’s investigation powers and improving information fows between ANAC and criminal judicial authorities. Finally, Law No. 3 of 2019, evocatively called ‘Spazzacorrotti’ (i.e. ‘Wipe out the corrupt’) (Mongillo, 2019; Gambardella, 2019; Padovani, 2018; Pulitanò, 2019a), ideally in a relation of continuity with the two previous anti-corruption reforms, introduced further changes to contrast offences against the public administration, also increasing disqualifying ancillary penalties (for example, the inability to contract with the public administration and the ban on holding public offces are made permanent in cases of imprisonment exceeding two years), and providing for new investigation and rewarding tools aimed at feshing out hidden corruption (specifcally, the possibility of using wiretaps among persons in the same place by resorting to ‘trojans’ is extended, and two new cases of exemption from criminal liability are introduced for the corruptee or the corrupter, if they confess immediately, and for the undercover agent, respectively). On the prevention side, the act contains provisions on transparency of political parties and movements and payments made in their favour. The abovementioned reforms, which have been preceded and accompanied for twenty years by a series of changes in legislation intended to impact, more or less directly, the anti-corruption system (for example, the legislation on confscation or the various mechanisms providing for an external commissioner or judicial administration of companies, or the progressive strengthening of investigation and procedural tools in the feld of corruption offences) are part of an established ‘urgency’ logic characterising many branches of Italian criminal legislation (Moccia, 1997), which portray criminal law (increasingly punitive, as evidenced by the increasing severity of punishments) as a privileged tool for remedying social dysfunctions, often with distorting effects and in confict with the fundamental principles of criminal law (Mongillo, 2019: pp. 235–251). We are thus witnessing an unchecked expansion of punitive law, used as symbolism or propaganda, to attract consensus and reassure the public as to the strong commitment against particularly serious forms of criminal activity, such as corruption.

Corruption offences: positive changes and persistent critical issues The original punitive framework outlined in the 1930 Italian Criminal Code provided for two main types of corruption based, respectively, on a public offcial performing an offcial act (known as ‘improper corruption’, Article 318 of the

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Italian Criminal Code) or an act contrary to the duties of their offce (known as ‘proper corruption’, Article 319 of the Italian Criminal Code) against payment of undue compensation (or promise thereof) in cash or in the form of some other beneft. The offence of extortion by a public offcial (‘concussione’, Article 317 of the Italian Criminal Code) was placed alongside these offences. In its original wording, the criminal provision in question punished a public servant who, by abusing their offce or powers, forced or induced someone to make an undue payment or promise money or some other beneft; in this case, the private person and victim of unlawful coercion was exempt from criminal liability. The system was subsequently supplemented by introducing an offence of corruption in judicial proceedings (Article 319 ter of the Italian Criminal Code) and by extending the criminal relevance of international corruption (Article 322 bis of the Italian Criminal Code). With this framework created under the Italian Criminal Code, in the 1990s, Italy faced the most serious case of corruption that had ever been uncovered in the country’s history. It became known as ‘Tangentopoli’ or ‘Mani pulite’. The above was, however, a punitive system that needed to be updated. It was already inadequate with respect to the forms of corruption that emerged with Tangentopoli, and, moreover, not in touch with the times compared to those that gradually emerged later on (Cantone, 2018: p. 4). First of all, the Italian anti-corruption system was not in line with the obligations undertaken by Italy internationally, as noted by the bodies responsible for monitoring the internal implementation of conventional instruments to fght corruption, adopted by the Council of Europe and the OECD, i.e., the GRECO (Groupe d’Etats contre la corruption) and the Working Group on Bribery in the International Business Transactions (WGB), respectively. Among the various crucial issues in the Italian system, these working groups found that there was a specifc need to revise the offence of extortion to overcome the inconsistency represented by the impunity of private persons who were able to achieve undue advantages through an unlawful conduct; to establish an offence of corruption among private persons that was broader than the crime of breach of corporate trust as a result of giving or promising a beneft in force at the time; to provide for an offence of trading in infuence (GRECO, 2012). As mentioned, intervening on the offences of corruption was also required in light of the inability of the system to effectively have an impact on the new forms of corruption emerging in practice, which case law was trying to remedy, sometimes even through actual ‘interpretative twisting’ in relation to the offences of corruption and extortion (Viganò, 2014: pp. 4–8; Severino, 2016: pp. 636–640). There is no doubt that the abovementioned reforms, and especially the 2012 ‘framework-level’ reform have had a positive effect on the punitive anti-corruption system. For example, replacing the offence of ‘improper corruption’ with that of ‘corruption for the performance of the function’, consisting of an action by a public offcial who receives for themselves or for others a promise of or a payment of money or other beneft ‘for the exercise of their functions or powers’, subject

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to a less severe punishment, remedied interpretations by way of analogy that conficted with the principle of legality. The interpretations in question in effect cancelled by way of interpretation the requirement of the ‘act’ subject to the illegal trade, provided for in the previous wording of the offence, thus broadening the legislative framing of corruption. Case law sought to punish, specifcally, the ‘payroll’ situations of public offcials, which now appear to be perfectly covered by the new Article 318 of the Italian Criminal Code (Viganò, 2014: p. 9; Pulitanò, 2012: p. 7). A symmetrically positive intervention was aimed at flling the gap in punishing illegal intermediation with public servants, preliminary to acts of corruption (Severino, 2013: p. 11): Article 346 bis of the Italian Criminal Code, introduced by Law 190/2012 and amended by the 2019 reform, punishes the actions by anyone, outside cases of complicity to commit corruption, participating in an agreement aimed at any form of ‘illicit infuence’ on the activity of public offcials or persons charged with a public offce. Trading in infuence is criminalised regardless of whether a connection with public bodies is boasted by an intermediary bearing no actual relationship with the former, or whether the person in question makes use of actual connections, by unduly causing others to give or promise money or another beneft as the price for unlawfully interceding before the public servant or as remuneration in relation to the exercise of the duties or powers. The gradual broadening of the application scope of corruption among private persons is also noteworthy (La Rosa, 2018; Seminara, 2017; Venafro, 2018). Its uneven regulation, set out under Articles 2635–2635 ter of the Italian Civil Code, has long been affected by the Italian legislator’s reluctance to adapt to international obligations. The changes introduced with Legislative Decree No. 38/2017 extended the offence’s application scope (now applying to any private entity and not only to commercial companies), expanding the category of punishable persons (now also including persons performing work with management duties within the entities) and punishable conducts, punishing the giving, promise and offer of money or other beneft, as well as the incitement to commit corruption. Law No. 3/2019 duly intervened by providing that all offences of corruption among private persons (and not only instances of corruption resulting in a distortion of competition in acquiring goods or services, as previously provided) could be prosecuted by the authorities without an upstream criminal complaint being required. Therefore, the object of protection is undoubtedly a public interest, namely fair and free competition (Mongillo, 2019: p. 292). However, in the current system for repression of corruption phenomena numerous critical issues remain, and they cannot be discussed in detail here. The most problematic aspect remains the distinction between extortion by a public offcial, undue inducement and corruption. The 2012 reform, as mentioned above, chose to keep the offence of ‘concussione’ in force – despite appeals to the contrary also by numerous international organisations, specifcally the OECD (Di Martino, 2013: p. 373; Montanari, 2012: pp. 14–18) – but provided for two separate offences: extortion, reduced to mere ‘coercion’, and undue inducement to give or promise benefts, provided by the new Article 319 quater,

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which also punishes the induced private party, thus transitioning from victim of the crime to active participant, albeit subject to a less severe punishment than the public servant. What is meant by inducement, and what the boundary with coercion is, are particularly controversial issues (Mongillo, 2013: pp. 174–206; Palazzo, 2016: pp. 67–69). According to the psychologistic criterion, the thin red line between extortion and undue inducement allegedly lies in the different degree of psychological pressure exerted on the private person (less intense in case of undue inducement, essentially corresponding to milder forms of persuasion, suggestion or moral pressure, which do not seriously affect the private person’s freedom to choose), whereas the criterion of undue advantage pursued by the private person posits that the boundary between the two offences is determined by the outcome of the functional act under the agreement. In other words, extortion would come into play only in the case of a functional act detrimental to the private person, whereas whenever the latter may expect or obtain an undue advantage from the act, Article 319 quater of the Italian Criminal Code would apply. A third approach postulates that in cases of doubt, the quantitative criterion concerning the degree of intensity of moral coercion should be supplemented by a qualitative criterion based on the nature of the advantage pursued by the private person. The Italian Supreme Court of Cassation, Joint Sections, with decision No. 12228/2013, Maldera and others (Balbi, 2015; Bartoli, 2014; Donini, 2014; Gatta, 2014; Pisa, 2014; Seminara, 2014), while favouring the objective criterion of undue advantage (given that the advantage in question, like the threat characterising extortion, represents, according to the Supreme Court, the essence of inducement and justifes punishing the induced), nonetheless acknowledged the merely demonstrative value of the suggested discretional criterion, admitting the existence of ambiguous, borderline cases, which require using additional criteria that the court must draw on as guidance within ‘grey areas’. In other words, the factual context (environmental factors and type of interpersonal relationships) will guide the court in choosing the type of offence that applies in the case at hand. Given the interpretative uncertainties that remain in case law (Collica, 2017), the need to draw a more precise line between constricting behaviour and inducive conduct (but also between the latter and the contiguous cases of corruption) is nowadays required even more so than in the past, given that they amount to different and differently punished offences. Even the current wording of the offence of trading in infuence generates doubts on its interpretation and has aspects that clash with constitutional principles (Mongillo 2019: pp. 297–302; Cingari, 2019: pp. 749–755; Gambardella, 2019: pp. 69–73). The essential elements of this offence are not comprehensively defned (for example no reference parameter exists to determine the unlawfulness of the mediation) and are inconsistent as to the disvalue of the unlawful conduct. It includes (and punishes in the same manner) both the ‘actual’ trading in infuence, that is where the unlawful agreement relates to an actually existing relationship and to a power of infuence actually capable of affecting the public servant (with real danger for the lawful and impartial functioning of the public

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administration), and the ‘potential’ trading in infuence, that is to say ‘boasting’ which does not relate to a power to infuence that is actually capable of affecting the public servant, and is characterised by a lower disvalue (Cingari, 2019: pp. 751–752; Mongillo, 2019: pp. 301–302). The offence punishes the mediator, but also the person who promises or gives money or a beneft, irrespective of whether the relationship between the mediator and a public servant exists or not. Aside from the fact that punishing the ‘client’ actually compromises the possibility of the phenomenon to come to light, the choice to punish in the same manner both a person who pays after being deceived by a ‘snake oil salesman’, and a person who does so being certain, for example, of being able to rely on existing relationships (public and well-known) between the mediator and the public offcial, seems problematic; these are objectively different conducts in terms of disvalue (Cantone and Milone, 2018: p. 3; Gambardella, 2019: pp. 71–73). Critical issues remain with regard to corruption among private persons, which is not yet fully aligned – specifcally with reference to the category of perpetrators and the sentencing framework – with the provisions of the Convention of the Council of Europe on Corruption of 27 January 1999 and the Framework Decision 2003/568/JHA on combating corruption in the private sector (Seminara, 2019: pp. 597–599). Finally, we note that no coordination exists between the new anti-corruption regulation and the provisions of military criminal law providing for offences against the military administration committed by military personnel with management or command functions; moreover, conficting case-law remains as to the relationship between corruption and the offence of collusion of members of the Guardia di Finanza (Revenue Guard Corps) under Article 3 of Law No. 1383/1941 (Rivello, 2017: pp. 3–7).

The most recent tools introduced to ‘wipe out corruption’: new exemption provisions and new means of assessing the commission of offences In an attempt to facilitate the uncovering of corruption, Law No. 3/2019 recently introduced, as already mentioned, an exemption from criminal liability (Article 323 ter of the Italian Criminal Code) for anyone (public servant or private person) who, after committing one of the offences against the public administration expressly listed in the provision in question, voluntarily turns themselves in, provided that the relevant report is formalised within a certain time limit and the offender actually cooperates with judicial authorities by providing useful and concrete information as proof of the offence and identifying the other perpetrators (Mongillo, 2019: pp. 262–271; Gambardella, 2019: pp. 54–56; Pulitanò, 2019b: pp. 601–602). The offences to which the exemption from criminal liability applies include any form of corruption and the offence of undue inducement to give and promise a beneft, but – inexplicably – the provision does not extend to trading in infuence (Mongillo, 2019: p. 264). According to the Report on the draft bill, exemption

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from liability is in line with the rationale behind the 2017 whistle-blowing law (see below) and reveals a twofold purpose: on a special preventive level, breaking the wall of silence for bilateral offences or offences otherwise fuelled by collusion, also enabling the acquisition of probative elements which are generally very diffcult to obtain in trial and are useful for establishing and punishing such criminal acts; on a general preventive level, discouraging unlawful conduct by introducing an ‘uncertainty factor’ with deterrence effects, in the sense that after providing for a criminal liability exemption for those who report an offence, the parties to the corruptive scheme may no longer rely for certain on a common interest in keeping quiet (Pulitanò, 2019b: p. 601). However, the strict time limit requirement introduced (the report must be made before the offender has been informed that investigations have been carried out against him/her in relation to the reported facts and, in any event, within four months from when the offence was committed) in fact runs the risk of making the exemption from liability ineffective. Indeed, the same posits that the person turn themselves in without actually knowing whether or not their name is entered in the register of suspects, whether they can actually beneft from the liability exemption (Gambardella, 2019: p. 55), and in any event within time limits that are so short that they make a change of heart by the offender, such as to encourage them to turn themselves in, unrealistic. In terms of criminal investigation, the use of undercover agents – entirely new for these types of offences (Gambardella, 2019: pp. 56–58; Mongillo, 2019: pp. 252–262; Pulitanò, 2019b: pp. 602–603; Scevi, 2019: pp. 14–17) – responds to similar purposes of reducing the dark number of corruption. The legislator intervened by amending Article 9, Paragraph 1(a) of Law No. 146/2006, which already included in a single legislative text various cases of undercover operations previously provided for in several special laws concerning, inter alia, the offences of facilitating illegal immigration, money laundering, drug traffcking, child prostitution and child pornography, terrorism and organised crime. Following the 2019 reform, undercover operations may also be used in investigations for all corruption-related offences, to be understood in a broad sense (therefore including, in addition to various instances of corruption, also the offence of ‘concussione’, undue inducement and trading in infuence). Reference to corruption offences has made it necessary to supplement the types of conduct that an undercover agent is entitled to carry out ‘for the sole purpose of acquiring evidence’ in relation to the various offences provided, because those already set out under Article 9 could not allegedly ft the undercover operations relating to corruption (Padovani, 2018: p. 4). Therefore, it is provided that undercover agents’ actions are justifed if they pay money or other benefts in performing an unlawful agreement that has already been entered into by others, promise or give money or other benefts requested by a public offcial or a person charged a public offce or requested as a price for unlawful mediation to a public servant or as remuneration. However, for actions not to be punishable, they must be necessary to obtain evidence relating to illegal activities that are already being carried out. Accordingly, undercover operations may not go so far as to solicit or provoke criminal conduct; an undercover agent may not act as an agent provocateur, but only be involved indirectly, or be purely

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instrumental in the performance of others’ unlawful activities, according to the exemption paradigm as conceptualised by the established case-law of the Italian Supreme Court and the European Court of Human Rights (Gambardella, 2019: pp. 57–48; Mongillo, 2019: pp. 253–254). However, it is worth wondering to what extent an undercover operation may in practice be an effective tool in the anti-corruption sector. At least with reference to situations in which corruption occurs in a ‘restricted’ context (for example, a tendering procedure or a construction project), where selective mechanisms of personal reliability operate and everyone will likely get to know each other, the possibility that an undercover agent could infltrate seems completely unrealistic; vice versa, where the criminal phenomenon originates from casual contingencies (for example, making use of a health care service), carrying out an undercover operation appears easier, but the risk that it crosses the line and provokes an offence is higher (Padovani, 2018: p. 5).

Whistle-blowing and the ‘culture of legality’ In Italy whistle-blowing was provided with a comprehensive statutory dimension in 2012, with the ‘Legge Severino’, only in relation to the public sector and with a certain delay compared to most European countries and over a century after the United States (Amato, 2014; Thüsing and Forst, 2016; Turksen, 2018). This delay was above all due to cultural reasons, connected both to the belief that corruption had to be fought with forms of criminal repression rather than through preventive administrative measures, and the fact that there has always been (and still is) a negative view of the person reporting an offence, seen as a traitor rather than a custodian of social integrity (Massari, 2018: pp. 981–982). Recently, whistle-blowing was regulated more comprehensively with Law No. 179/2017 (Borsari, 2018; Massari, 2018; Rugani, 2018), aimed at encouraging reporting offences and irregularities that an employee has become aware of during their employment relationship, guaranteeing more extensive protection for the informant. The 2017 reform supplements and strengthens the regulation already provided for the public sector under Article 54 bis of Legislative Decree 165/2001 (Italian Consolidated Law on Public Employment), which prohibits subjecting a civil servant to punishment, dismissal or a discriminatory measure if, in the interest of the public administration’s integrity, they report illegal conduct (therefore, not only the whole range of offences against the public administration but also, more generally, any form of abuse of the powers entrusted to the perpetrator who exerts them to obtain a private advantage) which they have become aware of by virtue of their employment relationship. Whistle-blowers are not protected if they are found, also with a frst instance decision, to be criminally liable for false allegations or defamation or for other offences committed by fling the report, or subject to civil liability for the same offences in cases of wilful misconduct or gross negligence. Law No. 179/2017 extended the concept of ‘civil servant’ (which

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now includes, for example, workers and collaborators of companies supplying goods or services that carry out work on behalf of the public administration), expanded the category of recipients of the report (which are now the person responsible for corruption prevention and transparency, ANAC, the judicial authorities and audit authorities) and strengthened, albeit not fully, the measures to protect the whistle-blower, including protecting the confdentiality of the latter’s identity, and providing for the appropriate procedures for presenting and managing reports, including electronically. The most notable aspect of the reform is that of having extended the protection provided for whistle-blowers to the private sector by amending Article 6 of Legislative Decree No. 231 of 2001 on entities’ liability for criminal offences, thus affecting organisational and management models to prevent the commission of predicate offences. Organisational models must now provide for, among other things, one or more channels whereby the indicated persons (top management and subordinates) may submit, to protect the entity’s integrity, detailed reports of unlawful conduct relevant for the purposes of the Decree and based on specifc and consistent facts, or infringements of the entity’s organisational and management model, which the whistle-blower has become aware of on the basis of the functions performed. The models must also include suitable measures to protect the identity of the whistle-blower in managing the report, prohibit retaliation or discrimination against the whistle-blower, as well as appropriate punishment not only for those who infringe the measures set out to protect the whistle-blower, but also against those who make, with wilful misconduct or gross negligence, reports that prove to be unfounded. The 2017 reform has also coordinated the whistle-blowing regulation with obligations relating to professional, scientifc or industrial secrecy, the infringement of which is subject to criminal punishment, and with the civil law obligation of loyalty to the employer. In the event of a complaint or a report, both in the public and private sectors, the pursuit of the interest to the integrity of public and private administrations, as well as the prevention and punishment of wrongdoing, is a just cause for disclosing offcial, professional or company secrets, exempting the whistle-blower from criminal or civil liability. The importance of this provision is clear if we consider that only by prioritising disclosures on the commission of unlawful actions is it possible to effectively punish such conducts without them being shielded by confdentiality obligations, on the one hand; and, on the other hand, to encourage employees to report such actions, by ensuring that they will not be prosecuted for infringing the confdentiality obligation. Nevertheless, there are several corrective measures that could still be provided to achieve a higher level of protection and greater preventive effectiveness of the instrument in question. The crucial issues concern, specifcally, the private sector. The decision to extend the protection of whistle-blowers only to a ‘restricted’ class of persons, comprising only the entities to which Legislative Decree 231/2001 is addressed that have adopted the relevant organisational and management models, is perplexing; adopting the model is optional for private

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entities, which also makes the measures aimed at protecting whistle-blowers purely optional. Furthermore, the gap existing in the area of unlawful conducts subject to report should also be expanded by including all those conducts that do not amount to a predicate offence under Legislative Decree 231 of 2001 or to an infringement of the organisational model. And yet, the main problem remains that of promoting, within a broader project of increasing awareness on the ‘culture of legality’ (Severino, 2016: p. 641), the maximum social ingraining of whistle-blowing, regarding which a distorted perception still prevails.

Conclusion There is no doubt that the historic 2012 reform triggered a fundamental change in perspective in the Italian anti-corruption system, placing alongside the traditional repressive approach – which had proven insuffcient to deal with a now all-encompassing and widespread criminal phenomenon – administrative prevention and other measures to fght corruption. Creating an unfavourable environment for corruption is therefore a potentially winning strategy. However, faced with particularly serious forms of crime such as corruption, criminal punishment remains essential. The result is a complex system with two ‘cores’, preventive and repressive, which do not always operate in perfect synergy and are not always fully effective, also because they are often the product of an urgency logic intended to affect contingent phenomena. As regards criminal law, the fght against corruption has materialised, especially with the most recent developments, in terms of a gradual increase in punitive measures, in particular through a widespread increased severity of criminal punishment, including ancillary measures, as if the threat of greater punishment in itself meant strengthening protection. Faced with social concern, placed under the zoom-in lens of public opinion, principally through the media, the primary objective seems to be that of sending a ‘zero tolerance’ message, in an attempt to normalise the degree to which systemic corruption is perceived by society. The introduction of the two new causes of exemption from criminal liability for those who turn themselves in and for undercover agents has a symbolic meaning too, underpinning the legislator’s idea of introducing new tools, even if not especially effective, to ‘wipe out the corrupt’ (Pulitanò, 2019b: pp. 606–607). The debate on the reliability of corruption perception indicators, even if deduced from the evaluations of offcial operators, and therefore on the adherence of these indicators to the actual data, is in fact very heated in Italy (Cantone and Carloni, 2019; Mongillo, 2019: pp. 235–240; Padovani, 2018: pp. 1–3). The spread of corruption is certainly an actual problem, even if it is diffcult to quantify, but it is also necessary to avoid emphasising data or indicators leading to them being elevated to guiding principles of criminal policy. Conversely, the data or indicators in question must not be ignored, lest running the risk of underestimating the phenomenon.

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To effectively fght corruption, it is thus necessary not to lose sight of the bigger picture. Clearly, the preventive system, albeit appropriately strengthened (e.g. through the introduction of the regulation to protect whistle-blowers – although it can still be improved), cannot adequately function if it is not supported by a comprehensive reform of public administration to avoid that the anti-corruption intervention plans and the preventive measures end up in the morass of bureaucratic formalities and muddled functioning mechanisms of public offces (Fiandaca and Musco, 2013: pp. 4–5). Likewise, it is essential to rethink the entire micro-system for the repression of corruption, which, as we have seen, is characterised by the presence of similar or contiguous offences (that, when applied in practice, are not always easily distinguishable from one another), and criminal provisions focusing more on criminological perpetrator types than on criminal facts (the offence of trading in infuence is emblematic in this regard), which respond to a rationale of anticipating protection and present a high defcit of certainty/specifcity (Manes, 2018). Tackling ancillary penalties, investigation tools, or, let alone, the penalty limits for specifc offences does not produce signifcant effects unless we frst focus on a rational rearrangement of the entire subject matter (Gambardella, 2019: p. 62). Finally, an effective anti-corruption policy undoubtedly cannot operate without a cultural and educational operation aimed at spreading the culture of legality in the public and private sectors (Pasculli, 2019: pp. 223–224). However, this clearly ‘educational’ function cannot be delegated primarily to punitive law through an unchecked and emergency expansion of criminally relevant conducts.

References Amato, G. (2014). Profli penalistici del Whistleblowing: una lettura comparatistica dei possibili strumenti di prevenzione della corruzione. Rivista Trimestrale di Diritto Penale dell’Economia, 3/4, pp. 549–607. Balbi, G. (2015). Sulle differenze tra i delitti di concussione e di induzione indebita a dare o promettere utilità. Alcune osservazioni in margine a Cass., Sezioni Unite, 24 ottobre 2013. Diritto Penale Contemporaneo, 1, pp. 143–159. Bartoli, R. (2014). Le Sezioni unite tracciano i confni tra concussione, induzione e corruzione. Giurisprudenza Italiana, 5, pp. 1208–1218. Borsari, R. (2018). La nuova disciplina del Whistleblowing. Rivista della Guardia di Finanza, 3, pp. 707–730. Caneppele, S. & Calderoni F. (eds.) (2014). Organized Crime, Corruption and Crime Prevention. Essays in Honor of Ernesto U. Savona. Cham: Springer. Cantone, R. (2017). Il sistema della prevenzione della corruzione in Italia. Diritto Penale Contemporaneo. Available from: https://www.penalecontemporaneo.it/ upload/3335-cantone2017a.pdf [Accessed 2nd July 2019]. Cantone, R. (2018). Il contrasto alla corruzione. Il modello italiano. Diritto Penale Contemporaneo. Available from: https://www.penalecontemporaneo.it/uploa d/4217-cantone2018a.pdf [Accessed 2nd July 2019].

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Cantone, R. & Merloni, F. (eds.) (2016). La Nuova Autorità Nazionale Anticorruzione. Torino: Giappichelli. Cantone, R. & Milone, A. (2018). Verso la riforma del delitto di traffco di infuenze illecite. Diritto Penale Contemporaneo. Available from: https://www.penaleco ntemporaneo.it/d/6358-verso-la-riforma-del-delitto-di-traffco-di-infuenze-ille cite [Accessed 2nd July 2019]. Cantone, R. & Carloni, E. (2019). ‘Percezione’ della corruzione e politiche anticorruzione. Diritto Penale Contemporaneo. Available from: https://www.pen alecontemporaneo.it/d/6495-percezione-della-corruzione-e-politiche-anticorr uzione [Accessed 2nd July 2019]. Center for the Study of Democracy. (2010). Examining the Links Between Organised Crime and Corruption. Available from: https://ec.europa.eu/home-affairs/sites/ homeaffairs/fles/doc_centre/crime/docs/study_on_links_between_organised_ crime_and_corruption_en.pdf [Accessed 22nd July 2019]. Cingari, F. (2012). La corruzione pubblica: trasformazioni fenomenologiche ed esigenze di riforma. Diritto Penale Contemporaneo, 1, pp. 79–98. Cingari F. (2015). La nuova riforma in tema di delitti contro la P.A., associazioni di tipo mafoso e falso in bilancio. Diritto Penale e Processo, 7, pp. 806–813. Cingari, F. (2019). La riforma del delitto di traffco di infuenze illecite e l'incerto destino del millantato credito. Diritto Penale e Processo, 6, pp. 749–755. Collica, M.T. (2017). La tenuta della sentenza Maldera, tra conferme e nuovi disorientamenti. Diritto penale contemporaneo, 2, pp. 195–235. Di Martino, A. (2013). Le sollecitazioni extranazionali alla riforma dei delitti di corruzione. In: B.G. Mattarella & M. Pelissero, eds., La legge anticorruzione. Prevenzione e repressione della corruzione. Torino: Giappichelli, pp. 355–380. Davigo, P. & Mannozzi, G. (2007). La Corruzione in Italia. Percezione Sociale e Controllo Penale. Roma and Bari: Laterza. Donini, M. (2014). Il corr(eo)indotto tra passato e futuro. Cassazione Penale, 5, pp. 1482–1506. Fiandaca, G. & Musco, E. (2013). Diritto penale. Parte speciale. Vol. I, Addenda: La recente riforma dei reati contro la pubblica amministrazione. Bologna: Zanichelli. Forti, G. (2003). Introduzione. Il volto di Medusa: la tangente come prezzo della paura. In: G. Forti, ed. Il Prezzo della Tangente. La Corruzione come Sistema a Dieci Anni da ‘Mani Pulite’. Milano: Vita e Pensiero. Gambardella, M. (2019). Il grande assente nella nuova ‘legge spazzacorrotti’: il microsistema delle fattispecie di corruzione. Cassazione Penale, 1, pp. 44–73. Gatta, G.L. (2014). La concussione riformata, tra diritto penale e processo. Rivista Italiana di Diritto e Procedura Penale, 3, pp. 1566–1586. GRECO. (2012). Third Evaluation Round, Evaluation Report on Italy Incriminations. Council of Europe. Available from: https://www.coe.int/en/web/greco/evaluat ions/round-3 [Accessed 22nd July 2019]. Gounev, P. & Ruggiero, V. (eds.) (2012). Corruption and Organized Crime in Europe: Illegal Partnership. London: Routledge. La Rosa, E. (2018). Corruzione Privata e Diritto Penale. Uno Studio sulla Concorrenza Come Bene Giuridico. Torino: Giappichelli. Manes, V. (2018). Corruzione senza tipicità. Rivista Italiana di Diritto e Procedura Penale, 3, pp. 1126–1155. Massari, G. (2018). Il whistleblowing all’italiana: l’evoluzione del modello sino alla legge n. 179 del 2017. Studium Iuris, 9, pp. 981–992.

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Moccia, S. (1997). La Perenne Emergenza. Tendenze Autoritarie nel Sistema Penale. Napoli: Esi. Mongillo, V. (2013). L’incerta frontiera: il discrimine tra concussione e induzione indebita nel nuovo statuto penale della pubblica amministrazione. Diritto Penale Contemporaneo, 3, pp. 166–212. Mongillo, V. (2015). Le riforme in materia di contrasto alla corruzione introdotte dalla legge n. 69 del 2015. Diritto Penale Contemporaneo. Available from: www. penalecontemporaneo.it/d/4359-le-riforme-in-materia-di-contrasto-alla-corruz ione-introdotte-dalla-legge-n-69-del-2015 [Accessed 5th July 2019]. Mongillo, V. (2019). La legge ‘Spazzacorrotti’: ultimo approdo del diritto penale emergenziale nel cantiere permanente dell'anticorruzione. Diritto Penale Contemporaneo, 5, pp. 231–311. Montanari, M. (2012). La normativa italiana in materia di corruzione al vaglio delle istituzioni internazionali. Diritto Penale Contemporaneo. Available from: http:// www.penalecontemporaneo.it/upload/1341134726Montanari%20-%20DPC .pdf [Accessed 5th July 2019]. Nicotra, I.A. (ed.) (2016). L’Autorità Nazionale Anticorruzione. Tra Prevenzione e Attività Regolatoria. Torino: Giappichelli. Padovani, T. (2018). La spazzacorrotti. Riforma delle illusioni e illusioni della riforma. Archivio penale, 3, pp. 1–10. Palazzo, F.C. (2016). Le norme penali contro la corruzione tra presupposti criminologici e fnalità etico-sociali. In: R. Borsari, ed., La corruzione a due anni dalla “Riforma Severino”. Padova: Padova University Press, pp. 61–76. Pasculli, L. (2019). Brexit, integrity and corruption: local and global challenges. In: L. Pasculli & N. Ryder, eds., Corruption in the Global Era: Causes, Sources and Forms of Manifestation. Abingdon: Routledge, pp. 212–232. Pisa, P. (2014). Una sentenza equilibrata per un problema complesso. Diritto Penale e Processo, 5, pp. 568–571. Pulitanò, D. (2012). La novella in materia di corruzione. Cassazione penale. Suppl. 11, p. 7. Pulitanò, D. (2019a). Tempeste sul penale. Spazzacorrotti e altro. Diritto Penale Contemporaneo, 3, pp. 235–250. Pulitanò, D. (2019b). Le cause di non punibilità dell’autore di corruzione e dell’infltrato e la riforma dell’art. 4 bis. Diritto Penale e Processo, 5, pp. 600–607. Rivello, P.P. (2017). Concorso di reati e confitto apparente di norme. Confitti di giurisdizione. Rassegna della giustizia militare, 5, pp. 1–18. Rugani, A. (2018). I profli penali del Whistleblowing alla luce della L. 30 novembre 2017n. 179. Available from: http://www.lalegislazionepenale.eu/wp-content/ uploads/2018/06/Rugani-approfondimenti.pdf [Accessed 5th July]. Scevi, P. (2019). Rifessioni sul ricorso all’agente sotto copertura quale strumento di accertamento dei reati di corruzione. Archivio Penale, 1, pp. 1–17. Seminara, S. (2014). Concussione e induzione indebita al vaglio delle Sezioni Unite. Diritto penale e processo, 5, pp. 563–568. Seminara, S. (2017). Il gioco infnito: la riforma del reato di corruzione tra privati. Diritto penale e processo, 6, pp. 713–729. Seminara, S. (2019). Indebita percezione di erogazioni, appropriazione indebita e corruzione privata. Diritto Penale e Processo, 5, pp. 593–599. Severino, P. (2013). La nuova legge anticorruzione. Diritto Penale e Processo, 1, pp. 7–13.

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Severino, P. (2016). Legalità, prevenzione e repressione nella lotta alla corruzione. Archivio Penale, 3, pp. 635–641. Spena, A. (2015). Dalla punizione alla riparazione? Aspirazioni e limiti dell’ennesima riforma anticorruzione (l. 69/2015). Studium Iuris, 10, pp. 1115–1124. Thüsing, G. & Forst, G. (eds.) (2016). Whistleblowing: A Comparative study. Dordrecht: Springer. Turksen, U. (2018). The criminalisation and protection of whistleblowers in the EU’s counter-fnancial crime framework. In: K. Ligeti & S. Stanislaw Tosza, eds., White Collar Crime - A Comparative Perspective. Oxford: Hart Publishing, pp. 331–366. Venafro, E. (2018). Il nuovo reato di istigazione alla corruzione privata come fattispecie attenuata dell’art. 2635 c.c. Available from: http://www.lalegislazione penale.eu/wp-content/uploads/2018/10/Venafro-approfondimenti-LP-1.pdf [Accessed 5th July 2019] Viganò, F. (2014). I delitti di corruzione nell’ordinamento italiano: qualche considerazione sulle riforme già fatte, e su quel che resta da fare. Diritto Penale Contemporaneo, 3/4, pp. 4–24.

Part III

The escape from criminal law: deferred prosecutions agreements and fnancial sanctions

5

Corruption, regulation and the law The power not to prosecute under the UK Bribery Act 2010 Shahrzad Fouladvand

Introduction Profound changes in the relationships between the state, the global market and civil society in the contemporary period have necessitated entirely new approaches to crime control. Prominent amongst recent initiatives is a strategy, referred to by Garland as ‘responsibilisation’ (Garland, 2001) which, so it is argued, goes some way to meet these new challenges. This doctrine seeks to mobilise non-state organisations and individual citizens to ‘raise consciousness’ and to ‘create a sense of duty’ in combating crime, enabling the state to govern from a distance (Garland, 2001: pp. 125, 137). It is a manifestation of Foucault’s conception of governmentality (Burchell, Gordon et al., 1992) in which sovereignty is expanded in order to shape ‘preventive partnerships’ (Crawford and Evans, 2017). Such an approach refects the increasingly limited capacity of the modern state to respond to serious and corporate crime, particularly, where successful criminal investigation and the prosecution of corporate offenders is timeconsuming, complicated, and costly. In these circumstances, the sovereign state is no longer able to act upon crime directly and independently but instead, by activating indirect action from non-state agencies and organisations, it can adopt a shared model of policing. A number of scholars, including Gill (2002), Kooiman (1993) and Lord (2014a, b) have argued that we are increasingly witnessing a shift in the enforcement of criminal law against corporate crime towards non-police agencies seeking alternative compliance measures such as regulatory techniques of negotiation and settlement. Hawkins (2002: p. 295) sees this as a converse process. Instead of reliance on normal police action associated with the criminal prosecution of offenders, we have moved towards regulators and non-police agencies, and therefore, prosecutions have become a last resort. Lord (2014a, b) argued that these broader processes, practices and relations shape behaviour within corporations and markets. As a result, it is no exaggeration to assert that the criminal justice response to serious and corporate offending has been transformed. This chapter will examine the challenges as well as opportunities for a more proactive prosecution model which places anti-bribery enforcement responsibility on corporations themselves, using the provisions of Section 7 of the UK

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Bribery Act 2010 as an example. It will analyse the operation of this Act in the light of responsibilisation theory and the de-centring of prosecution, by focusing on some regulatory dimensions of the Act and a new tool of the Deferred Prosecution Agreement (DPA). This has been subjected to sharp criticism as undermining the main purposes of the Act, particularly after the Rolls Royce case1 in January 2017. First, the chapter will discuss the diffculties of conducting investigations and prosecutions against major corporate offenders, before examining the shift from old governance in crime control, leading on to the debates in the next section on applying regulatory actions in such a transformed crime management framework. This will be followed by a consideration of the Bribery Act 2010 with the focus on section 7, particularly the new offence of failure to prevent, and the way in which DPAs have been used so far. Finally, a discussion on the way in which this new regulatory tool has treated corporations will conclude the chapter.

The problems of national prosecution of companies The prosecution of companies must be seen in the context of a globalised world in which many corporations can deploy considerably more resources and even political power than a nation state. According to Khanna, Apple has more cash on hand than two-thirds of the world’s nations (Khanna, 2016) and many corporations have simply escaped the confnes and legal restrictions of specifc national territories. It has even been argued that many such global oligopolies (SuarezVilla, 2014) have themselves become the essential institutions of global government, increasingly usurping the traditional role of the nation state (May, 2018). Heywood has noted that: Profound changes in the nature and organisation of the contemporary state mean that many of our traditional concepts and categories in regard to power and authority – perhaps most notably, the separation between public and private sectors and the autonomy of state action – need to be revised. (Heywood, 2017: p. 27) The almost insurmountable diffculties faced by a mere nation state in attempting to prosecute an international corporation are well known. First, a global organisation which feels itself challenged by a national prosecution agency can simply threaten to move its operation elsewhere, with the consequent loss of employment and tax revenues to the home state. Effective corporate impunity may also be achieved where an organisation is backed by another, powerful nation. For example, a Serious Fraud Offce (SFO) investigation into the highly questionable Al Yamamah arms deal involving BAE Systems was abruptly terminated in 2006 (Williams, 2008). There were suggestions at the time that continuation of

1 SFO v Rolls-Royce PLC and Another [2017] Lloyd’s Rep. FC 249.

Corruption, regulation and the law 73 the investigation might result in the Saudi Royal Family transferring an order for £6 billion worth of Eurofghters to France, leading to a potential loss of employment for 5,000 people in the UK and a suspension of security cooperation (The Guardian, 2008). Some organisations may simply be too big to prosecute (Packin, 2014; Hardouin, 2017) and, as the US Assistant Attorney General Lanny Breuer pointed out in December 2012 when declining to bring criminal proceedings against HSBC for money laundering: Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking license in the US, the future of the institution would have been under threat and the entire banking system would have been destabilized. (Greenwald, 2012) Locating evidence against a global corporation can be equally daunting when digital data can be deleted or transferred abroad in a matter of seconds. Large corporate entities can also employ the very best accountancy and legal teams, frequently able to outmanoeuvre the very ungenerously funded professionals in a national prosecution agency. The Blue Arrow prosecution in the UK in 1992, for example, resulted in a year-long trial which consumed £40 million (£70 million at current values) of the Serious Fraud Offce’s limited budget. Not only did the trial place an intolerable burden on jurors, who were required to navigate complex fnancial accountancy evidence, but the eventual convictions were shortly afterwards overturned by the Court of Appeal. Lord Phillips, the former President of the Supreme Court, opined at the time that the Blue Arrow affair has remained in the ‘institutional memory of the prosecutorial authorities and regulators’, suggesting to some commentators that such cases are ‘untriable’ and that the Serious Fraud Offce would never again dare to take on the City of London establishment (Francis, 2014). Currently, it spends an estimated average of three and a half years and £1.5 million ($2.25 million) investigating each bribery case (Amaee, 2012). As is well known, prosecuting either a company or corporate executives, presents serious problems of proof and the identifcation of individual perpetrators with appropriate mental culpability (Gobert, 2008). The reluctance to prosecute any of the bankers who helped to precipitate the 2008 banking crisis (Will et al., 2012) may not be unconnected with these extreme logistical diffculties. Moreover, it is very diffcult to punish a corporation with an appropriate sentence which is not fnancial and will not merely be passed on to innocent consumers or result in the loss of employment for innocent employees. As former Lord Chancellor, Baron Thurlow most appositely noted: Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked? (cited in Coffee, 1981: p. 386)

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Worse still, public attitudes towards the prosecution of corporate offending are scarcely supportive. According to Levi, crimes of deception are treated by the mass media as extensions of ‘infotainment’, such as individual and corporate celebrities in trouble (Levi, 2006). In popular imagination and in the culture of many large fnancial institutions, risk-taking with other people’s money is normality and even fraud need not be judged too harshly. Conrad Black, who was jailed in 2007 for fraud and obstructing justice, has been able to conduct a high-profle campaign, recently described as ‘the Wall Street Journal’s Innocence Project’ to clear his name (Schoenfeld, 2019). In May 2019 Donald Trump signed a full pardon for Black, describing him as a ‘friend (…) entrepreneur and scholar’ (BBC, 2019). The White House statement noted Black’s ‘tremendous contributions to business, as well as to political and historical thought’ including the publication of a 2012 book entitled ‘Donald J. Trump: A President Like No Other’ (ibid.). All of these diffculties suggest that the traditional route of national prosecution might not always be the most appropriate course for dealing with large scale or corporate offending in the twenty-frst century. This is not to suggest that the recent resurgence in effective corporate prosecutions is not welcome but that new strategies and new measures to enforce the rule of law in the international corporate sector are long overdue.

The shift from old to new governance These new strategies will inevitably refect changes in the relationship between the state and civil society. As the former head of the SFO, the lead agency in England and Wales for investigating and prosecuting transnational bribery and corruption, has put it, his agency cannot manage this alone, without the assistance of companies and senior executives in tackling economic crimes (Amaee, 2012). A review of the literature on the relations between government and society and their impact on laws and policies can help us to understand this transformation of governance towards a decentralised enforcement system, which is the focus of this chapter. Rose (2000) and Burchell (1993), for example, drawing on Foucault’s conception of governmentality, have argued that the central functions of the sovereign state have been replaced by a renewed focus on the development of technologies for exercising power. As Boyne (2000) puts it, the goal of governance becomes the ‘integration of society’ which also incorporates new ways of governing economic life (Hindess, 1998). Hindess sees the economy as a self-regulating system which provides resources for both the state and society if properly managed (1998: p. 223). It is in this liberal context that independent and responsible citizens interact with the public, make their own choices, and facing the consequences of those choices (Mazerolle and Ransley, 2006: p. 8). The complexity of economies makes it diffcult and arguably ineffective for them to be controlled by a central state, leading to government by the market in a decentralised decision-making process (ibid.: pp. 9–10). This diffusion of power and control between the state and civil society breaks down barriers between

Corruption, regulation and the law 75 governmental authorities and a range of agencies and justifes new forms of interventions that can be far more extensive (Garland, 1997: p. 175). In a way, as Garland argued, the burden of crime control has been shifted from governments to ‘responsibilized’ agents who have to take responsibility for their own decisions on risk (1997). This can lead us to what Feeley and Simon called ‘actuarial justice’ (1994) which focuses on the population rather than individuals and is aimed at prevention and risk minimisation rather than detection, punishment and rehabilitation. This responsibilisation strategy, therefore, goes beyond responsible individuals to communities and groups who become responsible for their choices (O’Malley, 1996) and instead of rehabilitating offenders it focuses on limiting the reach of crime. A decentred government and broad ‘networks of power’ (Loader, 2000) are formed to include multi-agency partnerships. Policing beyond government is a model that has increasingly transformed the government monopoly on policing, justice and corrections and has introduced a shared model in which policing belongs to everybody in a mixture of public, private and voluntary agencies (Bayley and Shearing, 1996). The involvement of third parties, particularly corporations in the new model of criminal law enforcement, encourages more proactivity (Alldridge, 2012: p. 1182) than was possible in a control environment dominated solely by the responsive actions of the police and criminal courts. This new enforcement responsibility regime has been already applied by some regulation authorities such as the Financial Services Authority (FSA) which obliged frms to set up effective control systems to mitigate fnancial crime risk (Trautman and Altenbaumer-Price, 2013). This has become a highly impactful strategy in the context of criminal investigation.

Regulatory Actions This section will discuss whether the risk of corruption and the failure to prevent it can be reduced by regulatory interventions to hold companies accountable for their actions and to ‘infuenc(e) the culture of the company’ (Bisgrove and Weekes, 2014: p. 418) instead of just punishing the wrongdoing. Although some authors like Black (2014) and others have criticised the regulatory techniques which might be used as a strategy for the avoidance of prosecution by questionable companies it cannot be ignored that the factors discussed above present real obstacles to successful prosecution. The negotiation and settlement process may, by contrast, secure rapid and effective compliance. The chapter will return to this issue in the later discussion of the Deferred Prosecution Agreements (DPA). Mazerolle and Ransley (2006) suggest that contemporary society is facing a new management paradigm where government and governance have been transformed from centralised state control to a system of de-centred networks of governance and crime control agents. In this new trend, a crime control partnership, therefore, in the name of ‘third party policing’ has been initiated as one of the key policing innovations where a multiple of ‘regulatory nodes’ take some responsibility for preventing or reducing crime problems by using a range of civil, criminal

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and regulatory rules and laws (Buerger and Mazerolle, 1998: p. 301). This partnership activates the indirect use of legal provisions with a range of engagement strategies from collaborative (e.g. self-reporting) to coercive, to address crime problems with the focus on prevention. This new form of nodal governance can be also seen as a direct refection of the inadequate operation of criminal investigations and proceedings. As Alldridge puts it, ‘following the money trail’ is a clear indication of the failure of criminal investigations and the UK Proceeds of Crime Act 2002 would not have been brought forward if the criminal investigation and criminal proceedings could secure the crime reduction (Alldridge, 2013: p. 244). This new ‘preventive turn’ was initially characterised as ‘responsibilisation strategy’ by Garland (1996: p. 452) when he argued that indirect interventions can bring diverse actors and agencies together to enhance the capacity of state and non-state organisations and result in an effective crime prevention policy and practice. Lord claimed that such responsibilisation strategies can be manufactured by the state as self-regulation but as a result of that self-regulatory practices can also emerge independently from state infuence (2014a: p. 43). As Braithwaite (2004) puts it, states and companies would therefore be unable to dominate global markets and global governance if they fail to adapt to the networked economy and networked governance which enabled a shift in both the private and public sector to compete for growth. Therefore, in such a framework, the state alone cannot take the responsibility for crime control. Corporations become distinctively powerful agents who play an important role in the economic, social, political and routine in the modern world. They cover such a huge space that they can have a major structural infuence. These powerful agents in our liberal political community can decide how to exercise their agency and so to perform their functions effectively to comply with the obligations imposed upon them (Shiner and Ho, 2018: p. 714). Shiner and Ho claimed that society trusts corporations to respect the rules but if they betray that civic trust then social agencies are entitled to step in to take actions alongside steps permitted by criminal justice (ibid.).

The UK Bribery Act 2010 One important domestic example of how these strategies can have an impact on legislation, is the UK Bribery Act 2010. According to Horder, deploying a regulatory strategy in parallel with a ‘criminal offence-led strategy’ can have a number of distinctive features which can be applied to bribery and other kinds of corporate wrongdoing in order to minimise the risk but also to offer a fexible range of penalties (2013: p. 200). In its 2007 consultation paper, ‘Reforming Bribery’ the Law Commission recommended a new criminal offence of failing to prevent bribery which seemed to have some regulatory dimension to it as the burden was put on the company to prove that it had adequate procedures in place to prevent bribery (The Law Commission, 2007). This was also one of the objectives of the Impact Assessment which was expressed to be supplemental to ‘Criminal Liability in Regulatory Contexts’ (The Law Commission, 2010: p. 231) to modernise the law enforcement and to replace outdated ‘doctrines of criminal liability

Corruption, regulation and the law 77 applicable to a business’. The regulatory approach was introduced to supplement criminal legislation on bribery in order to break the negative cycle of offending committed by global corporations with impunity which it is impossible to investigate because of inadequate time and resources. They pointed out that any penalty imposed by the courts may be small compared with the cost of bringing the prosecution. Horder claimed that the government has nonetheless failed to explain why a regulatory strategy to address bribery should not be implemented sectorally. He has argued that there is a strong case for making the guidance on adequate anti-corruption procedures mandatory in some industries, such as arms manufacturing and export, so that the UK can be taken seriously as a force in anti-corruption policy across the world (2013: p. 214). In order for the criminal offence-led strategy for bribery to work effectively it is better for it to be supplemented by a regulatory strategy in order to reduce the risk of bribery being committed (ibid.: p. 215). Before moving on to the discussion of this ‘failure to prevent’ model, it is worth mentioning briefy that until the late 1990s UK bribery laws were governed by the Victorian and Edwardian legislation of the Prevention of Corruption Acts 1889 to 1916. This legislation consisted of the Public Bodies Corrupt Practice Act 1889, the Prevention of Corruption Act 1906, the Prevention of Corruption Act 1916 and the common law offence of bribery. However, so cumbersome were these statutes that there was a very limited number of convictions each year and these were mainly for private sector bribery (The Law Commission, 2007: p. 19). As the Select Committee on the Bribery Act 2010 in its 2019 Report mentioned, the Prevention of Corruption Acts were outdated and ineffective to respond to important events particularly following the ‘cash for questions’ scandal and the case of John Poulson which provided an example of how small-scale bribery can build up into a multi-million-pound industry and involving 23 local authorities. The actual nature of the ‘public offcial’ division and the procedural question of prosecutorial consents, amongst other issues, were problematic under the old law (Alldridge, 2012: p. 1184) which called for the reform of the UK Bribery law. The world also witnessed some highly signifcant changes in this period, due to liberalisation of markets and the demands for fair competition in global markets which formed the target of the law in relation to different types of corruption at both national and international levels. This global process was initiated by the infuential 1977 Foreign Corruption Practice Act (FCPA) in the US which had extraterritorial jurisdiction reach. This was followed by the decision of the Organisation for Economic Co-operation and Development (OECD) countries to create the OECD Convention on Combating Bribery of Foreign Public Offcials in 1997 to deal with international business transactions. By joining this Convention, the UK bribery law came under intense scrutiny and were subjected to criticisms that the Prevention of Corruption Acts 1889–1916 did not adequately address overseas bribery, since there had never been any such prosecution by the United Kingdom (Bean and MacGuidwin, 2013: p. 67).

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Therefore, from the early 2000s the substantive and procedural English law of bribery looked increasingly unft for purpose. For example, Part 12 of the AntiTerrorism, Crime and Security Act 2001 amended the old laws by incorporating the bribery of foreign public offcials as a triable offense if a UK national or company paid a bribe to a public offcer abroad. This was in line with the implementation of the OECD Bribery Convention and it made a major contribution in the UK anti-corruption reform but also it created an enforcement focus for overseas bribery of foreign public offcials (Monteith, 2013: p. 251). This has extended the international scope of the SFO’s investigatory power. More signifcantly still, the UK Bribery Act was enacted in 2010 and created four categories of offences which reformed the entire UK anti-bribery regime. This legislation surpassed the FCPA and criminalised not only active bribery by offering, giving and promising a bribe but also passive bribery which is the request, acceptance or receiving of a bribe (Trautman and Altenbaumer-Price, 2013: p. 503). The extra-jurisdictional reach of the Act covers a broad range of corruption from private and public sector transactions both domestically and transnationally (Boles, 2014). It also made ‘failure of commercial organisations to prevent bribery’ a criminal offence under section 7 of the Act. The corporate entity, however, can have a defence if they can prove that they ‘had in place adequate procedures designed to prevent persons associated with’ it from bribing.2 This has pioneered a new path for corporate accountability in the UK and as Lord’s fndings demonstrated this new corporate offence of failure to prevent is a refection of self-policing which has been built in the UK Bribery Act section 7 (Lord, 2014a). The new legislation could therefore be seen as a prime example of the regulatory and responsibilising tendencies referred to above.

Section 7 and Deferred Prosecution Agreement (DPA) As the select committee on the Bribery Act 2010 stated in its 2019 report on ‘The Bribery Act 2010: post-legislative scrutiny’ (Select Committee, 2019), the problem of how companies can be punished for the wrongdoing of a minority of those involved in corrupt conduct should be put in a broader context. The response should not harm the great majority of those involved with the company who have played no part in the corrupt activities. This was a question which was considered at some length by the Law Commission which suggested making it an offence for a commercial organisation to fail to prevent bribery (Select Committee, 2019: para. 167). A culture of self-policing and compliance, therefore, was activated in section 7 of the UK Bribery Act 2010 by introducing the proactive and preventive ‘failure to prevent’ model but also to strengthen the UK’s role in the global fght against corruption. This section will provide some brief analysis of this new corporate crime, its defence of ‘adequate procedure’ and the new Deferred Prosecution Agreement

2 UK Bribery Act 2010, s. 7(2).

Corruption, regulation and the law 79 (DPA) in the context of a particular prosecution. Under Section 7 of the Bribery Act, UK companies can be held strictly liable for failing to prevent bribery by those associated with them. The SFO has the authority to decide whether or not prosecute a corporate body. This decision has been governed by the ‘Full Code Test’ in the Code for Crown Prosecutors3 and the joint prosecution Guidance on Corporate Prosecutions.4 According to the Guidance on Corporate Prosecution, when a corporate body decides to self-report wrongdoing the prosecution will consider whether this represents a genuine proactive approach taken by the corporate management team. But inevitably, if the decision is not to prosecute, how can good practice be enforced? As discussed above, in a globalised world, a criminal investigation and prosecution of economic crime particularly in relation to corporations is slow, costly and not always straightforward. A new trend towards ‘global settlements’ (Garrett, 2011) was articulated for example in the case of Innospec Ltd5 where an agreement was made between the SFO (2016) and the defendants which resulted in a range of guilty pleas, fnes, confscation and civil recovery orders. In 2012, challenges and diffculties in the prosecution of corporate economic crime were discussed in the ‘Consultation on a New Enforcement Tool to Deal with Economic Crime Committed by Commercial Organisations: Deferred Prosecution Agreements’ (Ministry of Justice, 2012a). Some of the main issues considered related to the question as to whether the conviction of commercial organisations should depend upon whether they were prepared to plead guilty to a criminal charge, given that there exist serious legal and evidential diffculties in proving corporate liability (ibid.: para. 32). There can also be some serious economic and social considerations in respect of a criminal conviction of a commercial organisation, such as the adverse impact on employees, customers, pensioners, suppliers and investors (ibid.: para. 27). This consultation paper concluded that: the current system does not allow for swifter alternatives to prosecution which can deal with wrongdoing effectively, proportionately and with a greater degree of certainty. We need to look afresh at prosecutorial and other enforcement options for dealing with offending by commercial organisations. (ibid.: p. 12) It was therefore suggested that there was a need to consider a range of tools and alternatives such as Deferred Prosecution Agreements (DPAs) which would facilitate a fair and pragmatic approach to tackling these kinds of crime. As Shiner and Ho (Shiner and Ho, 2018) put it, making money is the main aim of a company

3 The Code for Crown Prosecutors. Available from: www.cps.gov.uk/publication/code-cro wn-prosecutors [Accessed 16 July 2019]. 4 Guidance on Corporate Prosecutions. Available from: www.sfo.gov.uk/publications/guidanc e-policy-and-protocols/corporate-self-reporting/ [Accessed 16 July 2019]. 5 R. v. Innospec Ltd [2010] EW Misc 7, para. 36.

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and deterrence by way of fnancial penalties and reputational sanction can be practically more effective. Agreements with defendants and bargaining with accused persons and corporations have increasingly been used to avoid the diffculties with securing convictions in economic crime trials (Alldridge, 2012: p. 1182). Such agreements may include a range of types of plea bargain (whether or not achieved by means of self-reporting), civil recovery orders or as the outcome of involvement in international agreements. Tellingly, agreements not to press charges or impartial application of the law in bribery cases can be controversial due to the traditional roles of judge and prosecutor in the adversarial system (Alldridge, 2013: p. 222). However, given that companies are by their nature very different from natural persons, applying a DPA as a novel prosecutorial tool to tackle economic crime, is a compromise for effective punishment and regulation within a reasonable timeframe (Bisgrove and Weekes, 2014). The DPA model was adopted from the United States where it was initially offered to non-corporate cases and mainly to protect vulnerable members of society. However, the Ministry of Justice gradually changed this practice and since the 2000s it has offered DPAs to corporate offenders (Amulic, 2017). In 2012, the UK Government responded to a consultation on a new enforcement tool to deal with an economic crime which was based on a consultation with wide range of sources such as members of the public, prosecutors, members of the judiciary, the legal profession, businesses and academic and regulatory bodies (Ministry of Justice, 2012b). In this consultation paper, the Government maintained that the use of DPAs would allow prosecutors to hold offending organisations to account for their wrongdoing in a focused way without the uncertainty, expense, complexity or length of a criminal trial. This process was intended to encourage selfreporting by commercial organisation although the guidelines on the prosecution of bribery offences (CPS, n.d.) made it clear that self-reporting is no guarantee that a prosecution will not follow. Consequently, a DPA regime was introduced in the UK in 2014 via Section 45 of the Crime and Courts Act 2013, while Schedule 17 to this Act sets out the procedure for entering into a DPA. It is a discretionary agreement and based on voluntary cooperation between the offending company and the prosecutor, which allows prosecution of an offence to be suspended for a limited time. A DPA does not cover any individual but only a ‘body corporate’. The rationale was that the company voluntarily will comply with a range of conditions deemed appropriate to penalise the offending behaviour in order to avoid the reputational damage of criminal prosecution (Bisgrove and Weekes, 2014). The conditions may include a combination of fnancial sanctions, implementing enhanced compliance procedures, and providing ongoing cooperation with the SFO (n.d.). Although criminal charges will be fled by the prosecutor, the actual investigation would be suspended. The suspension may be lifted if the defendant breaches the terms of the agreement and the prosecution will drop the charges when the defendant completes the requirements successfully.6 During the negotiation for

6 Schedule 17 to the Crime and Courts Act 2013, paras 1 and 2.

Corruption, regulation and the law 81 a DPA, the Criminal Procedure and Investigations Act 1996 (CPIA) will not be applied7 however, the application for approval of the DPA will be considered before the court for fnal approval so that the court can make a declaration under paragraph 7(1) of Schedule 17 to the Act that the parties have settled the terms of the DPA.8 Since the introduction of DPAs in 2014, the SFO has secured four deferred prosecution agreements: Standard Bank PLC in 2015, XYZ in 2016, Rolls-Royce in 2017 and Tesco in 2017 (SFO, n.d.). Standard Bank was charged by SFO with one offence of failing to prevent bribery under Section 7 of the Bribery Act 2010. The proceedings were suspended when the DPA was approved by the President of the Queen’s Bench Division, the Rt. Hon. Sir Brian Leveson at Southwark Crown Court. In November 2018, Standard Bank met the requirements of the terms of its DPA with SFO within three years.9 The second DPA was approved in 2016 for XYZ, a small to medium sized enterprise (SME). XYZ during 2004–2012 was involved in systematic payment of bribes through its controlling minds to secure contracts in foreign jurisdictions. After admission of lack of adequate compliance provisions in place, XYZ made two self-reports to SFO. Given the scope of this case, the SFO decided to bring charges for offences in relation to the pre-2010 Act conduct, conspiracy to corrupt, in relation to post-2010 Act conduct, conspiracy to bribe contrary to s. 1 of the Criminal Law Act 1977 and failure to prevent bribery, contrary to section 7 of the Bribery Act 2010.10 The judge considered the seriousness of the offences but also took into account the impact of prosecution on employees and others innocent of any misconduct; the risk of insolvency; and the fact that the company self-reported corporate wrongdoing; fully disclosed internal investigation and cooperated with SFO.11 These issues resulted in the approval of a DPA for XYZ and Judge Leveson, as in the Standard Bank case, declared that the DPA is in the interests of justice and that its terms were fair, reasonable and proportionate.12 The third DPA was reached between Rolls-Royce and the SFO13 in January 2017 for a period of fve years. This has been the most highly controversial usage which was approved by the Court, since it raised some important questions, due to the gravity and extent of the offending involved. Rolls-Royce is considered to be a company of central importance to the UK and the second largest provider of defence aero engine products and services in the world with the capacity to employ 50,000 people in more than 50 countries.14 It was established that during the last

7 8

9 10 11 12 13 14

Criminal Procedure and Investigations Act 1996, c. 25 Arrangement of Act. Deferred Prosecution Agreements Code of Practice, paras 9 and 10. This DPA Code was issued by the Director of Public Prosecutions and Director of the Serious Fraud Offce pursuant to paragraph 6(1) of Schedule 17 to the Crime and Courts Act 2013. SFO v Standard Bank (2015) Case No. U20150854. SFO v XYZ (2016) Case No. U20150856, paras 8–12. Ibid., para. 15. Ibid., para. 26. SFO v Rolls-Royce plc [2017] Lloyd’s Rep FC 249. Ibid., para. 3.

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three decades, this enormous corporation made corrupt payments to local agents to secure contracts across several countries such as Indonesia, Thailand, Brazil, Nigeria, India and the United States.15 Sir Brian Leveson, who also approved this DPA, described the conduct of Rolls-Royce as ‘the most serious breaches of the criminal law in the areas of bribery and corruption’.16 Rolls-Royce was charged with 12 offences; 6 offences of conspiracy to corrupt (contrary to s. 1 of the Criminal Law Act 1977); 5 offences of failure to prevent bribery (contrary to s. 7 of the Bribery Act 2010, and 1 offence of false accounting contrary to s.17(1)(a) of the Theft Act 1968).17 As Cheung put it, this case was the largest foreign bribery in UK history and the SFO investigation was carried out by over 70 members of staff at any one time (Cheung, 2018). Despite the gravity of offending and the fact that Rolls-Royce did not self-report, Sir Brian Leveson ‘was satisfed that the DPA fully refects the interests of the public in the prevention and deterrence of this type of crime’.18 The fourth DPA was agreed in the Tesco case,19 which was a false accounting prosecution. However, this chapter will not discuss this as this case did not involve offences under the Bribery Act.

Reasonable Doubts about DPAs As this chapter established earlier, effective enforcement of the self-regulatory mechanisms may result in negotiations between state and individual corporations which can result in fexible standards (Ayres and Braithwaite, 1992). The application of DPAs based on failure to prevent bribery under the UK Bribery Act 2010 has raised some signifcant criticisms. Since the introduction of the new prosecutorial regime in 2014, DPAs have had a major infuence on some of the largest cases of corporate corruption, allowing them to be settled without criminal convictions (Select Committee, 2019). Before the adoption of this new tool in the UK, the House of Lords considered the relevant provisions to the Crime and Courts Bill in 2012. One of the examples which provoked discussion was the announcement mentioned above, that HSBC had concluded a fve-year DPA with the US federal prosecutors relating to its failure to prevent the money laundering of ‘at least $881 million in drug traffcking proceeds’.20 Its terms suggested that at trial the Department of Justice would prove the alleged charges beyond a reasonable doubt, by admissible evidence, however, without that agreement, the

15 16 17 18 19 20

Ibid., para. 5. Ibid., para. 4. Ibid. Ibid., para. 139. SFO v Tesco (2017) Case No. U20170287. Statement of Facts by the United States Department of Justice, 11 December 2012, para 9. Available from: www.justice.gov/sites/default/fles/opa/legacy/2012/12/11/dpa-att achment-a.pdf [Accessed 19 July 2019].

Corruption, regulation and the law 83 conviction of HSBC might have resulted in its having to cease banking operations in the United States (The New York Times, 2016: para. 15). Although a DPA enables the parties to resolve the issue effciently without going through a traditional prosecution and trial, using them remains controversial as ‘the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years’ (Reilly, 2017: p. 843). Senator Elizabeth Warren was concerned about such special treatment for corporations: If you’re caught with an ounce of cocaine, the chances are good you’re gonna go to jail. If it happens repeatedly, you may go to jail for the rest of your life … . But evidently if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fne and you go home and sleep in your bed at night. (cited in Gongloff, 2013) ‘Too big to jail’ is one of the major criticism against DPAs but this has been justifed by the prosecutors in a way that conviction may lead to widespread economic trouble with substantial harm to the employees and shareholders (Amulic, 2017: p. 137). Nevertheless, to many it appears that rich corporations can ‘buy their way out of prosecution’ (Transparency International UK, n.d.). The English DPAs have been developed beyond the US-style ones as they must be approved by the court and they are underpinned by statute. Nevertheless, they have been offered differently from each other as we discussed earlier. Rolls-Royce is clearly the most signifcant DPA agreed so far and it has been criticised for undermining the incentives of self-reporting, as in this case Rolls-Royce did not self-report and the investigation had been initiated by examining public internet postings. Even more importantly the application of ‘public interest’ test by Sir Brian Leveson in his consideration of the Rolls-Royce DPA, signifed a signifcant departure from the approach adopted in both Standard Bank and XYZ (Cheung, 2018). Para 2 (5) of the DPA Code of Practice (at 2.5) requires a prosecution ‘unless there are public interest factors which clearly outweigh those tending in favour of prosecution’. Sir Brian Leveson in para 61 of his judgement in Rolls-Royce referred to his frst reaction that: if Rolls-Royce were not to be prosecuted in the context of such egregious criminality over decades, involving countries around the world, making truly vast corrupt payments and, consequentially, even greater profts, then it was diffcult to see when any company would be prosecuted.21 He did, however, make an exception and was convinced that a DPA was in ‘the interests of justice’ and its terms were ‘fair, reasonable and proportionate’ under

21 SFO v Rolls-Royce, para 61.

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the Crime and Courts Act 2013, Schedule 17, para. 8(1). The co-operation by Rolls Royce including a waiver of privilege which was recognised as ‘extraordinary’ and the company was awarded a generous discounted fnancial penalty of a one-half discount instead of a one-third discount (Cheung, 2018). Robert Barrington, Executive Director of Transparency International UK has maintained that the lesson learned from the Rolls-Royce DPA seems to be that a powerful company ‘will never be prosecuted due to the collateral damage; and that the possible impact on potential victims holds greater sway with the court than the actual impact on real victims’ (Transparency International UK, n.d.). The use of DPAs in this context remains a highly controversial matter notwithstanding the recent scrutiny by the Select Committee on the Bribery Act 2010 in its 2019 Report. In an oral evidence given to Bribery Act 2010 Committee, the Policy Director at Corruption Watch, Susan Hawley pointed out that: There are genuine public confdence issues around DPAs and one of them is that, yes, the big companies can negotiate them. The small companies are much easier to prosecute, including for the substantive offences, which makes the offending more serious. Therefore, the public interest in offering them a DPA is lower, because the offending appears more serious. (Bribery Act 2010 Committee, 2018)

Conclusion It has been argued here that changes in the global political economy, and particularly the growth in the power, extent and infuence of the international corporate sector, have made traditional prosecutorial measures obsolete, at least in respect of large scale and corporate offending. National prosecutions are no longer ft for purpose and reliance on them alone would encourage further a culture of impunity for powerful corporations. If large international entities are to be successfully held to account for wrongdoing and deterred from further criminality, new prosecutorial strategies must be urgently adopted. One such approach has been championed by those who have developed the concept of responsibilisation, envisaging a co-operative approach between state and civil society. Preventative networks of surveillance and self-regulation are seen in this perspective as a vastly more successful strategy than reactive prosecution. By looking at one important example of the practical implementation of this approach under the UK Bribery Act 2010 and subsequent litigation, it has been possible to assess the viability of these responsibilisation strategies in action. Indeed, an analysis of the frst signifcant case arising under this part of the Act throws into sharp relief the advantages and disadvantages of dealing with corporate offenders in this way. On the one hand the Rolls Royce case appears to represent a wildly successful avoidance of all the barriers to prosecution set out in the frst section above and a holding of the company to account in a way which promises to change its institutional culture for the foreseeable future. On the

Corruption, regulation and the law 85 other it looks like a cynical manoeuvre designed to enable a powerful company to buy its way out of criminal culpability. In this light, the case appears not so much as a radical new approach to the regulation and responsibilisation of the international corporate sector as merely a convenient cloak for lawlessness and the politics of power. More worrying still is the possibility that the outcome of the Rolls Royce case signals a signifcant diminution of the rule of law, and that trial and judgement in open court are to be replaced by back room deals in which the extraordinary power of the corporate world can be articulated through agreements crafted specifcally to satisfy their commercial interests. Such concerns suggest that DPAs and other responsibilisation strategies need to be deployed with the greatest possible care, in appropriate circumstances and subject to vigorous policing and regulation by state agencies. Only then is it likely that they can hope to deliver the benefts that their proponents claim.

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Corruption, regulation and the law 87 Hardouin, P. (2017). Too big to fail, too big to jail: restoring liability. A lesson from HSBC case. Journal of Financial Crime, 24(4), pp. 513–519. Hawkins, K. (2002). Law as Last Resort: Prosecution Decision-Making in a Regulatory Agency. Oxford: Oxford University Press. Heywood, P.M. (2017). Rethinking corruption: hocus-pocus, locus and focus. Slavonic & East European Review, 95(1), pp. 21–48. Hindess, B. (1998). Neoliberalism and the national economy. In: M. Dean & B. Hindess, eds., Governing Australia. Cambridge: Cambridge University Press. Horder, J. (2013). Deterring bribery: law, regulation and the export trade. In: P. Alldridge & J. Horder, eds., Modern Bribery Law: Comparative Perspectives. Cambridge: Cambridge University Press, pp. 196–215. Khanna, P. (2016). These 25 companies and more powerful than many countries. Foreign Policy. Available from: https://foreignpolicy.com/2016/03/15/the se-25-companies-are-more-powerful-than-many-countries-multinational-corpora te-wealth-power/ [Accessed 22nd May 2019]. Kooiman, J. (1993). Modern Governance: New Government-Society Interactions. London: Sage. Levi, M. (2006). The media construction of fnancial white-collar crimes. British Journal of Criminology, 46(6), pp. 1037–1057. Loader, I. (2000). Plural policing and democratic governance. Social & Legal Studies, 9(3), pp. 323–345. Lord, N. (2014a). Regulating Corporate Bribery in International Business: AntiCorruption in the UK and Germany. Farnham: Ashgate. Lord, N. (2014b). Responding to transnational corporate bribery using international frameworks for enforcement: anti-bribery and corruption in the UK and Germany. Criminology and Criminal Justice, 14(1), pp. 100–120. May, C. (2018). The corporation as an institution of global governance. In: A. Nölke & C. May, eds., Handbook of the International Political Economy of the Corporation. Cheltenham, UK: Elgar, pp. 349–364. Mazerolle, L. & Ransley, J. (2006). Governance, Risk and Crime Control. Third Party Policing. Cambridge: Cambridge University Press. Ministry of Justice. (2012a). Consultation on a New Enforcement Tool to Deal with Economic Crime Committed by Commercial Organisations. Deferred Prosecution Agreements. Consultation Paper CP9/2012. Available from: assets.publishing.se rvice.gov.uk/government/uploads/system/uploads/attachment_data/fle/23 6065/8348.pdf [Accessed 16th July 2019]. Ministry of Justice. (2012b). Deferred Prosecution Agreements. Government Response to the Consultation on a New Enforcement Tool to Deal with Economic Crime Committed by Commercial Organisations. Response to Consultation CP(R)18/2012. Available from: https://consult.justice.gov.uk/digital-commun ications/deferred-prosecution-agreements/results/deferred-prosecution-agree ments-response.pdf [Accessed 16th July 2019]. Monteith, C. (2013). Bribery and corruption: the UK framework for enforcement. In: P. Alldridge & J. Horder, eds., Modern Bribery Law: Comparative Perspectives. Cambridge: Cambridge University Press, pp. 251–266. OMalley, P. (1996). Risk and responsibility. foucault and political reason. In: A. Osborne, T. Barry & N. Rose, eds., Foucault and Political Reason: Liberalism, Neo-Liberalism, and Rationalities of Government. London: UCL Press/Chicago: University of Chicago Press, pp. 189–208.

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Packin, N. (2014). Breaking bad: too-big-to-fail banks not guilty as not charged. Washington University Law Quarterly, 91(4), pp. 1089–1097. Reilly, P.R. (2017). Corporate deferred prosecution as discretionary injustice. Utah Law Review, 5, pp. 839–883. Rose, N. (2000). Government and control. British Journal of Criminology, 40(2), pp. 321–339. Schoenfeld, G. (21 May 2019). The Wall Street Journal's Innocence Project: the case of Conrad Black. The Bulwark. Available from: https://thebulwark.com/the-wal l-street-journals-innocence-project-the-case-of-conrad-black/ [Accessed 19th July 2019]. Select Committee on the Bribery Act 2010. (2019). Bribery Act 2010: Post-Legislative Scrutiny. HL Paper 303. SFO. (2016). Case Information. Innospec Ltd. Available from: https://www.sfo.gov. uk/cases/innospec-ltd/ [Accessed 16th July 2019]. SFO. (n.d.). Deferred Prosecution Agreements. Available from: https://www.sfo.gov. uk/publications/guidance-policy-and-protocols/deferred-prosecution-agreemen ts/ [Accessed 16th July 2019]. Shiner, R. & Ho, H. (2018). Deferred prosecution agreements and the presumption of innocence. Criminal Law and Philosophy, 12(4), pp. 707–723. Suarez-Villa, L. (2014). Corporate Power, Oligopolies, and the Crisis of the State. New York: Suny Press. The Law Commission. (2007). Reforming Bribery. Consultation Paper No 185. London: Law Commission. The Law Commission. (2010). Criminal Liability in Regulatory Contexts. Consultation Paper No 195. London: Law Commission. The New York Times. (15th July 2016). Too big to jail congressional report. The New York Times. Available from: www.nytimes.com/interactive/2016/07/15/ business/document-Too-Big-to-Jail-Congressional-Report.html [Accessed 19th July 2019]. Transparency International UK. (n.d.). Rolls-Royce Case: Justice for Sale or Fair Settlement? Available from: https://www.transparency.org.uk/our-work/busi ness-integrity/rolls-royce-case-dpas/ [Accessed 18th July 2019]. Trautman, L.J. & Altenbaumer-Price, K. (2013). Lawyers, guns, and money: the bribery problem and the UK Bribery Act. The International Lawyer, 47(3), pp. 781–517. Will, S., Handelman, S. & Brotherton, D. (2012). How They Got Away With it: White Collar Criminals and the Financial Meltdown. New York: Columbia University Press. Williams, S. (2008). The BAE/Saudi Al-Yamamah contracts: implications in law and public procurement: public international law. International & Comparative Law Quarterly, 57(1), pp. 200–209.

6

Justice deferred is justice denied? The jury’s out Axel Palmer

Introduction The properties of justice have long excited comment, with Lord Hewart CJ remarking almost a century ago that ‘Justice should not only be done, but should manifestly and undoubtedly be seen to be done’.1 The new millennium has seen twin challenges to Hewart: ‘justice’ meted out by non-court actors and a trend towards settlements ‘negotiated’ with prosecutors. In the realm of corporate fnancial crime, the ambit of United Kingdom (UK) legislation has steadily increased with many frms and individuals now subject to supervision by a statutory regulator, the Financial Conduct Authority (FCA) (2016). A key feature of the FCA is its ability to levy fnancial penalties, as opposed to undertaking criminal prosecutions. Criminal prosecutions, generally, lie in the hands of a specialist prosecutor, the Serious Fraud Offce (SFO). The SFO has the recent beneft of a new tool to employ: Deferred Prosecution Agreements (DPA). DPAs enable the SFO to negotiate outcomes to a prosecution with a commercial undertaking, rather than taking a case through a trial. This follows the approach of the United States (hereinafter, US), long considered the international leader in tackling fnancial crime (Ryder, 2011: p. 5), and now followed by other jurisdictions such as Australia, Canada and Argentina (Osofsky, 2018). This chapter considers the approach of the UK authorities (SFO and FCA) in combating fnancial crime, contrasting with the approach of the US.

Deferred prosecution agreements in the United States of America In the US, the enforcement authorities, the Department of Justice (hereinafter, DOJ) and the Securities and Exchange Commission (hereinafter, SEC), have deployed DPAs for many years and obtained signifcant income from fnes (Holder, 2014). As Reilly (2015) notes, ‘DPAs emerged in the early 1900s as a way to address non-serious misdemeanour charges, such as retail theft, especially

1 R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256, 259 (‘R v Sussex Justices’).

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when committed by juveniles or frst-time offenders’ (p. 314). The extension of DPAs to corporations can be traced to the US Supreme Court decision in New York Central & Hudson River Railroad Company v US2 which declared that ‘the old and exploded doctrine that a corporation cannot commit a crime’ was no longer appropriate. As Ryder describes, ‘this is a variation of the vicarious liability doctrine, and it allows the extension of civil liability on employers for the actions of the agents,’ subsequently, broadened to include agents of corporations ‘acting without authority or breaching specifc directions’ (Ryder, 2018: p. 250). The demise of Arthur Andersen3 caused the DOJ to reconsider indictment of corporations in favour of DPAs because it avoids the collateral consequences that committal to trial and conviction would entail, thus potentially penalising innocent investors and others (Grasso, 2016: p. 393). Since 2000, there have been 495 DPAs (and their variant ‘Non-Prosecution Agreements’) imposed by DOJ and SEC (Gibson Dunn, 2018: p. 2). However, there is growing disquiet about the lack of judicial oversight as a feature of the US process with Judge Kaplan ‘describing DPAs as “troublesome” insofar as they allow corporations to avoid criminal prosecutions by paying a fne instead of forcing culpable individuals to “pay the price” for their criminal activities’ (Gibson Dunn, 2018: p. 5). Kaplan’s view is that ‘both the interests of deterrence and the interests of just punishment are better served in all or most cases by prosecution of individuals responsible because crimes for which corporations are legally responsible are always committed by individuals’ (Gibson Dunn, 2018: p. 5). Kaplan is not alone: Judge Rakoff has asked similar questions in relation to the fnancial crisis, such as, ‘why have no high-level executives been prosecuted?’ and ‘the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed’ (Rakoff, 2014). The tension is clear in Transport Logistics International where Judge Chuang criticised the DPA before reluctantly giving approval stating: ‘the thing that always bothers me about deferred prosecution agreements is that it seems as if the discussion is always about what do we do to save the company when it’s the company and its personnel who were engaged in crimes’; that DPAs ‘should be reserved for companies that have engaged in extraordinary cooperation and have entirely rid themselves of all remnants of the prior criminal activity’ (Gibson Dunn, 2018: p. 5);4 and, effectively, the prevalence of DPAs risked a trend of ‘insuffcient deterrence’ of repeat behaviour. Nevertheless, the Appeal Court held that District Courts may not impose their own views about the adequacy of underlying criminal charges (Gibson Dunn, 2018). As a counter-balance, Gibson Dunn (2018) advances that ‘building effective cases against individuals can be exceptionally challenging for complex white collar

2 New York Central & Hudson River Railroad Company v US, 212 US 481 (1909). 3 United States v Arthur Andersen 544 U.S. 696 (2005). 4 United States v. Transp. Logistics Int’l, Inc., No. 8:18-cr-00011-TDC (D. Md. Mar. 12, 2018).

Justice deferred is justice denied? 91 crimes, particularly without the kind of corporate co-operation and disclosure an NPA or DPA may inspire’ (p. 5). Interestingly, US Senator Elizabeth Warren has attempted to counter this trend by introducing an ‘Ending Too Big to Jail Act’ arguing that ‘the fraud on Wall Street won’t stop until executives know they will be hauled out in handcuffs for cheating their customers and clients’ (Corporate Crime Reporter, 2018). According to Garrett (2014): ‘There is no offcial registry for corporate offenders, nor is there an offcial list of deferred or non-prosecution agreements by federal prosecutors’ (p. 7). Garrett’s database (Corporate Prosecution Registry, 2019) shows 168 DPAs and 230 NPAs since 2008 which underlines the US experience of these methods of disposal to be compared with the UK.

Background to deferred prosecution agreements in the United Kingdom In the UK, DPAs only became available in 2014 and, to date, this facility has only been used on four occasions: ‘three of those involved allegations of foreign bribery and one, the Tesco case, involved an allegation of fraud’ (Serious Fraud Offce, 2018a). In the US, because of the high probability of conviction on indictment, most cases are dealt with by the defendant ‘pleading guilty at an early stage of the process in exchange for a reduced sentence’. This conserves resources for cases which merit a full trial (de Grazia, 2008: p. 10). However, this practice is not without its criticism, from, among others, Bildfell (2016), Garrett (2014), Rakoff (2015), Reilly (2015) and Ryder (2018). The attractions of utilising DPAs were not lost on the SFO and, indeed, it was a key recommendation of the de Grazia review into the SFO’s operations. With the same objective in mind of expeditiousness and cost-effectiveness [author’s emphasis], and in parallel with its policy to engage with corporates through self-referral, the SFO endeavoured to respond to exhortations to adopt a more modern, or transatlantic, approach. It is important to briefy mention the cost-effectiveness of the DPA process and how this relates to the SFO since a series of harsh budget restraints that have been imposed since 2010. For example, since the advent of the Coalition government in 2010, the SFO, like many other government departments and agencies, had its budget cut as part of extensive austerity measures. For example, the annual budget of the SFO in 2008/2009 was £53.2 m reducing to £29.6 m in 2013/2014 with the resulting necessity to obtain additional ‘blockbuster’ funding from HM Treasury specifcally to fund major cases. For 2018/2019 this has been replaced by a core budget of £53 m (Serious Fraud Offce, 2018b). The decision to reduce the budget of the SFO, at a time when white collar crime increased and the duties of the SFO were expanded to incorporate the enforcement of the Bribery Act 2010, was questioned and criticised (see Masters, 2011; Russell, 2012; Armitage, 2012). However, it is important to note that fraud is an extremely diffcult criminal offence to detect, prosecute and expensive to enforce (see Lloyd-Bostock, 2007; Julian, 2007, 2008).

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The SFO itself had tried to negotiate outcomes with defendants in order to achieve the advantages of cost savings and certainty, but this was not without diffculty. In two cases, the SFO attempts to plea bargain with defendants caused tensions with the judiciary. Firstly, in Innospec,5 the Court of Appeal criticised the SFO for ‘usurping’ the Judge’s authority by agreeing punishment. Secondly, in Dougall6 the Judge rejected SFO claims for leniency. Since these cases would appear to be part of a ‘programme (…) instituted to encourage whistleblowing by city insiders, lawyers and accountants and to expand the SFO’s role in public anti-fraud initiatives’ (Fraud Advisory Panel, 2010), judicial antipathy was of clear concern. In 2012, the new SFO Director David Green outlined his vision and stated that ‘I am keen on maximising the set of tools available to SFO as an investigation and prosecuting agency, and DPAs represent a new and imaginative tool to deal with serious economic crime committed by commercial organisations’ (Green, 2012). Green considered that four ‘very important principles’ need to be observed: frstly, ‘sentencing in this jurisdiction is for the judge not the prosecution’; secondly, ‘corporates cannot be seen to be allowed some special kid glove treatment’; thirdly, ‘individuals will be prosecuted where that is the appropriate course of action’; lastly, ‘admissions as to conduct must be realistic, factual and not fanciful’ (Green, 2012; cf. also Serious Fraud Offce, 2013).

Deferred prosecution agreements in the United Kingdom In 2014, DPA’s became available to the SFO by virtue of the Crime and Courts Act 2013 (Ministry of Justice, 2014). A DPA, a discretionary tool, is subject to court approval (Serious Fraud Offce, 2013). The prosecutors are either the Director of Public Prosecutions or the Director of the SFO, with the Act making it clear that powers to enter into a DPA must be exercised personally by the designated prosecutor.7 The Act specifes the ‘persons who may enter into a DPA with a prosecutor’, which are in three categories: ‘P may be a body corporate, a partnership or an unincorporated association, but may not be an individual’.8 This latter provision differs from the US so that in the UK, ‘DPA’s will not be available for individuals, whether for individual crimes or for action undertaken on behalf of an organisation’ (Dyer, 2013: p. 12). The expectation was that a DPA would be likely to be available to companies which ‘self-report suspected criminal misconduct to SFO’ (Green, 2014). In such circumstances, the SFO would launch a formal criminal investigation to test the evidence and scale of offending. The SFO’s position is that:

5 R v Innospec, Southwark Crown Court, 26 March 2010, sentencing remarks of Lord Justice Thomas. 6 R v Dougall [2010] EWCA Crim 1048. 7 Crime and Courts Act 2013, s. 45, Schedule 17.3. 8 Crime and Courts Act 2013, s. 45, Schedule 17.4.

Justice deferred is justice denied? 93 The available evidence may well pass the evidential test. But if the company has taken appropriate disciplinary action against those responsible, made appropriate amendments to its compliance regime, compensated victims, and genuinely and proactively cooperated with the SFO investigation, it is hard to see how it would be in the public interest to prosecute the company, as opposed to individuals. (Green, 2014) The SFO warn that ‘if the corporate chooses to bury the misconduct rather than self-report, the risks attendant on discovery are truly unquantifable’ (Green, 2014). The expectation was that the frst DPA, subject to judicial supervision, would signal the future use of this mechanism and ‘as experience is built up by all parties, this will generate consistency and therefore predictability around the likelihood of achieving a DPA’ (Green, 2014). The reasoning was that ‘the most likely candidate for the frst DPA will be the type of case that would attract the lowest level of fne on a plea of guilty if proceedings were to take place’ (Parkinson, 2014). The clear issue for the SFO was that although it might well wish to avail itself of the new facility, given the history of judicial opprobrium, the SFO would not wish to risk an adverse outcome, and the attendant publicity, of its frst few DPA presentations to court being declined. Thus, the frst cases of signifcance might take some years to appear. In the UK, the prosecutor (SFO) may invite a corporate to enter DPA negotiations if it is considered in the public interest to do so (Osofsky, 2018). If the parties are ‘able to agree upon a statement of facts and provisional terms, a preliminary Court hearing is sought, so that the Court may decide whether a DPA is likely to be in the interests of justice, and whether the terms are fair, reasonable and proportionate.’ (Osofsky, 2018). Should that test be met, the next step is for the Court to declare approval at a fnal hearing, in public, ‘where the Court sets out its reasoning. The judgment, the statement of facts and the agreement are then published to ensure transparency.’ (Osofsky, 2018). In 2018, new SFO Director Lisa Osofsky emphasised that: The public interest analysis is crucial in considering whether a DPA could be appropriate. Factors for determining this include the seriousness of the predicate offence or offences; the importance of incentivising the exposure and self-reporting of corporate wrongdoing; the history (or otherwise) of similar conduct; the attention paid to corporate compliance prior to, at the time of, and subsequent to the offending; the extent to which the entity has changed both its culture and in relation to relevant personnel and the impact of prosecution on employees and others innocent of any misconduct. (Osofsky, 2018) The SFO make clear that ‘a DPA is not a private plea, ‘deal’ or ‘bargain’ between the prosecutor and the company. It is a way in which a company accounts for its alleged offending to a criminal court, and can have no effect until a judge

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confrms in open court that the DPA is in the interests of justice and that its terms are fair, reasonable and proportionate’ (Serious Fraud Offce, 2016a). The SFO state that any DPA must be backed by the corporate’s demonstrable commitment, evidence of reform and ‘assurance that companies are doing everything they can to ensure the crimes of the past [will not] be repeated long after the watchful eye of the prosecutor moves on to another target.’ (Osofsky, 2018). Having established the intentions and parameters behind DPAs, it is now appropriate to examine the four cases to date.

Serious Fraud Offce v Standard Bank PLC This frst DPA case involved Standard Bank PLC (Standard Bank), a UK bank and a subsidiary of Standard Bank Group Ltd, a South African public company.9 The Group was also the ultimate parent of Stanbic Bank Tanzania Ltd (Stanbic), a Tanzanian company. The Government of Tanzania wished to raise funds and Stanbic, which was not licensed to undertake this type of transaction, engaged Standard Bank which was licensed. Originally in February 2012, Standard Bank/ Stanbic quoted a fee of 1.4% of gross proceeds raised, later Stanbic Increased the proposed fee to 2.4%, because 1% would be paid to a local Tanzanian partner, Enterprise Growth Market Advisors Limited (EGMA). Two of EGMA’s three directors and shareholders were: a Commissioner of Tanzania Revenue Authority and, as such, a serving member of the Tanzania Government; a second director was formerly Chief Executive of Tanzanian Capital Markets and Securities Authority. In November 2012, Standard Bank/Stanbic were formally appointed by the Government of Tanzania to raise funds which, when completed in March 2013, amounted to $600 m. Stanbic paid $6 m to EGMA, most of which was withdrawn in cash within 10 days. Stanbic staff raised concerns about these withdrawals, escalated their concerns to Standard Bank Group in South Africa, which commenced an investigation on 2 April 2013. Standard Bank in London, without carrying out an investigation, instructed its law frm on 17 April 2013 to report the matter to the authorities, which it did within seven days to the SFO.10 The issue facing the SFO was consideration of the conduct of Standard Bank. The judgment makes clear that the predicate bribery offence was allegedly

9 Now called ICBC Standard Bank plc. ‘On 1 February 2015, the Industrial and Commercial Bank of China Limited [ICBC] acquired a 60% controlling interest in SB from Standard Bank Group Limited [SBG]. SBG retains a 40% interest in SB. ICBC did not own shares in SB at the time of the events described in this Statement of Facts and ICBC had no involvement in these facts in any way’. Serious Fraud Offce v Standard Bank Plc, Statement of Facts, 1–2. Available from: https://www.sfo.gov.uk/download/deferred-prosecution-agreeme nt-statement-facts-sfo-v-icbc-sb-plc/?wpdmdl=7603 [Accessed 12 August 2019]. 10 Serious Fraud Offce v Standard Bank Plc, Case No. U20150854, 4 November 2015, Preliminary Judgment, 16. Available from: https://www.judiciary.uk/wp-content/uploads/2 015/11/sfo-v-standard-bank_Preliminary_1.pdf [Accessed 11 April 2019].

Justice deferred is justice denied? 95 committed by two senior executives of Stanbic, involved the intention to bribe a foreign public offcial, use of public funds to make the bribe payment and could have compromised the integrity of the fnancial market. However, that was not Standard Bank’s conduct, because Stanbic was a sister company of Standard Bank within the South African Standard Bank Group. The SFO had concluded that there was insuffcient evidence to suggest that any of Standard Bank’s own employees had committed an offence or knew that two senior executives of Stanbic intended the payment to constitute a bribe.11 The SFO, having reached the conclusion that there was insuffcient evidence against employees of Standard Bank in relation to the bribe, with the consequence that the Bribery Act 2010 offence of ‘bribery of foreign public offcials’12 was not available, considered whether Standard Bank could have prevented the bribery.13 The ‘failure of commercial organisations to prevent bribery’ is an offence under the Bribery Act 2010:14 A relevant commercial organisation (…) is guilty of an offence under this section if a person (...) associated with [the organisation] bribes another person intending – (a) to obtain or retain business for [the organisation], or (b) to obtain or retain an advantage in the conduct of business for [the organisation].15 A complete defence to this offence is for a commercial organisation to have had in place adequate procedures designed to prevent persons associated with the commercial organisation from undertaking such conduct.16 The offence of failure of a commercial organisation to prevent bribery and the defence of having adequate procedures had not previously been tested in court and, as such, represented a signifcant development in the feld of anti-bribery and corruption. In this case, Stanbic was an associate of Standard Bank under different management. In order for Standard Bank to avail themselves of the ‘adequate procedures’ defence, they would have to demonstrate a clear policy. However, the judgment found that the policy was unclear, was not re-enforced effectively through to the team dealing with the fundraising through communication and training.17 The failure to provide suffcient guidance on relevant obligation and procedures where two group companies were involved, led to a transaction with a government of a high-risk country, with checks on a third party undertaken

11 12 13 14 15 16 17

Ibid., 26. Bribery Act 2010, s. 6. Serious Fraud Offce v Standard Bank Plc, Preliminary Judgment, n. 9, 26. Bribery Act 2010, s. 7. Bribery Act 2010, s. 7(1). Bribery Act 2010, s. 7(2). Serious Fraud Offce v Standard Bank Plc, n. 9, 20.

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by a sister company in which Standard Bank had no interest, oversight, control or involvement. Standard Bank did not undertake enhanced due diligence processes and did not identify the presence of politically exposed persons or note the change in arrangements through the introduction of a third party which was charging a substantial fee. The case was heard by a senior judge (Leveson P) who noted that the potential for confict and risk was evident but not addressed by Stanbic. The judgment concluded that an anti-corruption culture was not effectively demonstrated within Standard Bank as regards the transaction at issue. The outcome of this consideration whereby the SFO found that Standard Bank had failed to prevent bribery, in circumstances where it could not avail itself of the defence of ‘adequate procedures’, is the indictment in the fnal judgment: Standard Bank PLC, now known as ICBC Standard Bank PLC, between 1st day of June 2012 and the 31st day of March 2013, failed to prevent a person or persons associated with Standard Bank PLC, namely Stanbic Bank Tanzania Limited and/or Bashir Awale and/or Shose Sinare, from committing bribery in circumstances which they intended to obtain or retain business or an advantage in the conduct of business for Standard Bank PLC, namely by: (i) Promising and/or giving EGMA Limited 1% of the monies raised or to be raised by Standard Bank PLC and Standard Bank Tanzania Limited for the Government of Tanzania, where EGMA Limited was not providing any or any reasonable consideration for this payment; and (ii) Intending thereby to induce a representative or representatives of the Government of Tanzania to perform a relevant function or activity improperly, namely, showing favour to Standard Bank PLC and Stanbic Bank Tanzania in the process of appointing or retaining them in order to raise the said monies.18 The next consideration is whether the interests of justice would be served by entering a DPA as opposed to immediate prosecution. The SFO had to demonstrate to the court that the proposed DPA was in the interests of justice and the proposed terms of the agreement are fair, reasonable and proportionate.19 The reason for this is that the prosecutor has to approach the court after negotiations have commenced. A critical element of the UK DPA procedures is the requirement that the court examines the proposed agreement in detail. This is different

18 Serious Fraud Offce v Standard Bank Plc, Southwark Crown Court, Case No. U20150854, 30 November 2015, Final Judgment, 10. Available from: https://www.judiciary.uk/wp-co ntent/uploads/2015/11/sfo-v-standard-bank_Final_1.pdf [Accessed 11 April 2019]. 19 Criminal Procedure Rules 2015, s. 11.3(3)(i).

Justice deferred is justice denied? 97 from the US.20 The frst hearing is held in private with the preliminary judgment published together with the fnal judgment. The key issues for Standard Bank were: the seriousness of the conduct which, in this case, was that of Stanbic rather than Standard Bank; the immediate selfreport;21 co-operation with the SFO; and any history of similar conduct involving prior criminal, civil and regulatory enforcement actions. Standard Bank did immediately report to SFO and instructed its solicitors to investigate and disclose its fnding to SFO. The SFO gave credit for self-reporting a matter, bearing in mind the report came from Stanbic via Standard Bank Group, the conduct might not otherwise have come to the attention of the SFO. However, the judge made plain that mere self-reporting is not suffcient: the organisation must not withhold material which would jeopardise an effective investigation and prosecution. In this case, Standard Bank conducted a detailed internal investigation, sanctioned by and reported to SFO.22 The question of previous conduct is of interest: had Standard Bank been subject to prior criminal, civil or regulatory enforcement action? Here, Standard Bank had not been convicted for bribery and corruption nor had it previously been investigated by SFO. However, it had been subject to enforcement action by the FCA for failing in its anti-money laundering procedures.23 The judgment confrmed that by April 2014, the FCA had accepted that Standard Bank had taken extensive steps to remediate pre-existing failures.24 This step-by-step approach, with the additional consideration that the entity of Standard Bank had changed, allowed the court to agree that the conduct of Standard Bank could be dealt with by a DPA, subject to terms. This is of particular interest because at the time DPAs became available, commentators thought that ‘the most likely candidate for the frst DPA will be the type of case that would attract the lowest level of fne on a plea of guilty if proceedings were to take place’ (Parkinson, 2014). Standard Bank was not such a case. In this instance, the court stated that: the requirements falling upon Standard Bank which the court declared were likely to be in the interests of justice and were fair, reasonable and proportionate are as follows: I.

payment of compensation of US $6 million plus interest in US $1,046,196.58; II. Disgorgement of proft on the transaction of US $8.4 m; III. Payment of a fnancial penalty of US $16.8 m;

20 Serious Fraud Offce v Standard Bank Plc, Final Judgment, n. 17, 2. 21 To Serious Organised Crime Agency (now National Crime Agency) and Serious Fraud Offce. 22 Serious Fraud Offce v Standard Bank PLC, Statement of Facts, n. 8, 1–2. 23 Serious Fraud Offce v Standard Bank Plc, Preliminary Judgment, n. 9, 33. 24 Ibid.

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The preliminary judgment provided a detailed explanation of the rationale for the various terms. The Government of Tanzania was to receive compensation for the additional 1% fee paid to EGMA, together with interest and the original 1.4% fee.26 In addition, the SFO’s costs of £330,000 were to be covered. The major fnancial element, though, is the payment of a fnancial penalty of $16.8 m to HM Treasury (Consolidated Fund).27 The judge described this as the most diffcult assessment and referred to the requirements of the Crime and Courts Act 2013 which states that the fnancial penalty should be ‘broadly comparable to the fne that a court would have imposed’28 following conviction after a guilty plea. The detailed analysis commenced with the gross proft earned on the transaction of $8.4 m and applied the Sentencing Council Guidelines in respect of Fraud, Bribery and Money Laundering Offences (Sentencing Council, 2014), with a greater than medium level assessment of harm leading to a multiplication factor of 300%, reduced by one third to refect the early guilty plea.29 The fnancial provisions of the DPA could have been dealt with by a guilty plea in court but the purpose of the DPA (which expired on 30 November 2018), was for the other conditions of cooperation with the authorities and commissioning and submitting to an independent review of its existing internal anti-bribery and corruption controls, as contemplated in the Crime and Courts Act 2013.30 In the intervening period, Tanzania has arrested Sinare and sought extradition of Awale but a trial has not yet commenced. (The Guardian, 2018).

Serious Fraud Offce v XYZ The frst DPA provided a comparatively straightforward application of the DPA principles and process, whereas the second case, Serious Fraud Offce v XYZ Limited31 raised more complicated issues. The judge commented on ‘the

25 26 27 28 29 30 31

Serious Fraud Offce v Standard Bank Plc, Final Judgment, n. 19, 13. Serious Fraud Offce v Standard Bank Plc, Preliminary Judgment, n. 9, 36–58. Crime and Courts Act 2013, s. 45 Schedule, 17(14). Serious Fraud Offce v Standard Bank Plc, Final Judgment, n. 19, 16. Serious Fraud Offce v Standard Bank Plc, Preliminary Judgment, n. 19, 43–58. Crime and Courts Act 2013, Schedule 17 (5)(3)(e). Cf. Serious Fraud Offce, 2018c. Serious Fraud Offce v XYZ Limited, Southwark Crown Court, Case No. U20150856. Both Preliminary and Final Judgments are available from: https://www.sfo.gov.uk/2016/07 /08/sfo-secures-second-dpa/ [Accessed 12 August 2019].

Justice deferred is justice denied? 99 problems generated when a modestly resourced small to medium sized enterprise (SME) is demonstrably guilty of serious breaches of the criminal law’.32 The court had to grapple with raising a penalty, which would make XYZ insolvent, and mitigating the penalty to allow the company to continue to trade. However, on the other hand, nothing must be done to encourage the pursuit of criminal behaviour through a corporate vehicle which can be abandoned as insolvent if necessary.33 In this case, the role of the parent company was a key factor. The judgment, over two years later, remains considerably redacted and refers to the SME as XYZ and its parent as ABC, because of pending criminal proceedings, where two individuals have been charged.34 The judge (Leveson P) outlined key facts: XYZ generated the majority of its revenue from Asian markets; it was acquired by a US corporation in 2000; between 2004 and 2012, it was involved ‘in the systematic offer and/or payments of bribes to secure contracts in foreign jurisdictions’;35 28 out of 74 contracts examined were implicated; as a result of bribes being offered, XYZ received £17.24 m on those contracts, yielding a gross proft of £6.6 m, equating to approximately £2.5 m net proft; in 2011, ABC instituted its global compliance programme within XYZ, with concerns being raised in 2012. At that stage, XYZ self-reported to the SFO.36 The judge decided that it would not be in the public interest to force XYZ into insolvency, his rationale being that: prosecution and conviction would lead to signifcant legal costs and fnancial penalty at an unfavourable time in the industry, a context where XYZ currently operates on an ‘economic knife-edge’: XYZ would risk insolvency harming the interests of workers, suppliers, and the wider community. In any event, it is clear that XYZ in its current form is effectively a different entity from that which committed the offence.37 The resulting provisions were: 3. The indictment against the company has been suspended for a minimum of two and a half years and a maximum of fve years, dependent upon when the fnancial penalty is paid in full. At the end of this period, subject to compliance with the terms of the DPA, the SFO will discontinue the proceedings. 4. The 28 implicated contracts straddle the coming into force of the Bribery Act 2010 on 1 July 211. 24 pre-date and four post-date the Act.

32 Ibid., Preliminary Judgement, n. 30, 3. 33 Ibid. 34 Ibid., 5; R (on the application of AL) v Serious Fraud Offce and XYZ Ltd & Ors [2018] EWHC 856 (Admin). 35 Serious Fraud Offce v XYZ Limited, Preliminary Judgement, n. 30, 7. 36 Ibid., 11–13. 37 Serious Fraud Offce v XYZ Limited, Final Judgment, 18.

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5. As a result of the DPA a total of £6.5 m is payable (…), consisting of: 1. Disgorgement of gross profts of £6.2 m, of which £1.95 m will be contributed by its parent company. 2. A fnancial penalty of £352,000. 6. The SFO has decided not to pursue its costs in this case due to the fnancial position of the company. 7. It has not been possible to identify the victims in this case for the purposes of compensation. (Serious Fraud Offce, 2016a) In this case, XYZ and ABC would disgorge gross profts, thus, providing an example of the value of self-reporting and co-operation with the SFO.38 This was the frst DPA with criminal charges against individuals, although they have not been concluded and, meanwhile, the DPA has entered the scheduled termination period. The frst two DPA cases gave the court the opportunity to adopt tailored rather than prescriptive approaches: Standard Bank paid a penalty based on the revenues earned under the tainted contract, whereas in XYZ the penalty was based on gross profts, a much lower amount. The court has placed great emphasis on self-reporting, an early guilty plea and a fexible approach to additional mitigation, stating ‘a discount of 50% could be appropriate not least to encourage others how to conduct themselves when confronting criminality’.39

Serious Fraud Offce v Rolls Royce PLC In the third DPA in 2017, Rolls-Royce had to pay £671 m, including $170 m to the US and $25 m to Brazil, for ‘12 counts of conspiracy to corrupt, false accounting and failure to prevent bribery’ (Serious Fraud Offce, 2017a).40 A key element of this DPA was the duration of conduct, spanning three decades, relating to the sale of aero engines, energy systems and associated services. ‘The conduct covered by the UK DPA took place across seven jurisdictions: Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia’ (ibid.). This raised a question for the judge (Leveson P again) as to ‘whether it is necessary to infict the undeniably adverse consequences on Rolls-Royce that would fow from prosecution because of the gravity of its offending even though it may now be considered a dramatically changed organisation’ (Serious Fraud Offce, 2017a). The SFO’s attitude was that:

38 Serious Fraud Offce v XYZ Limited, Preliminary Judgment, 37, 68. 39 Serious Fraud Offce v XYZ Limited, Preliminary Judgment, 57. 40 Cf. also Serious Fraud Offce v Rolls-Royce Plc and Rolls-Royce Energy Systems Inc, Southwark Crown Court, Case No. U20170036, 17 January 2017. Available from: https://www.jud iciary.uk/wp-content/uploads/2017/01/sfo-v-rolls-royce.pdf [Accessed 12 August 2019].

Justice deferred is justice denied? 101 on any view, the offending was egregious in the extreme. The judge’s initial view, on reading the papers, was that if any company ought to be prosecuted, it was Rolls-Royce. What changed his mind, ultimately, was what he termed the ‘truly exceptional’ level of co-operation that the company demonstrated, both in their initial reports to the SFO and their subsequent co-operation with our investigation. (ibid.) Leveson concluded that Rolls-Royce: will have to suffer the undeniably adverse publicity that will fow from the facts of its business practices which will be exposed by the DPA so that the way in which it has done business will be obvious. Any public procurement exercise will be conducted in the light of its history and it will doubtless only win contracts on the merits of its products. That, of course, is as it should be. Neither will the conduct of Rolls-Royce escape sanction: it could only ever be fned and the DPA has to be approached on the basis that it must be broadly comparable to the fne that a court would have imposed on conviction following a guilty plea. (Serious Fraud Offce, 2017a) DPAs are a developing area of fraud disposal with the frst three exhibiting different features, indicating that the court’s involvement is not necessarily disadvantageous pace the US (Serious Fraud Offce, 2017a).

Serious Fraud Offce v Tesco plc The fourth DPA relates to Tesco plc. (Serious Fraud Offce, 2017b). In October 2014, the SFO announced that it had opened ‘a criminal investigation into accounting irregularities at Tesco plc’ (ibid.). In September 2016 the SFO named three former Tesco employees, who held senior management roles in the Tesco UK business, who had been charged over allegations of fraud and false accounting (ibid.). Then, in April 2017, Tesco announced to the Stock Exchange a DPA with the SFO but that because reporting restrictions had been imposed, no details were provided. The SFO commented that ‘the DPA only relates to the potential criminal liability of Tesco Stores Limited and does not address whether liability of any sort attaches to Tesco plc or any employee, agent, former employee or former agent of Tesco plc or Tesco Stores Ltd.’ (Serious Fraud Offce, 2017b). The brief announcement noted that ‘Tesco plc will take a total exceptional charge of £235 m in respect of the DPA of £129 m, the expected costs of an FCA compensation scheme of £85 m, and related costs’ (ibid.). Contemporaneously, the FCA was more forthcoming in stating that Tesco ‘agreed that they committed market abuse in relation to a trading update published on 29 August 2014, which gave a false or misleading impression about the

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value of publicly traded Tesco shares and bonds’ (Financial Conduct Authority, 2017a). The circumstances were: On 29 August 2014, Tesco plc published a trading update in which it stated that it expected trading proft for the six months ending 23 August 2014 to be in the region of £1.1bn. On 22 September 2014, Tesco plc published a further trading update in which it announced that it had ‘identifed an overstatement of its expected proft for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs’. Tesco knew or could reasonably have been expected to know that the information in the 29 August 2014 announcement was false or misleading. In making this fnding, the FCA does not suggest that the Tesco plc board knew or could reasonably have been expected to know that the information was false or misleading. (Financial Conduct Authority, 2017a) The FCA Final Notice provided an insight into a DPA condition imposed on Tesco that: Pursuant to the terms of the DPA, Tesco Stores Limited will commission Deloitte to: report on, and make recommendations for improvements to, the segregation of duties between relevant teams/functions and controls, governance and policies/training in respect of the recognition of commercial income; and review and comment on Tesco Stores Limited’s implementation of those improvements. (Financial Conduct Authority, 2017b) The SFO (2014a) have not commented upon whether Tesco self-reported its conduct: the SFO merely reported that the case was accepted for investigation in October 2014, after the second Stock Exchange announcement. The next stage in the process was to prosecute the three Tesco executives: Rogberg, Bush and Scouler. The trial of these executives was stopped in March 2018 because Rogberg suffered a heart attack. A retrial was ordered (Withers, 2018). In the retrial of Bush and Scouler in December 2018, the trial judge (Sir John Royce) ruled that they had no case to answer and the Court of Appeal directed they be acquitted.41 In the Rogberg retrial in January 2019, the SFO offered no evidence and he, too, was acquitted (Davey, 2019). Following the collapse of the criminal trials, the DPA and judgment were then published.42

41 R v Bush, Scouler [2019] EWCA Crim 39. 42 Serious Fraud Offce v Tesco Stores Limited, Case No. U20170287, Final Judgment, 10 April 2017. Available from: https://www.judiciary.uk/judgments/serious-fraud-offce-v-te sco-stores-limited-2017-dpa/ [Accessed 12 August 2019]; Serious Fraud Offce, Deferred Prosecution Agreement – SFO v Tesco Stores Ltd. Available from: https://www.sfo.gov.uk/

Justice deferred is justice denied? 103 The SFO then announced the outline of the DPA which was approved (but not published) in 2014: Through the DPA Tesco Stores Limited accepted responsibility for false accounting practices. Between February and September 2014, instead of working to safeguard the fnancial interests of the company and its shareholders, a culture existed at Tesco that encouraged illegal practices to meet accounting targets, including improperly recognised income in the UK accounts, by ‘pulling forward’ income from subsequent reporting periods. (Serious Fraud Offce, 2014b) The judge (Leveson P) explained in the judgment that ‘[i]f false or misleading information is provided to the market by a listed company, a false market can be created’.43 Thus, ‘the accuracy of fnancial results reported is of critical importance’.44 In the fnancial year to 22 February 2014, Tesco announced trading profts on UK revenue £43bn. The August trading update for six months to 23 August 2014 was for trading profts £1.1bn but on 22 September 2014, Tesco announced to the market an overstatement of profts amounting to £250 m (subsequently updated to £284 m). On the day of the correction announcement, Tesco share price fell 11.59%, reducing total share value of £2.16bn.45 The judgment recorded that the SFO had met the company, three days after the announcement on 22 September 2014, with Tesco offering the SFO full cooperation. The SFO opened its investigation on 29 October 2014. In the intervening period, the FCA opened and then discontinued an investigation because of SFO involvement.46 Tesco accepted that it had overstated its expected proft for the half year ‘principally due to the wrongly accelerated recognition of commercial income and delayed accrual of costs’.47 The judge underlined that ‘no criticism is made of the conduct of Tesco plc whose conduct throughout has been exemplary: (…) it could not have moved more swiftly to address the issue with the market, the regulators and the SFO’.48 In giving credit for the manner in which Tesco handles these matters, the judge considered that Tesco ‘has revealed clear evidence of what amounts to be a serious breach of the criminal law and, without reaching

43 44 45 46 47 48

download/deferred-prosecution-agreement-sfo-v-tesco-stores-ltd/ [Accessed 12 August 2019]; Serious Fraud Offce, SFO v Tesco Stores Ltd, Statement of Facts. Available from: https ://www.sfo.gov.uk/download/deferred-prosecution-agreement-statement-of-facts-sfo -v-tesco-stores-ltd/ [Accessed 1 February 2019]. Serious Fraud Offce v Tesco Stores Limited, Final Judgment, n. 40, 1. Ibid. Ibid., 1–4. Ibid., 5–6. Ibid., 3. Ibid., 16.

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any conclusion (…), implicates senior management’.49 The evidence stemmed from a report by a whistle-blower, culminating in the dismissal of three senior employees who were then subject to criminal proceedings.50 The judge considered that entering a DPA was in the interests of justice, balancing the seriousness of the offence which could point to prosecution: the harm to the integrity of the markets; the role of senior management; the duration of the activity; the corporate culture; failure of those aware of the conduct to report.51 One of those balancing factors was the potential adverse consequence of a criminal conviction, including repercussions such as effects on the UK supermarket and food industry as well as Tesco share price but, the judge concluded, ‘a criminal conviction recorded against Tesco Stores could have a real impact on persons who have not connection at all with the accounting practices of the company, including its employees, pensioners and all those in its supply chain’.52 The terms of the DPA are: (i) (ii) (iii) (iv)

The past and future co-operation of Tesco; Payment of a fnancial penalty of £128,992,500; Payment of SFO costs £3,069,951; Compliance programme.53

The total charge, to include compensation agreed by FCA, taken by Tesco was £210 m (Tesco, 2018).

Comments on the UK DPAs The frst matter to note is that all four DPAs have been under the jurisdiction of Sir Brian Leveson, President of the Queen’s Bench Division of the High Court and Head of Criminal Justice and, thus, a very senior judge. This facilitates consistency of approach and interpretation. The SFO distinguish the UK DPA regime from US by emphasising the close degree of judicial supervision. They state that: no agreement can take effect until it is endorsed by a judge and a judge will only agree to a DPA where he or she can be satisfed that it is in the interests of justice to do so and that the terms of the DPA, including any fnancial penalty, are fair, reasonable and proportionate. Save in exceptional circumstances, the fnal hearing at which the judge approves the DPA will be held in public and both the agreement and supporting statement of facts are then published. (Serious Fraud Offce, 2018a)

49 50 51 52 53

Ibid. Ibid., 35; R v Bush, Scouler [2019] EWCA Crim 39. Serious Fraud Offce v Tesco Stores Limited, Final Judgment, n. 40, 45–49. Ibid., 61–64. Serious Fraud Offce, SFO v Tesco Stores Ltd, Statement of Facts, n. 40.

Justice deferred is justice denied? 105 Other key differences between the two regimes are that ‘they are only available to corporates, not individuals’ and the UK does not have non-prosecution agreements since this would leave the ‘courts out of the picture’ (Osofsky, 2018). In the Standard Bank case, the SFO stressed self-reporting and co-operation from the bank and this appears also to be a factor in XYZ and Tesco. However, this was not a feature in Rolls-Royce.

Criminal Charges A feature of all four DPAs is the desire of the SFO to bring criminal charges against individuals. In Standard Bank, though, the SFO accepted that those persons identifed as responsible resided outside the jurisdiction. Indeed, the Tanzanian authorities themselves have faced diffculties in bringing criminal charges because the individuals are in a third country (The Guardian, 2018). In XYZ, it appears two individuals have been charged with conspiracy to corrupt contrary to section 1 Prevention of Corruption Act 1906, conspiracy to bribe contrary to section 1 Bribery Act 2010.54 This information came to light as a result of a judicial review, in April 2018, into legal privilege into documents held by XYZ. No other aspects have been reported. In Rolls-Royce, the Judge stated that ‘the investigation into the conduct of individuals continues and nothing in this agreement in any way affects the prospects of criminal prosecutions being initiated if the full code test for prosecution is met’.55 This is important because of the judge’s conclusions that: My reaction when frst considering these papers was that if Rolls-Royce were not to be prosecuted in the context of such egregious criminality over decades, involving countries around the world, making truly vast corrupt payments and, consequentially, even greater profts, then it was diffcult to see when any company would be prosecuted.56 However, the judge satisfed himself that ‘it is in the interests of justice that the conduct of Rolls-Royce be resolved through the mechanism of a DPA’.57 This was notwithstanding that he found ‘serious breaches of the criminal law in the areas of bribery and corruption (some of which implicated senior management and, on the face of it, controlling minds of the company)’.58 The DPA stated that that there was no ‘protection against prosecution of any present or former offcer,

54 55 56 57 58

R (on the application of AL) v Serious Fraud Offce and XYZ Ltd & Ors, n. 33. Serious Fraud Offce v Rolls-Royce Plc and Rolls-Royce Energy Systems Inc, n. 39, 24. Ibid., 61. Ibid., 64. Ibid., 4.

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employee or agent’,59 which he later referred to as ‘conduct involved senior (on the face of it, very senior) Rolls-Royce employees’.60 Some two years after the DPA, the new SFO Director announced the closure of the case: After an extensive and careful examination, I have concluded that there is either insuffcient evidence to provide a realistic prospect of conviction or it is not in the public interest to bring a prosecution (…) the SFO investigation led to the company taking responsibility for corrupt conduct spanning three decades, seven jurisdictions and three businesses, for which it paid a fne of £497.25 m. (Serious Fraud Offce, 2019a) Thus, although identifying Rolls-Royce as a serious case, there are no prosecutions of individuals. Tesco, the fourth DPA case, looked more propitious in terms of holding individuals to account because the SFO ‘interviewed fve suspects under caution as a result of which three have been charged with criminal offences and await trial’.61 However, although the SFO had found a realistic prospect of conviction of Tesco Stores Limited under Theft Act 1968,62 this conduct was investigated by the Financial Reporting Council (FRC). The FRC is the independent, investigative and disciplinary body for accountants and actuaries in the UK dealing with cases which raise important issue affecting the public interest. In June 2017, the FRC announced that it had: terminated its inquiry into the conduct of PricewaterhouseCoopers LLP and certain Members of the Institute of Chartered Accountants in England and Wales [in relation to the preparation, approval and audit of the fnancial statements] in their capacity as auditors of Tesco plc because they concluded that there was not a realistic prospect that a Tribunal would make an Adverse Finding against them. An investigation into other members of accounting bodies continued. (Financial Reporting Council, 2017) As part of the DPA arrangements, Tesco confrmed the charge against it of false accounting under Theft Act 1968 (Serious Fraud Offce, 2019b). However, the FRC clearly did not see a realistic possibility of making a fnding against it. In a separate development, the trial of the three individuals was halted because one of them had health issues. In the two retrials, the trial judge and

59 60 61 62

Ibid., 66. Ibid., 35. Serious Fraud Offce v Tesco Stores Limited 7. S 17 theft Act 1968. Serious Fraud Offce v Tesco Stores Limited 39.

Justice deferred is justice denied? 107 then Court of Appeal ruled in one that there was no case to answer63 and then the SFO (2019b) ‘offered no evidence’ in the second case. As Cronin and Hogg comment: The outcome here is perplexing, and one that betrays the perverse nature of SFO investigations into concurrent corporate and individual wrongdoing. The DPA could not be more stark in its appraisal of the conduct of the directors, (…) in the Statement of Facts, and presented by the SFO as if substantiating a fnding of individual wrongdoing. (Cronin and Hogg, 2019: p. 26) These events underline that DPAs are a new feature of UK law and still developing but it is clear that prosecuting individuals, where a corporate entity has agreed a DPA, is more challenging.

Conclusion The SFO achieved a double frst in Standard Bank.64 This was the frst occasion the SFO had prosecuted a commercial organisation for failure to prevent bribery in a case which has also provided the frst opportunity to enter into a DPA. The facts are such that the SFO was only able to investigate that failure, rather than the bribery itself which fell within the purview of the Government of Tanzania. The key element of this case was the promptness of the self-report, the fully disclosed internal investigation and co-operation of Standard Bank, upon which the judge and SFO (2015) commented approvingly. The question of ‘justice being delayed is justice denied’ is not the case in this matter. The agreement between the parties was held by the court to be in the interests of justice, the terms and supporting documents have been published so that the entirety of the process is open to public scrutiny. The SFO point to this as one of the key differences between the UK and the US: in the UK, ‘DPAs are judicially supervised and they are only available to corporates, not individuals; [and they do not] have non-prosecution agreements in the UK – this would leave the courts out of the picture’ (Osofsky, 2018). The SFO and the court emphasised that self-reporting and working with the SFO was important. By doing do, Standard Bank was able to ensure the matter remained confdential until such stage at which the matter and details could be placed into the public domain. It was intended that this format acts as a template for subsequent DPAs (Serious Fraud Offce, 2015). In XYZ, self-reporting was, again, a key feature and the company’s parent ABC was applauded by the court for its actions. A complicating factor was that XYZ was impecunious and reliant

63 R v Bush, Scouler, n. 40. 64 Serious Fraud Offce v Standard Bank Plc, n. 9.

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upon its parent for support which was, but need not have been, provided. Also in XYZ, the SFO for the frst time charged two individuals and the trials are awaited. In the third DPA case, Rolls-Royce, did not self-report but the SFO impressed upon the judge the ‘extraordinary’ level of co-operation by the company in order that he would not draw any distinction in this case between those who did and those who did not self-report.65 For some time, there was the prospect of criminal charges against individuals where the judge remarked upon serious breaches of the criminal law in the areas of bribery and corruption and noting that some implicated senior management and, perhaps, controlling minds of the company. Eventually, in 2019, the SFO decided that there was no realistic prospect of obtaining a conviction or that it is not in the public interest with the outcome that the case was closed. The latest case, Tesco, combined speedy self-reporting and seemingly ready agreement to a DPA, by accepting a criminal charge against it, together with prosecution of three named individuals. The outcome was that an independent regulator ruled that there was no realistic possibility of an adverse fnding against Tesco for the criminal charges to which it had admitted. Furthermore, the trials against three individuals were halted as there being no case to answer and/or no evidence being offered by the SFO. The conclusion to be reached in the UK is that DPAs have a place in the prosecutors’ armoury for appropriate cases. However, on the evidence, so far, of four matters, the answer to the Rakoff question of ‘why have no high-level executives been prosecuted?’ (Rakoff, 2015) is that it is diffcult with, currently, only XYZ outstanding. Therefore, it is clear that further cases are required to be able to satisfactorily engage with Lord Hewart’s comment that ‘justice should not only be done but should manifestly and undoubtedly be seen to be done’66 – so far, a Jury has not been required to deliver a verdict.

References Cases New York Central & Hudson River Railroad Company v US 212 US 481 (1909). R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256. R v Innospec, Southwark Crown Court, 26 March 2010. R v Dougall [2010] EWCA Crim 1048. R v Bush, Scouler [2019] EWCA Crim 39. R (on the application of AL) v Serious Fraud Offce and XYZ Ltd & Ors [2018] EWHC 856. Serious Fraud Offce v Rolls-Royce Plc and Rolls-Royce Energy Systems Inc., Case No. U20170036. Serious Fraud Offce v Standard Bank Plc, Case No. U20150854.

65 Serious Fraud Offce v Rolls-Royce Plc and Rolls-Royce Energy Systems Inc. 66 R v Sussex Justices, n. 1, 259.

Justice deferred is justice denied? 109 Serious Fraud Offce v Tesco Stores Limited, Case No. U20170287. Serious Fraud Offce v XYZ Limited, Case No. U20150856. United States v Arthur Andersen 544 U.S. 696 (2005). United States v Transp. Logistics Int’l, Inc., No. 8:18-cr-00011-TDC (D. Md. 12 March 2018).

Legislation Bribery Act 2010. Crime and Courts Act 2013. Criminal Procedure Rules 2015, 11.3(3)(i). Theft Act 1968.

Bibliography Armitage, J. (2012). Cuts Hamper Fight against Crime, Warns SFO Director. Available from: http://www.independent.co.uk/news/business/news/cuts-hamper-fght -against-crime-warns-sfo-director-7619339.html [Accessed 8th October 2019]. Bildfell, C. (2016). Justice deferred? Why and how Canada should embrace deferred prosecution agreements in corporate criminal cases. Canadian Criminal Law Review, 20, p. 163. Corporate Crime Reporter. (2018). Elizabeth Warren Unveils Legislation to Hold Wall Street Executives Criminally Accountable. Available from: https://www.cor poratecrimereporter.com/news/200/elizabeth-warren-unveils-legislation-holdwall-street-executives-criminally-accountable/ [Accessed 6th September 2019]. Corporate Prosecution Registry. (2019). Database. Available from: http://lib.law. virginia.edu/Garrett/corporate-prosecution-registry/index.html [Accessed 16th April 2019]. Cronin, M. & Hogg, C. (25th February 2019). Time to rethink DPAs after Tesco failures. Law Society Gazette. 26. Available from: https://www.lawgazette.co.uk/l egal-updates/time-to-rethink-dpas-after-tesco-failures/5069349.article [Accessed 6th September 2019]. Davey, J. (23rd January 2019). Third former Tesco director cleared of fraud over 2014 scandal. Reuters. Available from: https://uk.reuters.com/article/us-britai n-tesco-fraud/third-former-tesco-director-cleared-of-fraud-over-2014-scanda l-idUKKCN1PH105 [Accessed 12th August 2019]. de Grazia, J. (2008). Review of the Serious Fraud Offce. Final Report. Available from: https://webarchive.nationalarchives.gov.uk/20101220170218/http://www.s fo.gov.uk//about-us/our-policies-and-publications/operational-handbook/topi cs-f---j/jessica-de-grazia-fnal-review.aspx [Accessed 11th April 2019]. Dyer, P. (12th September 2013). Time to agree terms? The New Law Journal, 163, p. 11. Available from: https://www.newlawjournal.co.uk/content/time-agree-term s [Accessed 6th September 2019]. Financial Conduct Authority. (2016). About the FCA. Available from: https://www. fca.org.uk/about/the-fca [Accessed 30th January 2019]. Financial Conduct Authority. (2017a). Tesco to Pay Redress for Market Abuse. Available from: https://www.fca.org.uk/news/press-releases/tesco-pay-redress-market-ab use [Accessed 8th October 2019].

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Financial Conduct Authority. (2017b). Final Notice. Available from: https://ww w.fca.org.uk/publication/fnal-notices/tesco-2017.pdf [Accessed 8th October 2019]. Financial Reporting Council. (2017). Closure of Investigation into the Conduct of Members and a Member Firm as Auditors of Tesco plc. Available from: https://ww w.frc.org.uk/news/june-2017/closure-of-investigation-into-the-conduct-of-me mbe [Accessed 1st February 2019]. Fraud Advisory Panel. (2010). Roskill revisited: is there a case for a unifed prosecution offce? Available from: https://www.fraudadvisorypanel.org/wp-content/uplo ads/2015/04/Roskill-Revisited-Final-24-Mar10.pdf [Accessed 11th April 2019]. Garrett, B.L. (2014). Too Big to Jail: How Prosecutors Compromise with Corporations. Harvard: Harvard University Press. Gibson Dunn. (2018). 2018 Mid-Year Update on Corporate Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs). Available from: https://www.gibsondunn.com/2018-mid-year-npa-dpa-update/ [Accessed 8th October 2019]. Grasso, C. (2016). Peaks and troughs of the English deferred prosecution agreement: the lesson learned from the DPA between SFO and ICBC SN Plc. Journal of Business Law, 5, pp. 388–408. Green, D. (2012). David Green CB QC, Director, at the 10th Annual Corporate Accountability Conference. London: PricewaterhouseCoopers. Available from: https://www.sfo.gov.uk/2012/06/14/10th-annual-corporate-accountability -conference-held-pricewaterhousecoopers/ [Accessed 12th August 2019]. Green, D. (2014). Ethical Business Conduct: An Enforcement Perspective. Available from: www.sfo.gov.uk/2014/03/06/ethical-business-conduct-enforcement-pe rspective/ [Accessed 8th October 2019]. Holder, E.H. (2014). Attorney General Holder Remarks on Financial Fraud Prosecutions at NYU School of Law. Available from: http://www.justice.gov/opa/ speech/attorney-general-holder-remarks-fnancial-fraud-prosecutions-nyu-school -law [Accessed 8th October 2019]. Julian, R. (2007). Judicial perspectives on the conduct of serious fraud trials. Criminal Law Review, October, pp. 751–768. Julian, R. (2008). Judicial perspectives in serious fraud cases: the present status of and problems posed by case management practices, jury selection rules, juror expertise, plea bargaining and choice of mode of trial. Criminal Law Review, 10, pp. 764–783. Lloyd-Bostock, S. (2007). The Jubilee Line Jurors: does their experience strengthen the argument for judge-only trial in long and complex fraud cases? Criminal Law Review, April, pp. 255–273. Masters, B. (2011). Fraud Watchdog Weakened by Budget Cuts. Available from: https ://www.ft.com/content/8221aba2-58b5-11e0-9b8a-00144feab49a [Accessed 11th April 2019]. Ministry of Justice. (2014). A Guide to the Criminal Procedure (Amendment No.2) Rules, 2013 (S.I. 2013/3183). London: Ministry of Justice. Osofsky, L. (2018). Pace, Proactivity and Cooperation: Challenges and Priorities for the SFO Today. Available from: https://wp.nyu.edu/compliance_enforcemen t/2018/10/16/director-of-the-serious-fraud-offce-lisa-osofsky-keynote-on-f uture-sfo-enforcement/ [Accessed 8th October 2019].

Justice deferred is justice denied? 111 Parkinson, S. (27th February 2014). Doing deals to avoid prosecution: which company will be frst? The Times. Available from: http://www.thetimes.co.uk/ tto/law/article4017176.ece [Accessed 8th October 2019]. Rakoff, J.S. (2014). The fnancial crisis: why have no high-level executives been prosecuted? The New York Review of Books. Available from: www.nybooks.com/ articles/archives/2014/jan/09/fnancial-crisis-why-no-executive-prosecutions/ [Accessed 12th August 2019]. Rakoff, J.S. (2015). Justice deferred is justice denied. The New York Review of Books. Available from: http://www.nybooks.com/articles/2015/02/19/justice-defe rred-justice-denied/ [Accessed 8th October 2019]. Reilly, P.R. (2015). Justice deferred is justice denied: we must end our failed experiment in deferring corporate criminal prosecutions. Brigham Young University Law Review, 2, pp. 307–358. Russell, J. (2012). The case to answer for the Serious Fraud Offce. The Telegraph. Available from: http://www.telegraph.co.uk/fnance/fnancial-crime/9292 046/The-case-to-answer-for-the-Serious-Fraud-Offce.html [Accessed 30th January 2019]. Ryder, N. (2011). Financial Crime in the 21st Century. Cheltenham: Edward Elgar. Ryder, N. (2018). ‘Too scared to prosecute and too scared to jail?’ A critical and comparative analysis of enforcement of fnancial crime legislation against corporations in the USA and the UK. The Journal of Criminal Law, 82(3), pp. 245–263. Securities and Exchange Commission. (2013). Fiscal Year 2013 Agency Annual Report. Available from: http://www.sec.gov/about/secpar/secafr2013.pdf#con tents [Accessed 11th April 2019]. Sentencing Council. (2014). Defnitive Guideline for Corporate Offenders Issued by the Sentencing Council in Respect of Fraud, Bribery and Money Laundering Offences. Available from: https://www.sentencingcouncil.org.uk/wp-content/uploads /Fraud-Bribery-and-Money-Laundering-offences-defnitive-guideline-Web.pdf [Accessed 8th October 2019]. Serious Fraud Offce. (2013). Crime and Courts Act 2013: Deferred Prosecution Agreement Code of Practice. Available from: www.sfo.gov.uk/publications/gu idance-policy-and-protocols/deferred-prosecution-agreements/ [Accessed 8th October 2019]. Serious Fraud Offce. (2014a) Tesco Plc. Available from: https://www.sfo.gov.uk/ cases/tesco-plc/ [Accessed 8th October 2019]. Serious Fraud Offce. (2014b) Tesco Investigation. Available from: https://www.sfo .gov.uk/2014/10/30/tesco-investigation/ [Accessed 1st February 2019]. Serious Fraud Offce. (2015). SFO Agrees First UK DPA with Standard Bank. Available from: https://www.sfo.gov.uk/2015/11/30/sfo-agrees-frst-uk-d pa-with-standard-bank/ [Accessed 8th October 2019]. Serious Fraud Offce. (2016a). SFO Secures Second DPA. Available from: https:// www.sfo.gov.uk/2016/07/08/sfo-secures-second-dpa/ [Accessed 8th October 2019]. Serious Fraud Offce. (2016b). Charges in Tesco Investigation. Available from: https ://www.sfo.gov.uk/2016/09/09/charges-tesco-investigation/ [Accessed 1st February 2019]. Serious Fraud Offce. (2017a). SFO Completes £497.25m Deferred Prosecution Agreement with Rolls-Royce PLC. Available from: https://www.sfo.gov.uk/20

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17/01/17/sfo-completes-497-25m-deferred-prosecution-agreement-rolls-ro yce-plc/ [Accessed 12th August 2019]. Serious Fraud Offce. (2017b). SFO Agrees Deferred Prosecution Agreement with Tesco. Available from: https://www.sfo.gov.uk/2017/04/10/sfo-agrees-defer red-prosecution-agreement-with-tesco/ [Accessed 8th October 2019]. Serious Fraud Offce. (2018a). Current Priorities and Future Directions. https://ww w.sfo.gov.uk/2018/11/21/current-priorities-and-future-directions/ [Accessed 8th October 2019]. Serious Fraud Offce. (2018b). About Us. Available from: https://www.sfo.gov.uk/ about-us/#ourfundingandbudget [Accessed 8th October 2019]. Serious Fraud Offce. (2018c). UK’s frst Deferred Prosecution Agreement, between the SFO and Standard Bank, Successfully Ends. Available from: https://www.sfo.gov. uk/2018/11/30/uks-first-deferred-prosecution-agreement-between-the-sfo -and-standard-bank-successfully-ends/ [Accessed 8th October 2019]. Serious Fraud Offce. (2019a). SFO Closes Glaxosmithkline Investigation and Investigation into Rolls-Royce Individuals. Available from: https://www.sfo.gov. uk/2019/02/22/sfo-closes-glaxosmithkline-investigation-and-investigation-in to-rolls-royce-individuals/ [Accessed 3rd April 2019]. Serious Fraud Offce. (2019b). Deferred Prosecution Agreement between the SFO and Tesco Published. Available from: https://www.sfo.gov.uk/2019/01/23/deferr ed-prosecution-agreement-between-the-sfo-and-tesco-published/ [Accessed 3rd April 2019]. Tesco plc. (2018). Serving Shoppers a Little Better Every Day. Annual Report and Financial Statements 2018. Available from: https://www.tescoplc.com/media /474793/tesco_ar_2018.pdf [Accessed 6th September 2019]. The Guardian (Tanzania). (23rd April 2018). Stanbic bribery case takes new turn. The Guardian (Tanzania). Available from: https://www.ippmedia.com/en/news/st anbicbribery-case-takes-new-turn [Accessed 8th October 2019]. Withers, I. (2nd March 2018). Former Tesco bosses face fraud retrial over £250m accounting scandal. The Telegraph. Available from: https://www.telegraph.co. uk/business/2018/03/02/former-tesco-bosses-face-fraud-retrial-250m-acc ounting-scandal/ [Accessed 12th August 2019].

7

Deferred prosecution agreements and the restorative justice paradigm Justice restored or corporate cop out? Darren McStravick

Introduction The term ‘white collar crime’ was famously termed by Edwin Sutherland to defne fnancial crime (Sutherland, 1940). It has also been referred to as ‘economic crime’ and ‘illicit fnance’ (Ryder, 2018: p. 246). It is further argued that a proliferation in corporate criminal offences such as bribery and tax evasion has led to an increased focus in addressing these crimes (Cheung, 2018). One of the tools in the prosecutorial armoury that has developed by way of the Crime and Courts Act 2013 (the 2013 Act) is the Deferred Prosecution Agreement (DPA). Similarly, the 2013 Act allows for a greater use of restorative justice processes and practices to manage more conventional, court-based criminal conficts. Restorative justice principles include the need to repair harm for victims and increase a sense of remorse and accountability for offenders. Both models allow for reparation, compliance programmes and, if procedures are successfully completed, the opportunity to escape a criminal conviction. This chapter aims to build on previous research, including personal observations of a particular restorative programme managing adult offenders, to ask the question whether prosecution agreements managing corporate offending are restorative in practice and procedure or whether they are simply a prosecutorial tool used to avoid lengthy and costly trials with little hope of true remorse, accountability, reintegration and rehabilitation for participating stakeholders.

Restorative justice The concept of restorative justice has been utilised in a wide variety of jurisdictions and through many formats. Restorative principles can include restoration and rehabilitation of both victims and offenders, reparation of direct and indirect victims, offender accountability and remorse and the use of apology in order to repair the harm caused by criminal events. Whilst these restorative principles are generally agreed upon, the actual defnition has been continuously argued over by theorists. Famously, Marshall describes it as ‘a process whereby parties with a stake in a specifc offence resolve collectively how to deal with the aftermath of the offence and its implications for the future’ (Marshall, 1996: p. 37). For

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Braithwaite, restorative justice is the restoration of victims, offenders and the community to which they belong wherein victims can be ‘restored’ by regaining a sense of empowerment, dignity, security and social support, while offenders can also have their dignity restored after the shame of breaking the law has been confronted (Braithwaite, 1996). Walgrave and Bazemore have further defned the process as ‘every action that is primarily orientated toward repairing the harm that has been caused by crime’, including both coercive sanctions and voluntary processes (Bazemore and Walgrave, 1999: p. 48). Furthermore, the restorative paradigm is viewed as a way of doing justice by repairing the harm, which includes material damage, psychological and other forms of suffering inficted on the victim and his proximate environment, but also social unrest and indignation in the community, uncertainty about legal order and the authorities’ capacity for assuring public safety. It also encompasses social damage which the offender caused to himself by his offence. (Walgrave, 2003: p. 61) Several of these descriptions are relevant when placed alongside corporate crime and the reputational damage that such offending can leave on companies, employees and shareholders. They are also relevant when analysing Deferred Prosecution Agreements and the restorative ingredients within such agreements which can, as this chapter illustrates, help to delimit this type of collateral damage for corporations and relevant stakeholders alike. Restorative justice options are included in a number of statutory instruments. Pre-sentence restorative provisions on deferment of sentence are set out in sections 1 to 1D of the Powers of Criminal Courts (Sentencing) Act 2000 (‘the 2000 Act’). For example, under section 1 of the 2000 Act the court is empowered to defer passing sentence for up to 6 months (from the date of the deferment). Deferring sentence enables the court to have regard to the offender’s conduct after conviction or any changes in their circumstances, including the extent to which the offender has complied with any requirements imposed by the court. Furthermore, Part 2 of Schedule 16 to the 2013 Act inserts a new section 1ZA into the 2000 Act which makes it explicit that the courts can use their existing power to defer sentence post-conviction to allow for a restorative activity to take place, by imposing a restorative justice requirement. Section 1ZA(2) provides that a restorative justice requirement is a requirement to participate in an activity wherein the participants consist of, or include, the offender and one or more of the victims; which aims to maximise the offender’s awareness of the impact of the offending concerned on the victims; and which gives an opportunity to a victim or victims to talk about, or by other means express experience of, the offending and its impact. Of further interest is Section 1ZA(7) which defnes a ‘victim’ as a victim of, or other person affected by, the offending concerned. This could theoretically include, for example, indirect victims of corporate wrongdoing such as shareholders and other community members and stakeholders.

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Deferred prosecution agreements Andrew Ashworth cogently notes that discrepancies emerge in the way that ‘white collar crime’ is managed as part of criminal justice jurisprudence (Ashworth, 2009). For Ashworth, the police have traditionally been more concerned with criminal acts such as shop theft and burglary rather than crimes such as embezzlement and frauds upon and by companies. He argues that ‘for many years there has been interest in this type of corporate criminal behaviour, particularly deprivations of property perpetrated in commercial settings, but this has not really been refected by changes in the law or in enforcement practice’ (Ashworth, 2009: p. 356). Furthermore, Ashworth argues that statutory attempts at managing such ‘white collar crimes’ have not been very successful. This is a cogent argument; however, there have been recent attempts at solving this statutory conundrum. Just as the Crime and Courts Act 2013 allows for restorative justice options, so the concept of a deferred prosecution agreement is also provided for within the 2013 Act. Section 45 and Schedule 17 allow for a mechanism whereby, for certain economic or fnancial offences, a body corporate can avoid prosecution by entering into an agreement on negotiated terms with a designated prosecutor. This is not a private arrangement but requires, both provisionally before fnal agreement is reached, and after such agreement, the approval of the court. This is similar to restorative justice procedure which, although said to be quite different from the conventional criminal justice system (Christie, 1977; Zehr, 1990), generally requires court approval before the restorative meeting and fnal judicial discretion on sanction after the process has been completed. These prosecution agreements emerged as a more cost-effective option over a lengthy and complicated court-based trial (Ryder, 2018: p. 260). They also emerged as a result of pressure on authorities to successfully investigate corporate criminal wrongdoing as well as the reluctance of judges to allow for party agreement without a formal legal framework in place (Grasso, 2016: p. 389). To summarise, the essential features of a DPA see prosecutors fle formal criminal charges against a corporation based on a statement of facts. There is then an agreement to defer prosecution if the facts are acknowledged, monetary compensation is paid to various stakeholders and steps are taken to improve corporate behaviour by way of a compliance programme. If the provisions of the DPA are not followed then the case can proceed to trial with the admitted facts used in court (Shiner and Ho, 2018: p. 708). Deferred Prosecution Agreements, as Grasso correctly argues, can be viewed as a form of punishment despite the fact that one of the overall rationales behind the legal instrument is diversion from prosecution. Indeed, they have been described as ‘a way of imposing a term of probation upon a corporation without a conviction’ (Grasso, 2016: p. 388). In many ways this defnition can also be used to portray the restorative paradigm. Participating offenders work with criminal justice actors such as probation offcers to manage their offending behaviour and are helped to fnd both moral-based (such as an apology and/ or community-based work) and fnancial-based (reparative sum) opportunities to repair the harm caused to victims. If the restorative programme, as with the

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DPA requirements, are completed successfully then there is the possibility that participants will not receive a conviction for the offending behaviour. This outcome is of course very important both for corporations in order to protect and delimit reputational damage as well as for individual participating offenders without the stigmatisation of a formal criminal record and the many rehabilitative and re-integrative disadvantages such a conviction brings. There is, therefore, an argument that both DPA’s and restorative justice are symmetrically entwinned in many of their rationales, principles and ultimate requirements. Such symmetry can be evidenced within a number of key elements including that of discretion, contractual agreements, ‘collateral consequences’ theory and compliance plans as part of restorative and deferred prosecution agreements.

Discretion In short, the DPA must be in the interests of justice. The statutory requirements in para. 7(1) and 8(1) of Schedule 17 of the 2013 Act require that entering into a DPA is likely to be and is in the interests of justice and that the proposed and actual terms are fair, reasonable and proportionate. This particular principle, ‘in the interests of justice’, is an important ingredient and reasoning within Agreements as a whole. It is however widely open to interpretation. There have been some attempts to provide guidance on this matter. For example, the Criminal Procedure Rules (CrPR 11.3[3] [i]) require that any application for a DPA should explain why such an agreement is likely to be in the interests of justice and complies with the other requirements (Grasso, 2016: p. 396). Furthermore, the 2016 DPA Code of Practice also provides a measure of guidance on the relevant factors to be taken into consideration and the relative weight to be attached to each of them. For example, paragraph 2.6 states that: In applying the public interest factors when considering whether to charge, seek to enter a DPA or take no further criminal action the prosecutor undertakes a balancing exercise of the factors that tend to support prosecution and those that do not. Thus, the decision to allow for a DPA is ultimately an exercise of a prosecutor’s discretion as to which factors are considered relevant and what weight is given to each are matters for the individual prosecutor. It is quite possible that one public interest factor alone may outweigh other factors which tend in the opposite direction with decisions made on an individual case by case basis. Just as a prosecutor’s discretion is an important element in the decision whether or not a DPA is offered, judicial discretion has also been identifed within a number of restorative programmes, notably those models managing adult offenders. For example, as part of an Australian family group conferencing restorative model managing adults all referrals to the programme were determinate on the discretion of a number of magistrates (Rossner and Bruce, 2016). Furthermore, as

DPAs and restorative justice 117 part of my own research fndings within an Irish based, and Probation Service managed, pilot adult reparation programme it was evident that referrals to that particular programme were dependent on the good will and support of a specifc number of judges who were supportive of restorative principles and the diversionary ideal generally (McStravick, 2018). Indeed there was in evidence something of a ‘Russian roulette’ discretionary policy wherein some offenders were offered a restorative diversionary option in certain locations whereas in other courts an offender could be prosecuted for the same offence dependent on what judge was presiding over the case at that time. Such unfettered discretion has the potential for unfairness and disproportionate sentencing between those judges in favour of a restorative outcome and those who are either unsupportive or simply unaware that the restorative programmes exist. In a similar vein, the confusing discretionary reasons for a prosecutor entering into a possible deferment agreement, including the somewhat openended public interest test and the question of the ‘collateral consequences’ effect (Cheung, 2018) discussed further below, can result in inconsistency, confusion, and lead further to overall questions of the integrity of both systems. It has been argued that participating offenders’ feelings of trust and legitimacy can prove key to improving compliance with the law. This assumes that when an offender views a sanction as illegitimate and has a weak relationship, or no relationship at all, with the sanctioning agent, and when they deny any element of shame attached to the offence, the result can see such offenders continue to break the law (Tyler and Huo, 1990). This question of fairness and proportionality is also evident within the Corporate Guideline, the Sentencing Council’s defnitive guideline for the sentencing of corporate offenders convicted of fraud, bribery and money laundering (Cheung, 2018). Although not directly related to a DPA, as it implies a conviction, the Guideline does provide a point of reference for the fnancial penalty amounts forming part of those agreements (Cheung, 2018: p. 25). Within the Guideline there can be said to be confusion and inconsistencies over the amount of compensation that offending corporations should pay due to a ‘non-exhaustive list of aggravating and mitigating factors’ (and resultant confusion) that decision makers have to take into consideration when determining penalty outcomes (Cheung, 2018: p. 43). This lack of consistency, coupled with concerns over fair and just outcomes within corporate criminal conficts, allies with Ashworth’s concerns with restorative justice outcomes. For Ashworth there is a proportionality concern surrounding the impartiality and perceived fairness of restorative justice hearings (Ashworth, 2002). Article 6.1 of the European Convention on Human Rights states that every person has the right to a fair trial (and sentencing process) ‘by an independent and impartial tribunal’. Ashworth has questioned the impartiality of restorative conferences (and other models) which allow for victims and their families to participate in determining the outcome of such a process in that ‘the victim cannot be expected to be impartial, nor can the victim be expected to know about the available range of orders and other principles for the disposition of criminal cases’ (Ashworth, 2002: p. 586). Similarly, critics of DPAs argue that

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they have the potential to usurp the presumption of innocence in the sense that they bestow punishment and demand structural reform without a guilty verdict having been found at trial, although alternatively it is argued that they are reasonable retributive response to a breach of community laws (Shiner and Ho, 2018). Such proportionality concerns, then, can also be laid at the door of DPAs and corporate crime management structures due to the concerns over presumptions of innocence, confusion over discretion within decision making and the differing levels of penalty terms as part of agreements.

Contractual agreement DPAs, in accordance with the majority of restorative agreements, have an intrinsic contractual nature. Grasso points out that they: consist in an agreement between the Government and the targeted entity through which the latter acknowledges the alleged facts have happened and might admit the illegal behaviour, taking concerted actions to remedy the harm it caused and prevent future offending … if the legal person complies with the conditions of the agreement, criminal charges that have already been fled against it will be dismissed. (Grasso, 2016: p. 388) Interestingly however, and in some contrast with many restorative programmes, the Crime and Courts Act 2013 Schedule 17 s.5(1) does not require the corporation to formally admit to the crime, such admission considered to be ‘merely potential’ (Grasso, 2016: p. 396). Whilst most agreements will ultimately include some admission of liability, the fact that statutorily this admission is not mandatory is in stark contrast to the restorative ideal of taking accountability for the harm that has been caused. Despite this, the other elements within agreements such as the prevention of future offending and remedying the harm are, to a large extent, the raison d’être of many restorative meetings. Offenders will be able to participate in family group conferences, victim-offender mediations and offender reparation panels only if they agree that they have committed the crime. After admitting the offence and participating in a restorative meeting a contract is signed which can include tasks such as an apology, either written or verbal, compensation and community payback tasks as well as rehabilitative counselling meetings involving dependencies such as alcohol and drugs and anger and fnancial management concerns. It should be underlined at this point however that many theorists believe that genuine accountability is in itself diffcult to measure. For others, the admission of guilt by an offender is simply an act carried out in order to escape a possible conviction and does not necessarily symbolise contrition or accountability and is indeed coerced by criminal justice professionals to successfully complete the restorative process (Cunneen and Hoyle, 2010). There is little doubt that

DPAs and restorative justice 119 genuine remorse is diffcult to gauge but the participating offender is at least seen to take responsibility by admitting to the wrongdoing and embracing some level of accountability. Therefore, the criticisms over the level of genuine accountability within some restorative processes can serve to delimit concerns surrounding the ‘merely potential’ admittance criteria as part of the formal requirements within the 2013 Act.

Collateral consequences A further similarity between the practices and principles incorporating restorative justice and those relating to DPAs is the perceived need to reduce the harm caused by the criminal event. This includes reducing harm to the offender themselves and the advantages that a deferred prosecution can have in minimising reputational damage and future opportunities, and also reducing the harm caused to a wide array of both direct and indirect victims, community members and shareholders and stakeholders. For example, Cheung and others note that DPAs highlight the need to mitigate the ‘collateral consequences’ (Cheung, 2018: p. 46: Grasso, 2016: p. 393) of a corporate conviction and this is consistent with the historical role of these agreements across both United States and United Kingdom jurisdictions. Conversely, however, Clarkson contends that: with regard to the argument that punishing companies amounts to punishment of innocent shareholders and creates risks of redundancies, it must be borne in mind that such persons are not themselves subject to the stigma of conviction and criminal punishment. Those who take the benefts should also shoulder the burdens. (Clarkson, 1996: p. 563) This theory of widening the notion of collateral damage outside the usually recognised circle of direct victims affected by the criminal wrongdoing to include indirect victims and the wider community resonates with many of the principles of restorative justice generally. It also resonates more specifcally in relation to the identifed stakeholders within a criminal justice event and restorative outcome. For some restorative justice scholars, the restorative community should include ‘a perception of connectedness’ and relates to meaningful interrelationships between the direct stakeholders of a restorative justice event, victim, offender and family and close friends, all coming together within a restorative model such as a family group conference to mediate how best to resolve both the fall-out from a particular crime and how to repair the harm caused (McCold and Watchel, 2003: p. 294). Furthermore, Barton recognises community within a criminal justice context as consisting largely of ‘a collection of both primary and secondary stakeholders’ around the criminal offence itself (Barton, 2003: p. 41). For McCold, a restorative community can consist of both a ‘micro-community’ and a ‘macro-community’; a ‘micro-community’ represents the close relationships

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and familial bonds between victims and offenders and their family members and friends whereas the ‘macro-community’ represents other geographical infuences outside the more personal, relational sphere of family and close friends (McCold, 2004: p. 158). This particular community can include state institutions and religious groups, and other clubs and memberships. It can also include both criminal justice professionals and lay member volunteers actively involved in a particular restorative process. Such a community can also include the various stakeholders within a corporate entity such as employees and shareholders. These ‘secondary justice stakeholders’ are said to lack the emotional connectivity of its more personal, relational counterpart, and are judged to be more concerned with ‘aggregate’ rather than specifc harm (McCold, 2004: p. 158). Furthermore, a unique ‘meso-community’ has also been identifed, through direct observation, within an adult based reparation programme wherein these secondary stakeholders were seen to act like micro-community members towards the participating offenders with an added emphasis on social welfare concerns as well as the need for accountability for the harm caused (McStravick, 2018). Just as Clarkson has poured scorn on the principle of widening the notion of victimhood within corporate offending to include indirect victims such as company shareholders, so it is important to note that this ‘micro/macro community’ and victims dynamic within restorative processes has also been challenged. For some critics, this concept of community stretches both the practical and theoretical bounds of the communitarian ideal almost to breaking point (Umbreit, Coates and Vos, 2004). In addition, such idealistic notions of attached community members sharing common interests and obligations is similarly disputed by Durkheim, who argues that modern-day societal structures do not contain such shared relational bonds. For Durkheim, community could at one time have been conceived of ‘mechanical solidarity, or solidarity by similarities’ wherein people lived and worked together and values and roles were agreed and handed down through generations (Durkheim, 1984: p. 31). However, this solidarity then changed to a society now distinguished by difference. This ‘organic solidarity’ now represents a modern social cohesion based on a complicated system of interdependence which only recognises the pursuit of, legally and socially accepted, individual goals (Durkheim, 1984: p. 31). Furthermore, in this regard, Nils Christie, whilst famously recognising and indeed championing the need for greater social participation within criminal justice processes, also argued that ‘a lack of neighbourhoods’, or ‘killed neighbourhoods’ and ‘killed local communities’ results in delimiting the possibilities for a successful re-imagining of such social engagement (Christie, 1977: p. 12). It is submitted that, despite these restorative criticisms, the ‘collateral consequences’ theory behind DPA deliberations does have a restorative resonance in that the effects of the crime and the relevant stakeholders are being viewed from a much wider perspective than merely participating offender and direct victim. Research has shown that many restorative programmes successfully illustrate the consequences of criminal offending and the aggregate level of harm caused across

DPAs and restorative justice 121 a wide range of direct and indirect stakeholders. The crime itself can have repercussions for the family members of both offenders and victims as well as friends and proximate community members generally (McStravick, 2018). From a DPA perspective, as Ryder notes, ‘the economic reality is that the Department of Justice (in this case US based) is hesitant to seek to revoke the operating licence of a corporation due to collateral consequences’ and that ‘an alternative approach towards tacking corporate fnancial crime must be implemented’ (Ryder, 2018: p. 252). In a similar vein, Grasso views the DPA as a fexible instrument in that the lack of a public conviction and possible closure of a company, what Ryder calls ‘corporate death’ (Ryder, 2018: p. 251), can prevent the fall of share prices which can affect ‘guiltless shareholders … innocent employees, tax payers and even consumers’ (Grasso, 2016: p. 393). These consequences have been clearly identifed within corporate crime such as the conviction against the company Arthur Anderson LLP and that of the investment banking corporation Drexel Burnham Lambert. Anderson’s conviction for shredding fnancial documents as part of the Enron fallout was ultimately overturned by the US Supreme Court but not before the accounting frm had fled for bankruptcy with approximately 30,000 employees made redundant (Ryder, 2018: p. 251). Furthermore, in the case of Drexel, who entered into a plea bargain under the threat of prosecution for market manipulation, it was forced to close several departments after it paid a fne of 650 million dollars resulting in the loss of 5,000 jobs (Ryder, 2018: p. 250). Whilst there is clearly a need for accountability and punishment for criminal corporate wrongdoing, these cases and others help to illustrate the real danger of additional harm caused to a large number of indirect victims and stakeholders. Indeed, as Cheung has reiterated, criminal prosecutions for corporate wrongdoing are rare due to a number of factors, including the ‘potentially adverse effects of a corporate conviction on innocent employees, customers, investors and the wider economy’ (Cheung, 2018: p. 29). Such ‘collateral’ fall as part of ‘white collar’ wrongdoing can attach to the corporate community of shareholders and stakeholders in the same way that ‘conventional’ criminal acts have shown to impact on micro, macro and meso-communitarian stakeholders as well as direct victims and offenders themselves. The fact that both DPA’s and restorative justice programmes and their outcomes can minimise the harm caused by criminal actions and help to restore the possibility of reintegration and rehabilitation for corporate entities and direct stakeholders alike is therefore important when we consider the potential consequences.

Compliance procedures: the question of reintegration and rehabilitation As illustrated previously, the Crime and Courts Act 2013 allows for both restorative justice outcomes and DPAs. Schedule 17 of the 2013 Act, Part 1 s.5(3) introduces a restorative based reparative element to DPA outcomes in that the

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duties imposed on a particular party by way of these agreements can include fnancial penalties, victim compensation, donating money to a charity or other third party, and the implementation of a compliance programme relating to company policies and the future training of employees. Many of these duties can also be identifed as part of restorative justice programmes and contract deliberations. Participating offenders in a restorative process will be asked as part of contract agreements to donate money to a charity or pay a reparative sum to a communitybased organisation. In addition, they can be asked to pay a sum to the direct victim to compensate for the harm caused either by way of court sanction or under their own auspices. Within Irish-based reparation panel procedures, for example, offenders can only successfully complete the process if they carry out a number of tasks including writing a journal of how the offence has affected the stake-holders involved, writing an apology to both direct and indirect victims, paying a sum of reparation either to the recognisable victim or to a charity and also signing a promise not to reoffend in the future. If the judge decides that the contract has been successfully completed, a possible conviction will usually be dismissed under the Probation of Offenders Act 1907 Section 1(1) (McStravick, 2015: p. 195). These restorative contractual duties and deferred prosecution agreements are replicated within a wide number of restorative models and jurisdictions such as Australia and the UK (Rossner and Bruce, 2016; Hoyle and Rosenblatt, 2016), and can also be identifed within juvenile courts, drug courts and probation services generally wherein original charges can be imposed in case of a failure to comply (Shiner and Ho, 2018: p. 710). For Grasso, the ultimate aims of DPAs are both consequentialist and retributivist in nature (Grasso, 2016: pp. 399–400). The same can be said for restorative agreements. Indeed, Duff suggests that ‘restoration through retribution’ should be the desired outcome of restorative processes; that truly understanding restoration within the context of criminal justice, and understanding what retribution stands for in the criminal punishment context, can then help to illuminate the fact that ‘restoration is not only compatible with retribution and punishment but requires it’ (Duff, 2003: p. 382). For Christie, we should be inficting less pain through punishment and instead helping to manage and solve relational problems between stakeholders (Christie, 1981), whilst Zehr also sees criminal acts as ‘fundamentally a violation of people and interpersonal relationships’ (Zehr, 2003: p. 143). Thus, many varying theories exist as to what the ‘punishment’ concept should represent within both criminal justice and restorative justice processes, and there is much discussion around the concepts of ‘retributive’ and ‘restorative’ paradigms (Ashworth, 1993; Daly and Immarigeon, 1998). One element of both restorative agreements and DPAs which can be classed as consequentialist is the compliance duty within agreements. What the compliance duty for both corporations and participating offenders achieves if successfully completed is the opportunity for both reintegration and rehabilitation – both important principles within the restorative ideal. These principles can mean different things to different stakeholders. For example, it can refer to offenders

DPAs and restorative justice 123 reintegrating back into society as a whole and specifcally into their own local community. It can also attach to direct and indirect victims who require a reintegration back into their private community, free from both the actual harm caused by the offence as well as the added fear of repeat victimisation and ready to move on with their lives. For Zehr and Mika, the justice process should be seen as belonging to the community and active participation by community members can serve to maximise that role and encourage values such as rehabilitation and reintegration rather than coercion and isolation (Zehr and Mika, 1998: p. 53). Conversely, research considering whether or not offenders participating in particular restorative programmes had been successfully reintegrated into their various communities, whether that be in a ‘geographic community’ sense or one made up of a close-knit group of families and friends, found that such a notion of reintegration was rare. This was not because of any perceived failure of restorative justice as a process in itself but, as the authors reiterate, due to the perception that ‘a community in this sense did not exist’ (Shapland et al., 2006: p. 521). However, although this feeling of successful reintegration without a community base or close interdependent micro-ties is seen as diffcult to achieve, the researchers did fnd a more specifc sense of reintegration in the form of the strengthening or thickening of individual bonds between offender and supporters, or victim and supporters, or, very occasionally, ‘bridging’ social capital through new bonds between victim and offender (Shapland et al., 2006: p. 521; Putnam, 2000). Despite these identifed limitations, the compliance procedure as part of both DPA and restorative contract agreements can represent an important gateway into realising rehabilitative and reintegrative ideals. Compliance programmes and other reforms within DPAs can include corporate governance changes, the hiring and fring of specifc actors, and, aligned with many restorative outcomes, the giving up of trial rights and defences (Grasso, 2016: p. 393). In further alignment with restorative programmes a monitor can be appointed to oversee compliance with agreement terms in much the same way as case workers and probation offcers carry out a watchful eye over restorative agreement compliance. Further in line with restorative justice agreements, DPA compliance programmes can see health care being opened to stakeholders by certain medical institutions (Grasso, 2016: p. 393). As part of restorative justice compliance agreements participating offenders are asked to attend medical services within the community in order to address their respective addictions and rehabilitative needs. The argument that these compliance programmes within DPA can open up pathways to rehabilitation and reintegration is illustrated by the case of the UK-based utility company Severn Trent Water where it is said that ‘an open, cooperative and inclusive approach by management fostered the reintegration of the company after protracted fraud and data manipulation’ (Schormair and Gerlach, forthcoming 2019: p. 6). Furthermore, after acknowledging the wrongdoing publicly, compensating regulators and community members and implementing internal changes to management practices, procedures and personnel the company’s reintegration, and indeed rehabilitation, was considered complete

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after they were named ‘Utility of the Year’ after pleading guilty to all charges in court (ibid.: p. 6). Similarly, may successful participating offenders within restorative justice practices view the process as rehabilitative (McStravick, 2018: p. 107; Doak, 2011), whilst research also argues that the principles espoused within these practices allow for greater opportunities especially with prisoners for preventing recidivist tendencies and helping with desistance (Maruna, 2016).

Conclusion Fundamental restorative principles such as reintegration and rehabilitation can be successfully evidenced within DPAs and corporate-based criminal conficts just as they can within restorative justice programmes managing offenders and victims of conventional crime. Other procedures within both disposals are also similar such as the contractual nature and uneven use of discretion as part of decision making. Furthermore, the compliance procedures as part of both prosecution agreements and restorative based outcomes can help to repair the ‘social damage’ identifed earlier within this chapter by Walgrave due to criminal prosecution and stigmatisation (Walgrave, 2003: p. 61). Just as corporate entities can re-enhance their reputation and improve their working practices through such agreements to the beneft of all stakeholders, so participating offenders within restorative programmes can also successfully move on from their offending behaviour by fully addressing their addictions and other core reasons for their behaviour. In doing so the damage and stigma that a criminal prosecution can attach to an offender’s life, and the reputational damage that a public prosecution can cause to a corporation and stakeholders, is potentially negated. Both restorative justice and DPA principles also allow for a greater sense of accountability by way of increasing the range of indirect victims connected to the criminal event and recognising that the fallout from such acts, the ‘collateral consequences’ noted by Grasso, Cheung and others, can cover a wide spectrum. Addressing these concerns by fully considering all stakeholders within DPA and restorative justice compliance agreements can limit the harm attached to corporate and conventional criminal acts and better recognise the potential for both corporate entities and participating offenders to escape stigma and embrace rehabilitative change.

References Ashworth, A. (1993). Some doubts about restorative justice. Criminal Law Forum, 4(2), pp. 277–299. Ashworth, A. (2002). Responsibilities, rights and restorative justice. British Journal of Criminology, 42(3), pp. 578–595. Ashworth, A. (2009). Principles of Criminal Law. Oxford: Oxford University Press. Barton, C. (2003). Restorative Justice: The Empowerment Model. New South Wales: Hawkins Press. Bazemore, G. & Walgrave, L. (1999). Restorative juvenile justice: in search of fundamentals and an outline for systemic reform. In: G. Bazemore & L. Walgrave,

DPAs and restorative justice 125 eds., Restorative Juvenile Justice: Repairing the Harm of Youth Crime. Devon: Criminal Justice Press, pp. 45–74. Braithwaite, J. (1996). Restorative Justice and a Better Future. The Dorothy J. Killam Memorial Lecture, Dalhousie University. Cheung, R. (2018). Deferred prosecution agreements: cooperation and confession. The Cambridge Law Journal, 77(1), pp. 12–15. Christie, N. (1977). Conficts as property. British Journal of Criminology, 17(1), pp. 1–15. Christie, N. (1981). Limits to Pain. London: Martin Robinson. Clarkson, C.M.V. (1996). Kicking corporate bodies and damning their souls. Modern Law Review, 59, pp. 557–573. Cunneen, C. & Hoyle, C. (2010). Debating Restorative Justice. Oxford: Hart Publishing. Daly, K. & Immarigeon, R. (1998). The past, present and future of restorative justice: some critical refections. Contemporary Justice Review, 1, pp. 21–45. Doak, J. (2011). Honing the stone: refning restorative justice as a vehicle for emotional redress. Contemporary Justice Review: Issues in Criminal, Social and Restorative Justice, 14(4), pp. 439–456. Duff, R.A. (2003). Restorative punishment and punitive restoration. In: G. Johnstone, ed., A Restorative Justice Reader. Cullompton: Willan Publishing, pp. 382–397. Durkheim, E. (1984). The Division of Labor in Society. Introduction by Coser, L. Translated by Halls, W.D. New York: Free Press. 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, p. 388. Hoyle, C. & Rosenblatt, F.F. (2016). Looking back to the future: threats to the success of restorative justice in the United Kingdom. Victims & Offenders, 11(1), pp. 1–20. Marshall, T.F. (1996). The evolution of restorative justice in Britain. European Journal on Criminal Policy and Research, 4(4), pp. 21–43. Maruna, S. (2016). Desistance and restorative justice: it’s now or never. Restorative Justice: An International Journal, 4(3), pp. 289–301. McCold, P. (2004). What is the role of community in restorative justice theory and practice? In: H. Zehr & B. Toews, eds., Critical Issues in Restorative Justice. Monsey, New York: Criminal Justice Press, pp. 155–172. McCold, P. & Wachtel, B. (2003). Community is not a place: a new look at community justice initiatives. In: G. Johnstone, ed., A Restorative Justice Reader. Cullompton: Willan Publishing, pp. 294–302. McStravick, D. (2015). Behind the restorative veil: an insight into Irish reparation panel practice and theoretical principles. Contemporary Issues in Law, 13(3), pp. 193–215. McStravick, D. (2018). Adult reparation panels and offender centric meso communities: an answer to the conundrum. International Journal of Restorative Justice, 1(1), pp. 96–121. Putnam, R.D. (2000). Bowling Alone: The Collapse and Revival of American Community. New York: Simon and Schuster. Rossner, M. & Bruce, J. (2016). Community participation in restorative justice: rituals, reintegration and quasi-professionals. Victims and Offenders, 11(1), pp. 107–125.

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Ryder, N. (2018). Too scared to prosecute and too scared to jail? A critical and comparative analysis of enforcement of fnancial crime legislation against corporations in the USA and the UK. The Journal of Criminal Law, 82(3), pp. 245–263. Schormair, M.J.L. & Gerlach, L.M. (2019). Corporate remediation of human rights violations: a restorative justice framework. Journal of Business Ethics, pp. 1–19. Available from : https://doi.org/10.1007/s10551-019-04147-2. Shapland, J., Atkinson, A., Atkinson, H., Colledge, E., Dignan, J., Howes, M., Johnstone, J., Robinson, G. & Sorsby, A. (2006). Situating restorative justice within criminal justice. Theoretical Criminology, 10(4), pp. 505–532. Shiner, R.A. & Ho, H. (2018). Deferred prosecution agreements and the presumption of innocence. Criminal Law and Philosophy, 12(4), pp. 707–723. Sutherland, E.H. (1940). The white-collar criminal. American Sociological Review, 5, pp. 1–12. Tyler, T.R. & Huo, Y. (1990). Trust in the Law: Encouraging Public Cooperation with the Police and the Courts. New York: Russell Sage Foundation. Umbreit, M.S., Coates, R.B. & Vos, B. (2004). Restorative justice versus community justice: clarifying a muddle or generating confusion. Contemporary Justice Review, 7(1), pp. 81–89. Walgrave, L. (2003). Imposing restoration instead of inficting pain: refections on the judicial reaction to crime. In: A. Von Hirsch, J.V. Roberts, A. Bottoms, K. Roach & M. Schiff, eds., Restorative Justice and Criminal Justice: Competing or Reconcilable Paradigms. Oxford and Portland: Hart Publishing, pp. 61–78. Zehr, H. (1990). Changing Lenses: A New Focus for Crime and Justice. Scottsdale: PA, Herald Press. Zehr, H. & Mika, H. (1998). Fundamental concepts of restorative justice. Contemporary Justice Review, 1, pp. 47–55. Zehr, H. (2003). Retributive justice, restorative justice. In: G. Johnstone, ed., A Restorative Justice Reader. Cullompton: Willan Publishing, pp. 69–82.

8

Financial sanctions as a weapon for combatting grand corruption Anna Bradshaw

Introduction Financial sanctions might refect the concerns raised to date about the appropriateness of misappropriation sanctions and their application in practice; which have emerged against a background of increasing concerns about the unchecked way in which sanctions law and policy has developed more generally, particularly outside the auspices of the UN. Questions are being raised about the extent to which international law imposes, or should impose, limits on the ability of states to prescribe and enforce sanctions; whether collectively or unilaterally. Misappropriation sanctions provide a particularly good example when framing the debate because they give rise to concerns that are common to all fnancial sanctions as well as additional issues stemming from the confation of foreign policy and criminal justice objectives. To the extent that these concerns have been aired in legal challenges they have so far not been fatal to the EU’s continued pursuit of misappropriation sanctions. In this sense the outcome of these challenges demonstrate the illusory nature of the procedural and substantive safeguards ostensibly in place for all fnancial sanctions; undermined by restrictive judicial interpretations, compounded by the lack of specifcity in the grounds for designations and the objective they pursue as well as by the practical obstacles to accessing a judicial remedy in the frst place. The available safeguards for individuals and entities affected by misappropriation sanctions can be seen to fall far short of corresponding safeguards available in the criminal justice context; for interim freezing orders made in support of confscation as well as non-conviction based civil asset recovery. More problematically, the adoption of misappropriation sanctions effectively cancels out the safeguards available for criminal and civil asset recovery: where assets are already administratively frozen by fnancial sanctions, there is little need to exercise criminal or civil powers as well. This interrelationship between criminal, civil and administrative asset freezes creates a risk that the choice of assistance provided to third countries in their fght against grand corruption is driven by a desire to avoid the constraints of the human rights protections to which conventional criminal and civil law responses are subject. For this reason, misappropriation sanctions may

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be inherently inappropriate: the fght against any kind of criminality can only be undermined by recourse to administrative measures to freeze assets in circumstances where there are already well-established mechanisms in place for mutual legal assistance (MLA) in criminal and civil matters. It is diffcult to see how the subordination of the criminal justice objective to the foreign policy objective justifes lower human rights standards; particularly where administrative asset freezes can be far more debilitating than criminal or civil asset freezes.

Misappropriation sanctions in context Financial sanctions are, along with trade sanctions, a standard feature of economic sanctions. In the EU fnancial sanctions are one of a range of ‘restrictive measures’ that can be imposed on natural or legal persons and groups or non-State entities under Title V of the Treaty on European Union (TEU) and Title IV of the Treaty on the Functioning of the European Union (TFEU), in pursuit of the Common Foreign and Security Policy (CFSP). One reason for the EU to adopt restrictive measures is to ensure consistent implementation by all its Member States of sanctions adopted by the UN Security Council under Chapter VII of the UN Charter, but they can also be adopted ‘autonomously’ in pursuit of the EU’s own objectives; to extend the reach of UN sanctions, or to impose sanctions which have no UN counterpart. In all instances they take the form of Decisions agreed unanimously by all Member States in Council, imposing prohibitions and restrictions on a range of otherwise lawful activity undertaken within EU territory or by persons otherwise subject to EU jurisdiction. In the areas where the EU has competence, these prohibitions and restrictions are implemented across the EU by directly applicable Regulations. The national laws of each EU Member State will govern the implementation of any remaining prohibitions and restrictions, as well as the enforcement of breaches. Asset freezes are at present the most commonly encountered fnancial sanction in practice, often but not always imposed in conjunction with travel bans on individuals. Asset freezes and travel bans are typically imposed on members of a governing regime and their associates, in a ‘targeted’ approach that avoids the otherwise indiscriminate effect of many other forms of economic sanctions on the civilian population of a country. Misappropriation sanctions can be seen to be a distinct subset of country-based fnancial sanctions, because they are directed at persons connected to a former governing regime rather than those currently in power. They can also be seen to be a subset of the EU’s autonomous activity-based sanctions imposed on: terrorists;1 persons responsible, supportive of

1 Council Decision (CFSP) 2016/1693 and Council Regulation (EU) 2016/1686 of 20 September 2016 imposing additional restrictive measures directed against ISIL (Da’esh) and Al-Qaeda and natural and legal persons, entities or bodies associated with them [2016] OJ L255/1.

Financial sanctions as anti-corruption 129 or otherwise involved in chemical weapons proliferation and use;2 and persons providing support for or who are otherwise involved in cyber-attacks.3 However, a distinguishing feature of misappropriation sanctions is in this respect its symbiotic dependence on the parallel pursuit of criminal proceedings in a third country.

Misappropriation sanctions as a response to grand corruption The frst occasion which led the EU to adopt misappropriation sanctions was the Tunisian Revolution, following the resignation of President Zine El Abidine Ben Ali. On 31 January 2011, the Council announced that it had: decided to adopt restrictive measures against persons responsible for the misappropriation of Tunisian State funds and who are thus depriving the Tunisian people of the benefts of the sustainable development of their economy and society and undermining the development of democracy in the country.4 Subsequent litigation has revealed that this was an EU-led initiative: an EU delegation had requested the Tunisian Ministry of Foreign Affairs to urgently identify persons known or suspected of having acted against the interests of the Tunisian state, whom Tunisia wished to punish.5 More than eight years later, the list of designated persons remains largely intact; with 47 designations out of an initial 48.6 The reasons accompanying all designations initially read: ‘Person subject to judicial investigation by the Tunisian authorities in respect of the acquisition of movable and immovable property, the opening of bank accounts and the holding

2 Council Decision (CFSP) 2018/1544 and Council Regulation (EU) 2018/1542 of 15 October 2018 concerning restrictive measures against the proliferation and use of chemical weapons [2018] OJ L259/12. 3 Council Decision (CFSP) 2019/797 and Council Regulation (EU) 2019/796 of 17 May 2019 concerning restrictive measures against cyber-attacks threatening the Union or its Member States [2019] OJ L129I/1. 4 Council Decision 2011/72/CFSP of 31 January 2011 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Tunisia [2011] OJ L31/40. 5 Judgment of the General Court (Third Chamber) of 28 May 2013, Case T-200/11, Al Matri v Council, at para.58; judgment of the General Court (Eighth Chamber) of 30 June 2016, Case T-545/13, Al Matri v Council, ECLI:EU:T:2016:376, at para.63. See also evidence provided by Maya Lester QC to a UK Parliamentary Select Committee on this point, referenced in their resulting report (House of Lords, 2017: p. 14). 6 Council Regulation (EU) No 101/2011 of 4 February 2011 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Tunisia [2011] OJ L31/5.

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of fnancial assets in several countries as part of money-laundering operations’.7 They now read, subject to variations: Person subject to judicial investigations by the Tunisian authorities for misappropriation of public monies by a public offce-holder, misuse of offce by a public offce-holder to procure an unjustifed advantage for a third party and to cause a loss to the administration, exerting wrongful infuence over a public offce-holder with a view to obtaining directly or indirectly an advantage for another person and for the offence of the receipt by a public offcial of public funds which he knew were not due, and used for the personal beneft of himself or members of his family.8 The EU again invoked misappropriation sanctions shortly afterwards, in response to the Egyptian Revolution. On 11 February 2011, Hosni Mubarak resigned as President of Egypt and political control passed to the Military Council. On 21 March 2011 the Council imposed asset freezes on: persons having been identifed as responsible for misappropriation of Egyptian State funds and who are thus depriving the Egyptian people of the benefts of the sustainable development of their economy and society and undermining the development of democracy in the country.9 Subsequent legal challenges have established that these restrictive measures were preceded by an unsuccessful MLA request made by the Egyptian Military Council to the United Kingdom, refused because of the absence of suffcient supporting information.10 In accordance with the accompanying reasons,11 individuals have been designated on the basis that they are ‘subject to judicial proceedings by the Egyptian authorities in respect of the misappropriation of State Funds on the basis of the United Nations Convention against corruption’. Five possible permutations of listings on this basis were enumerated by the General Court: (1) those who at the end of judicial proceedings are found guilty of misappropriating Egyptian State funds; (2) those who are found by a criminal court to

7 8

Ibid., Annex 1. Council Decision 2014/49/CFSP of 30 January 2014 amending Decision 2011/72/CFSP concerning restrictive measures directed against certain persons and entities in view of the situation in Tunisia [2014] OJ L28/38, Annex. 9 Council Decision 2011/172/CFSP of 21 March 2011 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Egypt [2011] OJ L76/63. 10 Judgment of the General Court (Third Chamber) of 21 March 2014, Case T-256/11, Ezz and Others v Council, ECLI:EU:T:2014:93, para.155. 11 Council Decision 2011/172/CFSP, n. 9, and Council Regulation (EU) No 270/2011 of 21 March 2011 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Egypt [2011] OJ L76/4.

Financial sanctions as anti-corruption 131 be accomplices to persons in the frst category; (3) those in the process of being prosecuted for misappropriating Egyptian State funds; (4) those being prosecuted as accomplices; and (5) anyone who is the subject of connected judicial proceedings, including those who are subject to judicially prescribed protective measures because they may unwittingly have benefted from the proceeds of misappropriation.12 A total of nine individuals remain listed out of the initial nineteen. Since 21 March 2018 an additional reason for listing is given for four of them, referencing their ‘association’ to their respective spouses who are now ‘subject to judicial proceedings or asset recovery process by the Egyptian authorities following a fnal court ruling in respect of the misappropriation of State Funds on the basis of the United Nations Convention against corruption’.13 The third and fnal invocation of the EU’s misappropriation sanctions to date followed the suppression of the demonstrations in Independence Square in Kiev on February 2014. On 5 March 2014 EU asset freezes were imposed on ‘persons identifed as responsible for the misappropriation of Ukrainian State funds and persons responsible for human rights violations, with a view to consolidating and supporting the rule of law and respect for human rights in Ukraine’.14 Here, misappropriation sanctions form part of a broader package of economic sanctions adopted by the EU in response to Russia’s annexation of Crimea; under which only a small portion of designations are on misappropriation-related grounds (with 12 out of an initial 18 persons remaining). Although designations can also relate to human rights violations the stated reasons for all designations were initially that the person in question was ‘subject to criminal proceedings in Ukraine to investigate crimes in connection with the embezzlement of Ukrainian State funds and their illegal transfer outside Ukraine’. Following legal challenges these reasons have been amended to refer to ‘criminal proceedings by the Ukrainian authorities for the misappropriation of public funds or assets’, and in some instances also the abuse of offce by a public offce-holder in order to procure an unjustifed advantage for himself or for a third party and thereby causing a loss to Ukrainian public funds or assets.

Issues particular to misappropriation sanctions in connection with legal challenges Like all acts of EU institutions, restrictive measures are governed by and subject to EU law. Specifc legal safeguards are available to natural and legal persons affected by the EU’s restrictive measures, many of which have evolved incrementally and

12 Ezz and Others v Council, n. 10, para.67. 13 Council Implementing Regulation (EU) 2018/465 of 21 March 2018 implementing Regulation (EU) No 270/2011 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Egypt [2018] OJ L 78I/1. 14 Council Decision 2014/119/CFSP and Council Regulation (EU) No 208/2014 of 5 March 2014 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Ukraine [2014] OJ L66/1.

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are not centrally located; such as periodic reviews of designations. None of these protections is specifc to misappropriation sanctions, but their shortcomings may in many instances be more apparent in this context. To demonstrate this point, we will focus on how legal challenges to misappropriation sanctions have been determined, as these decisions are publicly available.

The procedure for bringing legal challenges to designations A designated person has a right to request an administrative review of the listing by the Council in addition to periodic reviews, and to bring annulment actions in the General Court of the Court of Justice of the EU (CJEU) pursuant to Article 263 TFEU. Article 275 TFEU expressly preserves the jurisdiction on the EU courts to monitor compliance with Article 40 TEU and to rule on legal challenges brought against restrictive measures in accordance with Article 263 TFEU.

Practical obstacles to bringing challenges First, in order to bring an annulment action in the General Court, the designated person will need to instruct an EU-qualifed lawyer. The designated person will also need to seek and obtain a legal expenses licence from the relevant national authority in order to permit legal fees to be paid by the designated party or a third-party funder on their behalf; in so far as this involves dealing with frozen funds or making funds available indirectly to, or for the beneft of, a designated person (Offce of Financial Sanctions Implementation, 2018: p. 28). Persons subject to misappropriation sanctions are also likely to face additional hurdles under the money laundering laws of the EU Member State in which the lawyer is based, given that the designation is expressly based on their alleged criminal conduct. Second, applications must be brought within two months of the day on which the measure complained of was adopted, notifed to the complainant or otherwise brought to their attention. Notices addressed to designated persons are published in the Offcial Journal alongside the restrictive measures, informing them of their ability to bring administrative and legal challenges; but there is no other mechanism for dissemination. Like many designated persons, the targets of misappropriation sanctions are unlikely to be located within or near EU territory and may not speak any of the EU’s offcial languages. A further ten days may be added to the deadline on account of distance,15 but this still leaves very little time to the designated person to prepare an application. Although the Council can be petitioned in order to obtain more information about the reasons for listing beyond those stated in the restrictive measures a response is unlikely to be forthcoming before the expiry of the deadline (House of Lords, 2017: p. 23). Third, the ability of a designated person to challenge their listing also depends on their understanding of the reasons for their designation and access to the

15 Article 60 of the Rules of Procedure of the General Court [2015] OJ L105/1.

Financial sanctions as anti-corruption 133 information on which the listing is based. In addition to the general principles of effective judicial protection and rights of defence, there is an express obligation on the Council to provide a statement of reasons.16 However, the obligation on the Council to disclose the evidence relied upon in support of a designation is heavily qualifed. In particular, the Council may be able to confne disclosures of sensitive material to the Court only.17 In the context of misappropriation sanctions the evidence relied on in support of a designation is less likely to be confdential but because it relates to third-country judicial proceedings is likely to need to be carefully scrutinised with the assistance of a local lawyer in order to confrm that any information and material provided by the third-country authorities is accurate and that it has been correctly interpreted and understood. This dimension adds signifcantly to the time, complexity and cost involved of bringing an annulment application on the part of persons designated as subject to misappropriation sanctions; additional to the resources they will need to expend in connection with the third-country judicial proceedings.

The availability of human rights protections Designated persons are in principle entitled to invoke the protection of rights conferred on them under EU law, which include the procedural protections set out in the European Convention on Human Rights (ECHR) as well as in the Charter of Fundamental Rights of the European Union (EU Charter). However, restrictive measures are not considered punitive or deterrent in nature and therefore do not attract the full range of procedural protections ordinarily available for criminal justice measures. The enormity of the threshold faced by the designated person is well illustrated by the legal challenges brought to fnancial sanctions across the board, not just misappropriation sanctions: in only one case to date has the CJEU been prepared to fnd that an asset freeze constituted a disproportionate interference with the designated person’s rights.18 The position adopted by the CJEU ignores the impact of fnancial sanctions in practice; described by one of the Advocate Generals to the court as suspending normal economic life.19 An administrative asset freeze imposed by fnancial sanctions is demonstrably more debilitating than any corresponding asset freeze which could have been ordered by the criminal courts of EU Member States in response to MLA requests by the Tunisian, Egyptian or Ukrainian authorities or in support of any civil recovery proceedings that could have been initiated in the civil courts of EU Member States based on the existence of the third-country

16 Article 296 TFEU. 17 Article 105 of the Rules of Procedure of the General Court, n. 15. 18 Judgment of the Court (Grand Chamber) of 3 September 2008, Joined cases C-402/05 P and C-415/05 P, Yassin Abdullah Kadi and Al Barakaat International Foundation v Council of the European Union and Commission of the European Communities, ECLI:EU:C:2008:461. 19 Opinion of Advocate General Sharpston of 22 September 2016, C-599/14 P, Council of the European Union v Liberation Tigers of Tamil Eelam (LTTE), ECLI:EU:C:2016:723.

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criminal proceedings. The diagram below is a crude comparison of the three different types of asset freeze from a UK law perspective. Although there will be national variations depending on the EU Member State reviewed, these are the key features on which administrative, criminal and civil asset freezes are expected to diverge. The impact of an administrative asset freeze is relevant to the proportionality of its interference with individual rights. Proportionality is not just a requirement under the ECHR but also an autonomous EU law principle: where Union institutions have a choice between several appropriate measures, the least restrictive must be used and the inconveniences caused must not be disproportionate to the aims pursued.20 The EU courts, however, point to the temporary and reversible nature of restrictive measures and the availability of derogations for basic needs, legal expenses and extraordinary expenses in support of the conclusion that they do not affect the ‘essential content’ of qualifed rights.21 This concern applies equally to all administrative asset freezes but may be considered particularly acute in the context of misappropriation sanctions because of the stark contrast between the position of a designated person and the subject of a request for MLA or extradition in support of third-country criminal proceedings, or the provision of MLA to third countries in support of civil matters. In particular, far greater procedural protections would have been expected to be available under national law in the criminal justice context. Under the terms of the Council of Europe’s Convention on MLA in criminal matters to which they are all signatories, EU Member States would be expected to refuse third-country requests which relate to offences they consider to be political or connected to a political offence.22 By (stark) contrast, as instruments of foreign policy misappropriation sanctions are themselves by defnition politically motivated, and are furthermore adopted in acknowledgment of the equally politically motivated nature of the third-country proceedings they are intended to support.

Third-party interests The proportionality of misappropriation sanctions becomes particularly diffcult to maintain when the designated person is not alleged to have engaged in misappropriation but are merely involved in third-country proceedings as a third party – such as persons subject to judicially prescribed protective measures because they may unwittingly have benefted from the proceeds of misappropriation. Targeted sanctions are inherently problematic where designations are based on family ties or other forms of association rather than the person’s own activity, as a substantial

20 Judgment of 15 September 2016, Yanukovych v Council, T346/14, EU:T:2016:497, para. 164. 21 Judgment of the General Court (Third Chamber) of 27 February 2014, Ezz and Others v Council, Case T-256/11, EU:C:2014:93, para. 209. 22 European Convention on Mutual Assistance in Criminal Matters, Article 2.

Table 8.1 UK conventional asset freezes versus fnancial sanctions Conventional asset freezes in support of criminal or civil recovery proceedings Duration

Material scope

Territorial reach

Scope for variation/ amendment on application Signalling effect/ stigma

Associated compliance obligations

Administrative asset freeze by way of fnancial sanctions

Dependent on the continued Dependent on the continued existence of existence of proceedings, as grounds for designation, as determined determined by a court. by a political decisionmaker. Assets in which the subject All funds and economic resources of the order has a legal or belonging to, owned, held or benefcial interest, to the controlled by a designated person, extent necessary in order to as well as any funds or economic satisfy a future asset recovery resources to be made directly or order and to the extent that indirectly available to them or for there is a risk of dissipation their beneft. It is also prohibited to of assets unless frozen. knowingly and intentionally participate in activities which have as their object or effect the circumvention of a relevant prohibition or restriction. National only, unless and until EU-wide, with extraterritorial application enforced in a particular outside the EU to the extent that it territory by order of the must be complied with by EU persons local courts pursuant to a and in connection with EU business request for MLA. conducted by a legal entity. Open-ended grounds for Exhaustive grounds for derogation, variation, subject to the subject to the discretion of the discretion of the court. national competent authority, and often also subject to prior approval by the Commission and the competent authorities of other Member States. The subject of the order is Details of the asset freeze are published alleged to have committed a in the restrictive measure, together criminal offence or appears with the reasons for listing. These are to hold assets on behalf of reproduced on the EU’s searchable such a person, and a court consolidated list of persons, groups has been satisfed that there and entities subject to EU fnancial is some foundation to the sanctions as well as on corresponding suspicion. Orders are not lists operated by national authorities generally made available for inside and outside the EU. public consumption. Must be complied with by Must be complied with by anyone anyone with notice of the required to comply with EU sanctions, order, within the jurisdiction who has reasonable cause to suspect of the court who made it. that their actions would amount to a breach. Any information which would facilitate compliance must be immediately supplied to the national competent authority, who shall pass it on to the Commission.

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proportion of misappropriation sanctions are. There are no carve-outs for bona fde third-party interests in the same way that there would be from conventional criminal or civil asset freezes. Familial or other association as a ground for designation may, in fact, be harder to challenge in the misappropriation context than under country-based regimes. In an early seminal judgment,23 the General Court confrmed that restrictive measures cannot be applied to individuals based solely on their family connection rather than any personal conduct on their part. Only an individual’s own involvement in activities to which the relevant legislation relates can justify the adoption of restrictive measures against them.24 However, this limitation does not apply with equal force to misappropriation sanctions in circumstances where the third country in question permits preventative orders such as asset freezing orders or preservation orders that are ancillary to misappropriation investigations and prosecutions to be made against family members and other third parties. The EU court has confrmed that misappropriation sanctions may be based on judicial proceedings without any need to describe the personal involvement of the person confrmed,25 and has for this purpose endorsed expansive interpretations of the concepts of ‘investigations’ and ‘proceedings’.26

The appropriateness of continuing reliance on misappropriation sanctions As foreign policy instruments, sanctions are adopted through a process which is often rapid with little opportunity or reason for prior consultation and outreach. The EU’s misappropriation sanctions are no exception to this general rule and the occasions on which they have been adopted were not preceded by any public debate, whether in the European Parliament or otherwise. Almost a decade after their frst adoption there has yet to be any principled, independent analysis of the concerns raised by misappropriation sanctions, whether at EU level or otherwise. Yet there can be seen to be growing awareness of the failure of international law to catch up with developments in the design and application of sanctions; as acknowledged by the UN Human Rights Council in its resolution on human rights and unilateral coercive measures,27 as well as in subsequent reports presented to the same body by the Special Rapporteur on the negative impact of

23 Judgment of 13 March 2012, Case C-376/10 P, Pye Phyo Tay Za v Council; ECLI:EU:C:2012:138:ILEC 106 (CJ 2012). 24 Judgment of the General Court (Fourth Chamber) of 12 December 2013, Case T-58/12, Nabipour and Others v Council, ECLI:EU:T:2013:640, paras 107–108. 25 Judgment of the Court (Fifth Chamber) of 5 March 2015, Case C-220/14 P, Ahmed Abdelaziz Ezz and Others v Council, ECLI:EU:C:2015:147, para. 84. 26 Judgment of the General Court (Fifth Chamber) of 22 November 2018, T-274/16 and T-275/16, Thabet and Others v Council, ECLI:EU:T:2018:826, para. 210. 27 Resolution adopted by the UN Human Rights Council, 27/21, Human rights and unilateral coercive measures, A/HRC/RES/27/21, 3 October 2014.

Financial sanctions as anti-corruption 137 unilateral coercive measures on the enjoyment of human rights.28 Because misappropriation sanctions raise a range of unique concerns that are distinct from those arising in connection with fnancial sanctions more generally, this analysis is urgently required before greater use is made of misappropriation sanctions; particularly as the European Parliament has called for EU autonomous sanctions to target systemic corruption related to grave human rights violations.29 Only by adopting a principled approach to the appropriateness of adopting sanctions in response to third-country grand corruption, gross human rights violations and other serious criminality can these measures be bestowed with the legitimacy and robustness they require to withstand challenges in the legal and public courts. To the extent that the UK maintains the EU’s misappropriation sanctions once it ceases to be a Member State, these measures will now at least come under scrutiny by UK Ministers and UK courts pursuant to the Sanctions and AntiMoney Laundering Act 2018.30 The analysis should ideally include the following concerns. First, misappropriation sanctions are based on criminal allegations in a third country. This means that the availability and duration of misappropriation sanctions are effectively delegated to third-country institutions. In this sense, the availability of misappropriation sanctions indirectly confers powers on a third country to determine who becomes the target of EU fnancial sanctions and for how long; which could potentially be delegated to the discretion of individual decisionmakers. Misappropriation sanctions can also be seen to bestow external legitimacy on the judicial proceedings they seek to support, in circumstances where the independence of the third country’s law enforcement authorities and the judiciary may be far from established; thereby running the risk of perpetuating any substantive or procedural human rights violations perpetrated in connection with those proceedings. In this sense restrictive measures adopted for the purpose of strengthening the rule of law in the third country could end up having the opposite effect in practice, encouraging or even condoning departures from the rule of law by the third country’s public authorities. Only some considerable time after the misappropriation sanctions were frst adopted did the EU courts begin to require the Council to verify, before relying on any third-country decisions in support of designations, that those decisions have been adopted in compliance with procedural rights, including the rights of the defence and the right to effective judicial protection; and to include at least a brief explanation to this effect in the statement of reasons accompanying

28 United Nations General Assembly, Human Rights Council, 39th session, Report of the Special Rapporteur on the negative impact of unilateral coercive measures on the enjoyment of human rights, 30 August 2018, A/HRC/39/54. 29 European Parliament Resolution of 14 March 2019 on a European human rights violations sanctions regime (2019/2580(RSP)). 30 Chapter 2 (Review by appropriate Minister, and other reviews).

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a listing.31 However, this protection can be seen to be heavily caveated. The Council’s verifcation obligation is limited to the third-country decision on which the particular restrictive measures are based – it does not extend to the procedural rights compatibility of the third-country investigations or proceedings as a whole.32 In any event, the Council’s verifcation exercise is not the same as those of a national judicial authority in the context of asset-freezing criminal proceedings.33 The Council is not required to conduct its own further investigation if it has already obtained information it deems to be suffcient from the third country; unless the evidence provided by the third-country authorities is capable of giving rise to legitimate doubts regarding the conduct of the proceedings and the adequacy of information provided about it.34 Beyond the context of the specifc proceedings the bar is set very high: It is only if the Council’s political choice to support the new Ukrainian regime, including the cooperation resulting from the restrictive measures at issue, turns out to be manifestly erroneous, in particular because fundamental rights are systematically infringed in that country after the change of regime, that the alleged lack of correspondence between the protection of fundamental rights in Ukraine and that existing in the Union could have an impact on the legality of the maintenance of those measures in respect of the applicant. (Yanukovych v Council, para. 161, unoffcial English translation). The EU court’s approach to the degree of scrutiny the Council is expected to apply to third-country proceedings may be diffcult to reconcile with the approach adopted by the European Court of Human Rights to the extra-territorial application of Article 1 of the ECHR in connection with the execution of MLA and extradition requests for the last three decades.35 Whilst signatories are not obliged to verify whether the third country proceedings would be compatible with the ECHR, violations may occur where the subject of the request would face a real risk of suffering a fagrant denial of justice in the third country; by which is meant a breach of the principles of fair trial so fundamental so as to amount to a

31 Judgment of Court (Grand Chamber) of 26 July 2017, Council v LTTE, C-599/14P, EU:C:2017:583; judgment of the Court (Fourth Chamber) of 19 December 2018, Azarov v Council, C-530/17P, EU:C:2018:1031; judgment of the General Court (Sixth Chamber) of 11 July 2019, Yanukovych v Council, Joined Cases T-244/16 and T-285/17. 32 Judgment of the General Court (Sixth Chamber) of 13 December 2018, Mykola Yanovych Azarov v Council of the European Union, T-247/17, ECLI:EU:T:2018:931. 33 Judgment of the General Court (Sixth Chamber) of 30 January 2019, Stavytskyi v Council, T-290/17, ECLI:EU:T:2019:37, para. 92. 34 Ibid., para. 131. 35 ECtHR, Soering v the United Kingdom, Appl. no. 14038/88, 7 July 1989, Series A no.161, para. 113.

Financial sanctions as anti-corruption 139 nullifcation, or destruction of the very essence of the right guaranteed by Article 6 ECHR.36 Corruption proceedings brought against former members of the governing regime in the aftermath of a revolution could conceivably satisfy this test. Second, the grounds on which persons are designated as subject to misappropriation sanctions are expressly based on historic conduct. This means that the designated persons are unable to infuence the duration of the sanctions by changing their behaviour; short of any steps accused persons might be able to take to expedite the third-country proceedings, whether by pleading guilty to a criminal charge or otherwise. In any event, this is not an option open to family members or other persons associated with suspects who are merely subject to judicial proceedings imposing preventative asset freezes. The EU court has on at least one occasion rejected a challenge by designated on the basis of third-country preventative measures by pointing to their failure to challenge the underlying freezing order;37 which ignores the possibility that such challenges may not be viable under the third country’s legal order. Third, misappropriation sanctions appear to have had at best a questionable effect on the fght against grand corruption. The stated purpose of misappropriation sanctions is to assist the third country to prosecute misappropriation offences,38 and to fnd and repatriate misappropriated public funds.39 The aim pursued is one that can ultimately be achieved only by successful criminal proceedings in the third country, supported by the EU Member States executing any necessary MLA and extradition requests. The success of misappropriation sanctions depends on the success of the third country’s criminal justice response to grand corruption. Commentators are starting to point out that these objectives have gone largely unsatisfed to date (Portela, 2019). A recent Explanatory Memorandum prepared by the UK Foreign and Commonwealth Offce in connection with the proposed extension of the EU’s misappropriation sanctions on Tunisia contained a similar observation: progress has been slow in respect of international asset recovery, particularly as the asset freeze itself does not enable EU Member States to return disputed funds to the Tunisian State.40 In large part, this is due to the lack of convictions secured by the third countries’ authorities, which would be a prerequisite for securing EU Member State assistance in the

36 ECtHR, Othman (Abu Qatada) v the United Kingdom, Appl. no. 8139/09, 17 January 2012, para. 260. 37 Thabet and Others v Council, n. 26, para. 199 38 Yanovych v Council, n. 32. 39 Judgment of the General Court (Sixth Chamber) of 21 February 2018, T-731/15, Sergiy Klyuyev v Council of the European Union, ECLI:EU:T:2018:90. 40 Standard Form of Explanatory Memorandum on the European Union’s Common Foreign and Security Policy, Council Decision (CFSP) 2019/… of [dd/01/2019] amending Decision 2011/72/CFSP concerning restrictive measures directed against certain persons and entities in view of the situation in Tunisia, Council Implementing Regulation (EU) 2019/… of [dd/01/2019] implementing Regulation (EU) No.101/2011 concerning restrictive measures directed against certain persons, entities and bodies in view of the situation in Tunisia, Submitted by the Foreign and Commonwealth Offce on 16 January 2019.

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confscation and repatriation of assets, where available. However, the lack of convictions to date might in part be attributable to the adoption of misappropriation sanctions, to the extent that these measures have effectively obviated the need for the third countries to seek MLA from the EU Member States in locating and freezing assets within their territories. Fourth, replicating the assistance conventionally available through well-established MLA channels without any of the corresponding procedural protections available in the criminal justice context risks devaluing those instruments. The way to stave off this temptation is not to water down the safeguards available in connection with cooperation in criminal matters but instead to try to replicate the advantages of sanctions – an instantaneous, EU-wide, asset freeze – within the established criminal justice framework. Regulation (EU) 2018/1805 of the European Parliament and of the Council of 14 November 2018 on the mutual recognition of freezing order and confscation orders, due to come into force at the end of 2020, provides for the mutual recognition of freezing and confscation orders made by EU Member State courts. This instrument was adopted under Article 82 TFEU which envisages EU instruments based not only on mutual recognition of judgments and judicial decisions but also the approximation of Member State laws and regulations in the areas of terrorism, traffcking in human beings and sexual exploitation of women and children, illicit drug traffcking, illicit arms traffcking, money laundering, corruption, counterfeiting of means of payment, computer crime and organised crime. Further measures could in principle be adopted under Title V TFEU governing the EU’s Area of Freedom, Security and Justice. The European Parliament in the course of calling for the adoption of EU autonomous sanctions to target individuals and entities responsible for, involved in or which have assisted, fnanced or contributed to the planning, directing or committing of gross human rights violations, abuses and acts of systemic corruption related to grave human rights violations also recognised that criminal prosecution should remain the primary objective of all efforts by the EU and its Member States to punish perpetrators of gross human rights violations and crimes of atrocity.41 There appears to be no reason why the same rationale should not also apply to grand corruption.

Conclusions The adoption of misappropriation sanctions may risk not just undermining the fght against grand corruption and other heinous crime in third countries but also damaging the perceived legitimacy of sanctions as a foreign policy tool. Even if it is accepted that supporting a third country’s criminal proceedings is an appropriate foreign policy goal for the EU to pursue, and that assistance in the recovery of assets is the best form for that support to take, the manner in which this is

41 European Parliament resolution of 14 March 2019 on a European human rights violations sanctions regime (2019/2580(RSP)), para.12.

Financial sanctions as anti-corruption 141 provided can be perceived as a convenient shortcut to avoid the procedural protections and other restrictions on MLA as well as the limits to the EU’s jurisdiction in criminal justice matters. Despite the deferential approach adopted by the EU court to legal challenges brought to date, reservations about the appropriateness of misappropriation sanctions will only increase as the criminal proceedings on which they are predicated fail to result in convictions and the related repatriation of assets from outside the jurisdiction. The adoption of misappropriation sanctions may even have undermined the third-country criminal proceedings they were intended to support, as fewer requests for MLA may have been sought once the administrative asset freeze was in place. The existence of misappropriation sanctions may similarly have precluded non-conviction based civil recovery of assets in those EU Member States where the power exists. For these reasons, the better response to third-country grand corruption and other activities of concern is to strengthen the criminal justice responses available to the EU and its Member States. Misappropriation sanctions can only operate lawfully and effectively if greater care is taken to forge a symbiotic relationship between foreign policy and criminal justice objectives and if meaningful safeguards are made available to affected legal and natural persons. These challenges should ideally be addressed before misappropriation sanctions are relied on again – whether by the EU, by the UN or some other supra-national organisation or by individual countries acting unilaterally.

References House of Lords, European Union Committee. (2017). The Legality of EU Sanctions. 11th Report of Session 2016-17, 2 February 2017, HL Paper 102. Available from: https://publications.parliament.uk/pa/ld201617/ldselect/ldeucom/102/10 2.pdf [Accessed 16th September 2019]. Offce of Financial Sanctions Implementation. (2018). Financial Sanctions Guidance. London: HM Treasury. Available from: https://assets.publishing.service.gov.uk /government/uploads/system/uploads/attachment_data/fle/685308/fnanci al_sanctions_guidance_march_2018_fnal.pdf [Accessed 16th September 2019]. Portela, C. (2019). Sanctioning Kleptocrats: An Assessment of EU Misappropriation Sanctions. Berlin: Civil Forum for Asset Recovery (CiFAR). Available from: https ://cifar.eu/wp-content/uploads/2019/03/CiFAR_Sanctioning-kleptocrats.pdf [Accessed 12th September 2019].

Part IV

Information as evidence: whistle-blowing

9

Keep the canaries singing Are whistle-blowers in Nigeria adequately protected? Alison Lui and Soji Apampa

Introduction Corruption has for many years, been a serious and ongoing challenge for Nigeria (Hope, 2017). In particular, the failures in detection and prosecution of corruption in Nigeria are huge obstacles (Onuegbulam, 2017) to curbing corruption. In 2018, Nigeria was ranked 144 out of 180 countries in Transparency International’s Corruption Perceptions Index (CPI). The CPI score for Nigeria has hovered around 25–28 since 2012 (Transparency International, 2019). The Corruption Perceptions Index is based upon the perceived opinions of corruption in the public sector by business people and experts. The low score of 27 in 2018 means that Nigeria, in the bottom third of the table since the index was launched, is perceived to be a very corrupt country. Despite some corporate governance mechanisms being in place in Nigeria, the major hurdle to fght corruption is the lack of political will and capacity to enforce laws and regulations. The Corporate Affairs Commission, the regulator for corporations in Nigeria, is weak in carrying out its duties (Oyejide and Soyibo, 2001; Okike, 2007; Amaeshi and Amao, 2008). Corruption permeates every stratum of life in Nigeria. It is pervasive, endemic and systemic. Nigeria is home to the largest concentration of the world’s poor – according to then British Prime Minister, Theresa May, during her August 2018 visit to Nigeria, 87 million Nigerians lived on less than $1.90 a day. This makes Nigeria ‘home to more very poor people than any other nation in the world’ (Odebode et al., 2018). These poor Nigerians are desperately in need of more effective and effcient service delivery from government, augmented by competitive products and services fnanced by an effcient fnancial services sector. However, the fnancial sector has not been spared the consequences of corruption. According to the Governor of the Central Bank of Nigeria, ‘8 main interdependent factors led to the creation of an extremely fragile fnancial system that was tipped into crisis by the global fnancial crisis and recession’ (Sanusi, 2010). Some of the factors for the 2007–2009 fnancial crisis ftted well into the corrupt environment narrative: ‘major failures in corporate governance at banks, and inadequate disclosure and transparency about fnancial position of banks’. The Central Bank of Nigeria revealed that fve CEOs (Afribank Plc, Finbank

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Plc, Intercontinental Bank Plc, Oceanic Bank Plc and Union Bank Plc) were dismissed for poor corporate governance and risk management practices (Omoh and Komolafe, 2009). Since at least three of the banks are systematically important, the Central Bank of Nigeria had to step in and preserve fnancial stability. No one from the fve banks blew the whistle and the lack of legal protection for whistleblowers in Nigeria at the time could well have been a factor. The Nigerian fnancial services sector is a good portal to review the provisions in Nigeria, as it is one sector that impacts the public interest of all Nigerians directly or indirectly. In this chapter we examine the effectiveness of Nigeria’s relatively new arrangements for whistle-blowing. In particular, we will critically analyse two questions. First, does the Nigerian Whistle-blowers Protection Bill provide adequate protection to whistle-blowers? Secondly, does the fnancially incentivised Whistle-blowing Policy adopted by the Federal Ministry of Finance encourage whistle-blowing in Nigeria?

Legislation and corporate governance protection in Nigeria Soft law, in the form of corporate governance codes, has been drafted in an attempt to provide some transparency in Nigeria. In 2016, the Financial Reporting Council released the unifed National Code of Corporate Governance. The National Code of Corporate Governance has three parts: (1) National Code of Corporate Governance for the Private Sector in Nigeria 2016 (Private Sector Code); (2) Public Sector Governance Code in Nigeria 2016 (Public Sector Code); and (3) Not-For-Proft Organisations Governance Code 2016 (Not-For-Proft Code). According to the National Code of Corporate Governance, private companies must comply with the Corporate Governance Code whilst not-for-proft organisations adopt the ‘Apply or Explain’ approach, similar to the UK’s philosophy of ‘Comply or Explain’. The Code for the public sector will not be applicable until an executive directive is secured from the federal government. This is because the enabling laws that set up most government establishments already carry some form of governance structures. The implementation of the 2016 Code was suspended due to the need for further consultation with stakeholders. The Nigerian Financial Reporting Council has released the 2018 National Corporate Governance Code (‘the 2018 Code’) in January 2019. The 2018 Code covers all public companies (whether listed or not), all private companies that are holding companies of public companies as well as regulated private companies who fle returns to any other regulatory authority other than the Federal Inland Revenue Service and the Corporate Affairs Commission. The National Corporate Governance Code 2018 is a positive step towards more transparency. Principle 19 of the National Corporate Governance Code 2018 provides some protection to whistle-blowers. There are clauses regarding a whistle-blowing framework encouraging whistle-blowers to report unethical conduct (principle 19.1); confdentiality for all disclosures (principle 19.2), anonymity of the whistle-blower (principle 19.2) and no detriment to whistleblowers (principle 19.6). Any whistle-blower who suffers from retaliation may

Keep the canaries singing 147 be entitled to compensation and/or reinstatement (principle 19.6). The 2018 Code does not mention internal whistle-blowing mechanisms such as a dedicated hotline for whistle-blowers. Principle 19 simply states that ‘an effective whistleblowing framework for reporting any illegal or unethical behaviour minimises the Company’s exposure and prevents recurrence’ shall be established. In the UK, the Financial Conduct Authority has seen an increase of 28% in reports from whistle-blowers since the implementation of new rules from the Financial Conduct Authority and the Prudential Regulatory Authority. These new rules include internal whistle-blowing arrangements able to handle all types of disclosure from all types of person. There were 1,340 whistle-blowing disclosures recorded for fnancial year 2014/15 against 1,040 in 2013/14 (Financial Conduct Authority, 2016). Companies in Nigeria should therefore be encouraged to implement their own internal whistle-blowing mechanisms to ensure that whistle-blowers feel safe to raise ethical concerns and that the company will deal with the concerns effectively. Evidence from Onakoya and Chinonye’s research (2016) reveals that Nigerian bank employees hold back from whistle-blowing for the following reasons. First, bank employees are worried of retaliation. Whistle-blowers are often harassed; ostracised; victimised and dismissed from their jobs (Lui, 2014). Onakoya and Chinonye (2016) opine that the absence of whistle-blowing legislation and the combination of weak legal, judicial and political institutions (Judge and McNatt, 2011) create a signifcant hurdle for whistle-blowers in Nigeria. Secondly, the social stigma of being labelled a whistle-blower is a deterrent. Isolating whistle-blowers after a disclosure is common because they are often seen as traitors. Furthermore, the Nigerian banking sector is dominated by 25 banks. The recapitalisation exercise between 2004 and 2005 reduced the number of banks from 89 to 25 in Nigeria (Okoye et al., 2017). This consolidation means that if a Nigerian employee is dismissed for whistle-blowing, it is very diffcult to be hired by another Nigerian bank. Other factors discouraging whistle-blowing are potential lawsuits and costs involved; fear of job loss; absence of support; absence of company policies and procedures. For fnancial analysts and journalists, reputational and career prospects are the most important factors preventing them from blowing the whistle (Dyck et al., 2010). To address the above concerns, legislators in Nigeria drafted two pieces of legislation. The Whistle-blowers Protection Bill (WPB) and the Safeguarded Disclosure (Whistle-blowers, Special Provisions, Etc.) Bill (SDB) were brought in front of the Nigerian Assembly in 2008 and 2009 respectively. The Nigerian Senate passed a version of the WPB in 2017.1 It aims to protect whistle-blowers and is an improvement to previous individual pieces of legislation with limited scope to protect whistle-blowers such as the Freedom of Information Act 2011, the Corrupt Practices and Other Related Offences Act 2000, and the Investments and Securities Act 2007. The SDB aims to protect potential whistle-blowers in

1 The House of Representatives (the lower chamber) did not pass any version yet.

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both the public and private sectors from detriment or reprisals. Here we focus on the WPB because there are no further updates on the SDB. Beginning with pre-disclosure, clause 1 of the WPB states that whistle-blowers are protected if the disclosure is made in good faith; that they have reasonable cause to believe the information disclosed are substantially true and the disclosure is made to one or more of the persons or institutions stated in clause 3. Clause 1 is interesting because of the good faith requirement. Good faith is linked to the whistle-blowers’ motives. Without such a requirement, whistle-blowers could bring malicious, tactical or self-interested disclosures. Experience from the UK might be of interest to Nigeria because the UK was the frst country in Europe to pass legislation to protect whistle-blowers from retaliation. In 2013, the Public Interest Disclosure Act was amended so that whistle-blowers still need a reasonable belief they disclose information in the public’s interest, but the good faith requirement was removed. This is because the good faith test allowed employers and judges to question whistle-blowers’ motives. UK employment tribunals can penalise whistle-blowers with bad motives by deducting compensation awarded to whistle-blowers by up to 25%. The focus of the disclosure should be primarily on the message and not on the messenger provided the message is substantively accurate. The Nigerian WPB does not include a requirement of disclosing in the public’s interest, although the Nigerian Whistle-blowing Policy stipulates that concerns must be ‘raised in public-spirit and in good faith’ (Federal Government of Nigeria, 2017). The Nigerian Whistle-blowing Policy contains 16 sections on whistle-blowing. The Federal Ministry of Finance created the Whistle-blowing Policy and the Federal Executive Council approved it in December 2016. The policy is aimed at encouraging citizens to report criminal acts such as mismanagement or misappropriation of public funds and assets. The absence of disclosure in the public’s interest in the Nigerian WPB might lead to whistle-blowers bringing disclosure for personal gains such as bonuses and not issues of public interest. The wording of a disclosure as stated in clause 1(b) is rather wide: (b) another person has not complied with a law or is in the process of breaking a law or is likely to break a law which imposes an obligation on that person. The potential impact of this is that an employer breaching an employee’s employment contract or employment legislation could fall within clause 1(b). This is arguably a private matter and not in the public’s interest. One might question whether the intention behind the WPB is designed to protect private matters of whistle-blowers. In reality, though, the dividing line between private and public matters can be thin. If an employer provides ‘Victorian workhouse conditions’ to employees, this could be a matter of public interest, especially if there are many employees concerned. In the UK, the House of Commons Treasury Select Committee Chairman Ian Wright criticised that the company Sports Direct’s ‘working practices are closer to that of a Victorian workhouse than that of a

Keep the canaries singing 149 modern, reputable high street retailer’ (Vandevelde, 2016). Although the Sports Direct case is not about whistle-blowing, the matter was of public interest. It led to the Green Paper on Corporate Governance Reform 2016 where the issue of employee voices was discussed. Perhaps the WPB should be amended so that the good faith requirement is replaced by substantively accurate information and the insertion of the public interest requirement. This will shift the focus from the whistle-blowers’ motives to the message. The second issue on pre-disclosure protection is clause 19 of the WPB, which makes it unlawful for employers to prevent or discourage employees from making disclosures. Employment contracts which seek to do so are void. The WPB does not actively encourage whistle-blowing. Rather, clause 19 imposes penalties if employers prevent employees from whistle-blowing. This is in line with UK’s Public Interest Disclosure Act 1998, which does not actively encourage whistleblowing. One method of encouraging whistle-blowers to make disclosures is to clearly state in their job offer letters the right and importance of whistle-blowing. Concrete examples of successful cases in Nigeria can also be included to enable employees to see the benefts of whistle-blowing. Another way of encouraging whistle-blowers is by fnancial incentives. The US False Claims Act 31 USC §§ 3729–3733 uses fnancial incentives. Under the False Claims Act, whistle-blowers who sue on behalf of the government to recover misspent money can claim up to 30% of the money recovered. It seems that the False Claims Act has infuenced the Nigerian government. Financial rewards stated in clause 14(4) of the WPB might encourage some whistle-blowers (Smaili and Arroyo, 2017). Research by Andon et al. (2018) reveals that fnancial incentives provided professional accountants more incentive to blow the whistle to a relevant external authority. Financial incentives also increased the whistle-blowers’ motivation where the perceived gravity of seriousness of the act is higher. Given the negative experiences and consequences many whistle-blowers face when speaking up, fnancial incentives can be an encouraging method to report illegal conduct (Feldman and Lobel, 2010). Andon et al.’s results confrm the results of Feldman and Lobel (2010) but the two studies can be distinguished. Andon et al.’s study focuses on using fnancial incentives amongst working, professional accountants in reporting fnancial statement fraud whilst Feldman and Lobel (2010) examined four legal mechanisms of incentivising a panel of 2,000 employees to whistle-blow. One of the four legal mechanisms examined is fnancial incentives. Professional, working accountants have more opportunity than other employees to detect accounting fraud. Opportunity and information accessibility therefore infuence whistle-blowers in certain professions. Clause 14(4) of the WPB is brief, but it sets out the same fnancial incentives as those contained in the Whistle-blowers’ Policy 2016. Whistle-blowers may be entitled to between 2.5% and 5% of amount recovered if the information provided led to the recovery of concealed assets. The fnancial incentives in Nigeria have been fairly successful to date. In 2017, the Ministry of Information and Culture announced that more than $176 million USD has been recovered in the frst two

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months of the Whistle-blowers’ Policy (Shaban, 2017). In May 2018, the Minister of Finance paid approximately $1,351,506 USD to 14 whistle-blowers for their assistance in recovering assets from corporate tax evasion (Adu et al., 2018). Whereas the WPB ‘questions’ the motive of the whistle-blower, the policy in section 14(4) introduced for the frst time, a ‘Reward Scheme for Disclosure of Information Leading to Voluntary Return of Stolen Funds/Assets’ offering 2.5– 5% of the sum recovered, appearing to care more for the ‘message’, than what drives the ‘messenger’. This also closes another gap in the WPB which does not actively encourage whistle-blowing whereas the policy does. The whistle-blower policy was then given effect through the setting up of a Whistle-blowing Unit within the Presidential Initiative on Continuous Audit located in the Federal Ministry of Finance. Operations started January 2017.

Results to date The following summarises the milestones achieved by the Whistle-blowing Unit: Whereas it is unclear in the WPB, the Whistle-blower Policy is very specifc in defning who a whistle-blower is (Section 5, Expected Whistle-blowers) and provides separate procedures for internal and external whistle-blowers (Section 7, Procedures and Processes for Whistle-blowing). The Whistle-blower Policy is also very specifc about what constitutes ‘private and public interest matters’. In section 3 and 4, examples are provided as to what constitute specifc issues of public interest. Sections 3 and 4 are helpful since they guide the whistle-blower towards public interest disclosures needed by the authorities in order to combat corruption, fraud and misuse of public assets. Actionable tips received by the Whistle-blowing Unit typically fell into the following classifcation: Table 9.1 Whistle-blower unit milestones Milestones as at June 2018 1. Communications received (comments, tips, 11,019 suggestions, complaints, enquiries, etc.) 2. Tips received 1,983 3. No. of investigations commenced 918 4. No. of investigations completed 623 40 5. Referrals to Independent Corrupt Practices and Other Related Offences Commission/ Economic and Financial Crimes Commission/Department of State Security 6. Convictions (Economic and Financial Crimes 4 Commission) 7. Under prosecution (Economic and Financial 12 Crimes Commission)

Recoveries made in the period

Total amount of recoveries: Nigerian Naira 7.8 billion, US $378 million and £27,800

Keep the canaries singing 151 Table 9.2 Whistle-blower unit tip classifcations Serial number

Violations

i.

Contract infation and conversion of government assets to personal use Ghost workers Payment of unapproved funds Embezzlement of salaries of terminated personnel Diversion of excess crude oil funds Improper reduction of fnancial penalties Diversion of funds meant for distribution to a particular group of people (farmers) Diversion of funds to personal commercial bank account to earn interest Non-remittance of pension & NHIS deductions Failure to implement projects for which funds have been provided Embezzlement of funds received from donor agencies Embezzlement of funds meant for payment of personnel emoluments Violation of Treasury Single Account regulations by keeping funds in commercial banks Violation of FIRS (VAT) regulation by adjusting Value Added Tax payment Non-procurement of equipment required for aviation safety Money laundering and diversion of funds meant for approved projects Illegal sale of government assets Diversion of Revenue (IGR) Financial misappropriations (embezzlement) Concealed bailout funds Mismanagement of microfnance banks Illegal Recruitments Violation of Procurement Act

ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. xx. xxi. xxii. xxiii.

Given the seriousness of the matters covered in the tips received, the sheer weight of communications received from the public and the recoveries made in the process, one can conclude that in the absence of a legal framework for whistle-blower protection, the introduction of a fnancial incentive may have been responsible for this level of reporting. According to the Chairman of the Presidential Audit Committee on Recovered Assets, Mr. Femi Lijadu, on tax evasion matters at least, 14 whistle-blowers were rewarded with the sum of Nigerian 439.2 million Naira ($1,351,506 USD). The actual overall number of whistleblowers rewarded under the scheme was not disclosed. If the motive for making the reports was self-interested and for fnancial gain, the whistle-blowers appear to have been ready not to report anonymously. Therefore, they are not protected

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beyond the assurances given by the policy in section 12, ‘Protection against retaliation as a result of whistle-blowing’ suggesting any person making a report in the public interest and in good faith, whether or not upheld against any Party, shall be protected. Although the policy appears not to care about the motives behind a report, it does try to ensure that in section 15, ‘Protection against malicious and false claims’. According to that section, ‘When a tip is received, a frst level review of available information is carried out by the investigation unit to determine the credibility and suffciency of such information. An investigation would only be opened against a party where the facts of the preliminary review detect a violation or misconduct. Whistle-blowers are warned against acting maliciously or making false allegations to seek personal gain’. The level of reporting experienced by the policy is not a particularly surprising result given the fndings of Andon et al. (2018). They suggest that a fnancial incentive may increase the intention to whistle-blow amongst professional accountants, to a relevant external authority. Although nothing is known of the identity or background of the whistle-blowers in the case of Nigeria, the fndings from Andon et al. (2018) appear to hold. They state in their paper that how people perceive the seriousness of wrongdoing is positively associated with the intention to whistle-blow to a relevant external authority. They also believe that the presence of a fnancial incentive moderates the intention to whistle-blow: the intention to report is higher when the offences are of higher seriousness, and where the seriousness of the offence is lower but a fnancial incentive is present, the intention to report remains high. They conclude with the warning that because of the fnancial incentive, there could be a high number of potentially frivolous reports coming through. In Nigeria, the authorities seem prepared to parse reports into comments, suggestions, complaints, enquiries in addition to whistle-blower tips. Andon et al. (2018: p. 176) suggest a way to curb this would be by ‘including stiff penalties for bad faith, or frivolous reports, particularly for serial whistle-blowers’. It is reassuring to see that sections 15 (Protection from False and Malicious Claims) and 16 (Penalty for False Claim or Information) of the Whistle-blower Policy in Nigeria contain stiff penalties for false and malicious claims.

Weaknesses of legislative protection in Nigeria Two problems, however, exist with the fnancial reward scheme in Nigeria. First, the WPB lacks the public interest requirement, but the Federal Ministry of Finance’s Whistle-blowing Frequently Asked Questions and Answers stipulates one (Ministry of Finance of the Republic of Nigeria, 2017: p. 2). The anomaly can be rectifed by inserting the same requirement in the WPB. Otherwise, the Nigerian authorities may face an increase in whistle-blowing cases motivated by private reasons due to the lure of fnancial incentives. The authorities may waste time and resources on claims which are not considered in the public’s interest. Second, the fnancial reward is not easy to obtain. The disclosure must be

Keep the canaries singing 153 information which the Nigerian government does not have and could not otherwise have obtained from any other public source available to the government. The disclosure also needs to lead to successful recoveries of assets. Not only is the threshold high but effective enforcement and political will are crucial to lead to successful recoveries of assets. This means that the co-operation of authorities such as the Economic and Financial Crimes Commission, the Independent Corrupt Practices and other related Offences Commission, the Code of Conduct Bureau, the Code of Conduct Tribunal and the judiciary are required. Further, adequate time and resources are needed to help these authorities and provide timely fnancial rewards to successful whistle-blowers. Educating the public about what types of claims can be brought and the level of details may also help potential whistle-blowers (Hopwood, 2016). Other weaknesses exist in the WPB. Although this is not yet set out in the WPB, whistle-blowers can make anonymous disclosures according to the Federal Ministry of Finance’s Frequently Asked Questions booklet (Ministry of Finance of the Republic of Nigeria, 2017). Whistle-blowers are offered confdentiality in the booklet, since they can disclose information without providing their names. There will not be records of the whistle-blower’s identity. One of the most diffcult issues for employers and regulators to determine is whether a concern reported is genuine. Since anonymity provides protection to the whistle-blowers’ identities, one might question their motives in blowing the whistle. Ultimately, if there is alleged wrongdoing, then the motive of the whistle-blower should not be the deciding factor in investigating the allegation. However, the credibility of the whistle-blower may be called into question if the practical process of obtaining data is diffcult (Ayers and Kaplan, 2005) and the evidence provided is less accurate than when whistle-blowers’ identities are known (Price, 1998). Besides, anonymity is not always possible due to the nature of the information they may provide. Anonymity can also create practical diffculties such as gathering information and identifying relevant participants if the whistle-blower’s identity is concealed. It will, however, give a ‘veil of ignorance’ (Elliston, 1982), which is a safeguard to whistle-blowers since the employment protection given to them is unsatisfactory. Yet, insuffcient emphasis is placed on protecting whistle-blowers once they have made a disclosure. Anonymity is futile if whistle-blowers have been victimised, since they need to provide their personal details under clause 13(2) WPB to bring a claim for victimisation. This leads to two issues. First, whistleblowers need protection regarding their personal data. The WPB has no provision in relation to the protection of the whistle-blowers’ personal data or any recourse if there is such a breach. This is especially important if the personal data is being transferred from one department to another, or to another country. With data hacking an increasingly common problem (Overfelt, 2016), the Nigerian government should consider encrypting the data and other ways of protecting such information from cyber hackers. Further, the Nigerian government should resist the temptation of keeping metadata from the internet service providers

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for unnecessary periods. Australia provides a good example here. In 2015, the Australian federal government passed the Telecommunications (Interception and Access) Amendment (Data Retention) Act, requiring internet service providers to keep customers’ metadata for two years and allow government agencies to use such data under certain conditions. The conditions have been criticised as too lenient (Humphreys and de Zwart, 2017). Although the Telecommunications (Interception and Access) Amendment (Data Retention) Act does not allow internet service providers to store data about the content of communication, it can identify information about their subscribers, including billing information, and information about the type, time, duration and location of communications. Furthermore, security agencies can identify journalists’ contact with whistleblowers through either evidence or inference. This is despite the fact that the Australian government has mechanisms in place to check on the power of security agencies. External whistle-blowing to the media is potentially at risk if the identity of whistle-blowers and journalists could be identifed. The measures to retain data have to be proportionate to the objective of national security. In Europe, similar data retention schemes have been found to be disproportionate to the objective of national security (Suzor et al., 2017). The UK’s Court of Appeal ruled in 2018 that the Data Retention and Investigatory Powers Act (DRIPA) did not adequately restrict police offcers’ access to personal information, including citizens’ phone records and web browsing history. The DRIPA is wider than the Australian Telecommunications (Interception and Access) Amendment (Data Retention) Act because the former includes personal information and therefore identifable data. The Court of Appeal’s ruling came after the European Court of Justice’s decision that the UK has breached European law by its policy of ‘general and indiscriminate retention’ of communication data.2 The comparative analysis should hopefully provide some useful guidance to the Nigerian government regarding the balance of national security and data retention. Anonymity is also futile when it comes to compensation. Compensation for dismissal or redundancy as a result of whistle-blowing is too late for the whistleblower. It is very diffcult for whistle-blowers to fnd new employment after being dismissed. They are often seen as outcasts. Therefore, changes must be made to the law and governance to protect whistle-blowers better. After all, an empirical study by Jos et al. (1989) reports that when asked ‘if you knew the results of your whistle-blowing before you attempted to report these incidents, would you have done what you did?’ an overwhelming majority (81%) of fred whistle-blowers have answered affrmatively. When such a high percentage of whistle-blowers are prepared to act selfessly, it is only just and fair that greater protection is given to them.

2 Judgement of the Court (Grand Chamber), Court of Justice of the European Union. Joined Cases C-203/15 Tele2 Sverige AB v Post-ochtelestyrelsen and C-698/15 Secretary of State for the Home Department v Tom Watson and Others.

Keep the canaries singing 155

Other hurdles to combatting corruption Legislation tries to rectify the imbalance of power in whistle-blowing but legislation is of course, not a panacea to combatting corruption. Social norms matter and the way society views corruption is very important. In Nigeria, corruption is partially accepted and institutionalised due to the close alliance between politicians and businesses (Adekoya, 2011). Furthermore, the informal social networks of corruption in the public sector and the elitist social structure in Nigeria exacerbate the problem (Akinkugbe, 2018). The Nigerian government has to establish trust with the Nigerians in order for more whistle-blowers to come forward. Legislation reinforcing whistle-blower protection helps to increase transparency but other ways are required to increase trust with the public. Akinkugbe (2018) submits that education and training are important parts of this trust-winning effort. The average Nigerian distrusts the government and its fight against corruption. The government should guide citizens on how to reject corruption. Furthermore, transparency is needed in relation to the assets recovered with the assistance of whistle-blowers. If Nigerians know how and from whom these assets were recovered are spent, they are more likely to trust the government and blow the whistle. Past governments in Nigeria have been fairly successful in recovering assets but the veil of secrecy shrouding the government has built up distrust amongst the citizens over the years: Coal miners used to carry caged canaries into the mines with them. When the canaries stopped singing, they knew they were in trouble and they had better get out fast. Whistle-blowers in government and other large organizations are, in a way, our canaries. When they are free to “sing”, those institutions are healthy. When they are silenced, we are in trouble. (Reed Irvine, cited in Shetty, 2003) The canaries are singing in Nigeria despite inadequate whistle-blowing protection law. Whistle-blowers are left to rely on just the whistle-blowing policy of this current administration, possibly induced by fnancial incentives, for mostly individual reasons. This will be attractive to certain types of whistle-blowers. According to Smaili and Arroyo (2017), self-interested whistle-blowing of the sort Nigeria has recently rewarded would most likely have come from outsiders driven by the fnancial incentives. They have the knowledge, skills, information or other resources to blow the whistle on tax evasion for their personal beneft. Does this unearth all wrongdoing needed to be unearthed to curb corruption in the public interest? Catching potential wrongdoing before it damages the public interest has to be one of the goals of a whistle-blower programme, not just the recovery of stolen assets. Nigeria’s land mass approaches fve times that of the UK and it is divided into 36 autonomous state governments, one federal capital territory and 774 local governments under them. This chapter has addressed the situation at the federal level, which may not apply to any of these sub-national levels. The Nigerian

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constitution delineates items that can be legislated upon by the federal alone (the exclusive list) and items that federal and sub-national levels can make laws about, although in the event of confict federal laws will take precedence (the concurrent list) and items that are unallocated (residual list). Constitutional law experts such as Professor Ben Nwabueze warn that under Nigeria’s federal constitution, ‘The President has no power or responsibility under our federal system to watch over or oversee the state and local governments to ensure that they do not commit corruption’ (Nwabueze, 2015). The import is that it will be very keenly refuted that a Whistle-blower Protection Act or Policy made at the federal level could be binding on sub-national units in Nigeria. Meanwhile, there are currently no sub-national units in Nigeria that have enacted a whistle-blower protection law or developed a special whistle-blower policy. A recent case in point is that of the Governor of Kano State in October 2018. A whistle-blower released a series of videos presumably made by a hidden camera purporting to show Governor Ganduje in the act of collecting bribes from a state contractor, totalling $5 million USD in cash. This was dubbed Ganduje-gate by the media and the videos have animated social media discussions in Nigeria for a number of weeks. The Economic & Financial Crimes Commission has claimed it cannot probe the matter as the governor enjoys constitutional Immunity against criminal proceedings (Inyang, 2018). The whistle-blower chose to release the videos via social media and when the veracity was challenged, and the governor denied collecting such bribes, the person has agreed, through his lawyer, to testify before a Kano State Assembly Investigative Panel if certain safeguards would be agreed to (Odunsi, 2018): 1. That the video clips will be submitted to two experts for forensic analysis and report: one, a serving offcer of the Department of State Services and the other an expatriate, while their bills will be paid for by the state. 2. That a certifed true copy of the report(s) prepared by the experts shall be made available to the whistle-blower prior to his appearance. 3. That the whistle-blower has undertaken to surrender to the experts, the device used in capturing all the events in the video clips submitted and others yet to be submitted for discreet analysis and scrutiny. 4. That all the proposed questions to be asked by the panel in the anticipated session shall not be more than ten and shall be forwarded to the whistleblower in advance. 5. That the sitting be restricted to limited persons and that the whistle-blower should be allowed to wear mask, bear pseudo name and receive protection from authorities for himself, family and business undertakings. 6. The contractor also demanded that the panel must also have in attendance the governor, Jaafar Jaafar, publisher of the Daily Nigerian newspaper, and one Aminu Daurawa (the Kano State Police boss). The contractor appears to be aggrieved over his allegations that the governor has been demanding 15–30% of contract sums in bribes. The governor reacted by

Keep the canaries singing 157 seeking an interim injunction to prevent the newspaper from releasing any more videos and instituted a Nigerian Naira three billion defamation suit against the newspaper (Ibrahim, 2018). This is either an incredibly brave act or an incredibly foolish act by the whistle-blower as only time will tell how this case will turn out. The Kano state government has labelled the whistle-blower as a ‘blackmailer and extorter … that the hidden motive is to reduce the popularity of the Governor and consequently affect the anticipated quantum of All Progressive Congress votes from Kano in the 2019 general elections’ (Ozibo, 2018). Retaliation is always a risk that whistle-blowers face and this is a clear example of retaliation by the Kano state government despite video evidence. Although the Kano state government challenges the veracity of the video, one representative from a reputable international anti-corruption agency has examined the video clip. He has confrmed that the clip is genuine (Omilana, 2018). Absence of whistle-blower legislation at federal and sub-national levels continues to be an impediment to the fght against corruption in Nigeria, notwithstanding the fact that the federal policy has achieved some asset recoveries. One would never know how much more could have been recovered or how much more could have been deterred if there had been a proper framework in place. The Governor of Kano State case shows that absence of supportive laws and policies at the autonomous sub-national levels in Nigeria given its sheer geographic scale, compounds the problem of instituting an appropriate legal or policy solution. Lack of political will is a major issue that may have delayed any legislative attempt to encourage and protect whistle-blowers to expose scandals. According to Sahara Reporters, Nigeria’s legislators seldom act in the public interest (Akintide, 2011), a sentiment echoed by Tom and Attai (2014) that calls for legislature to be occupied by ‘moral politicians’. The impression of lawmakers at sub-national levels is that they are stooges of the State Governors and therefore do not act in the public interest either. These perceptions betray an underlying lack of public trust amidst widespread suspicions that special interests hold sway over the priorities of lawmakers in Nigeria. There are serious doubts as to whether or not there is suffcient political will to enact the tough laws needed to deal decisively with corruption such as through strengthening protections for whistle-blowers.

Conclusion The Nigerian Whistle-blowers Protection Bill (WPB), if/when enacted, would provide some protection to whistle-blowers. Whistle-blowers are protected if the disclosure is made in good faith; that they have reasonable cause to believe the information disclosed are substantially true and the disclosure is made to one or more of the persons or institutions stated in clause 3 of the WPB. In particular, the fnancial incentives set out in the Whistle-blowing Policy of the Federal Ministry of Finance (anticipated in the WPB) prove to be quite successful so far. To date, approximately Nigerian Naira 7.8 billion, US $378 million and £27,800 of assets has been recovered with the help of whistle-blowers. Nevertheless, there

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are still improvements to be made to the WPB to encourage whistle-blowing in Nigeria. First, there should be a public interest element in the WPB to discourage whistle-blowers disclosing for private or personal reasons. Secondly, safeguarding the whistle-blowers’ anonymity and data should be included in the WPB to protect them from retaliation. The draft Nigerian Corporate Governance Code 2018 deals with anonymity but it does not provide internal whistle-blowing mechanisms such as a dedicated whistle-blowing hotline. The current absence of whistle-blowing legislation at both federal and national levels in Nigeria compound the problem. It is hoped that Nigerian legislators will take heed of such considerations to better protect whistle-blowers. Whistle-blowers play an important role in combatting corruption and misconduct. In the long term, politicians and businesses must change the culture of institutionalised corruption in Nigeria. They should also empower regulators and relevant authorities to enforce sanctions against wrongdoers more effectively.

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Keep the canaries singing 159 Financial Conduct Authority. (2016). FCA introduces new rules on whistleblowing. Available from: https://www.fca.org.uk/news/press-releases/fca-introduces-ne w-rules-whistleblowing [Accessed 26th June 2019]. Hope, K.R. (2017). Corruption in Nigeria. Corruption and Governance in Africa. Cham: Palgrave Macmillan. Hopwood, G. (2016). Encouraging the Reporting of Corruption: Principles of Whistleblower Protection. Windhoek: Hanns Seidel Foundation–Institute of Public Policy Research. Humphreys, S. & de Zwart, M. (2017). Data retention, journalist freedoms and whistle-blowers. Media International Australia, 165(1), pp. 103–116. Ibrahim, N. (15th November 2018). #Gandujegate: Kano Gov sues Daily Nigerian publisher, demands N3bn. The Premium Times. Available from: https://www.pre miumtimesng.com/news/top-news/295970-gandujegate-kano-gov-sues-daily-n igerian-publisher-demands-n3bn.html [Accessed 26th June 2019]. Inyang, I. (23rd November 2018). EFCC reveals why it can’t probe Governor Ganduje over bribe videos. The Daily Post. Jos, P., Tompkins, M.E. & Hays, S.W. (1989). In praise of diffcult people: a portrait of the committed whistle-blower. Public Administration Review, 49(6), pp. 552–561. Judge, W. & McNatt, D. (2011). The antecedents and effects of national corruption: a meta analysis. Journal of World Business, 46, pp. 93–103. Lui, A. (2014). Protecting whistle-blowers in the UK fnancial industry. International Journal of Disclosure and Governance, 11(3), pp. 195–210. Ministry of Finance of the Republic of Nigeria. (2017). FMF Whistle-blowing Policy-Frequently Asked Questions. Abuja: Ministry of Finance of the Republic of Nigeria. Nwabueze, B. (28th October 2015). Fighting corruption subject to consultational limitations. The Vanguard. Available from: https://www.vanguardngr.com/20 [Accessed 15/10/fghting-corruption-subject-to-consultational-limitations/ 26th June 2019]. Odebode, N., Fabiyi, O. & Akinkuotu, E. (2018). Nigeria, home to highest number of world's very poor people: UK Prime Minister. The Punch Newspapers. Available from: https://punchng.com/nigeria-home-to-highest-number-of-worlds-very -poor-people-uk-prime-minister/ [Accessed 26th June 2019]. Odunsi, W. (9th November 2018). Ganduje: contractor who recorded bribery videos showing Kano gov breaks silence. The Daily Post. Available from: https://dailypo st.ng/2018/11/09/ganduje-contractor-recorded-bribery-videos-showing-ka no-gov-breaks-silence/ [Accessed 26th June 2019]. Okike, E. (2007). Corporate governance in Nigeria: the status quo. Corporate Governance, 15(2), pp. 173–193. Okoye, L., Adetiloye, K.A., Erin, O. & Evbuomwan, G.O. (2017). Impact of banking consolidation on the performance of the banking sector in Nigeria. Journal of Internet Banking and Commerce, 22(1), pp. 1–16. Omilana, T. (11th October 2018). Ganduje speaks on bribe video, threatens lawsuit. The Guardian. Available from: https://guardian.ng/news/ganduje-speaks-on-br ibe-video-threatens-lawsuit/ [Accessed 26th June 2019]. Omoh, G. & Komolafe, B. (14th August 2009). CBN sacks 5 banks' CEOs, appoints acting MD/CEOs. Vanguard News. Available from: https://www.vanguardngr.c om/2009/08/cbn-sacks-5-banks-directors/ [Accessed 26th June 2019].

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Onakoya, O.A. & Chinonye, M. (2016). Effect of system factors on whistle-blowing attitude of Nigerian banks employees: a conceptual perspective. Paper presented at the 3rd International Conference on African Development Issues (CU-ICADI). Ota: Covenant University. 9th–11th May 2016. Onuegbulam, M. (2017). Whistle-blowing policy and the fght against corruption in Nigeria: implications for criminal justice and the due process. Nnamdi Azikiwe University Journal of International Law and Jurisprudence, 8(2), pp. 174–180. Overfelt, M. (17th March 2016). The next big threat in hacking: data sabotage. CNBC. Available from: https://www.cnbc.com/2016/03/09/the-next-bigthreat-in-hacking--data-sabotage.html [Accessed 26th June 2019]. Oyejide, T. and Soyibo, A. (2001). Corporate Governance in Nigeria. Conference on Corporate Governance, Accra, 29th–30th January 2001. Ozibo, O. (14th October 2018). Kano debunks ‘Ganduje’s bribe video,’ drags publisher to court. Daily Trust. Availble from: https://www.dailytrust.com.ng/ kano-debunks-gandujes-bribe-video-drags-publisher-to-court.html [Accessed 26th June 2019]. Price, A. (1998). Anonymity and pseudonymity in whistleblowing to the US Offce of Research Integrity. Academic Medicine, 73(5), pp. 461–472. Sanusi, S. (2010). The Nigerian banking industry: what went wrong and the way forward. Convocation Lecture delivered at the Convocation Square. Kano: Bayero University. 26th February 2010. Available from: http://w1218.cbn.gov.ng/out/ speeches/2010/the%20nigerian%20banking%20industry%20what%20went%20w rong%20and%20the%20way%20forward_fnal_260210.pdf [Accessed 26th June 2019]. Shaban, A.R.A. (2017). Nigeria's whistle-blowing initiative yields recovery of $176 million. Africa News. Available from: https://www.africanews.com/2017/02/ 13/nigeria-s-whistleblower-initiative-yield-recovery-of-over-176m// [Accessed 26th June 2019]. Shetty, K. (25th March 2003). India's needs a Whistle-blowers Protection Act. The Hindu. Available from: https://www.thehindu.com/thehindu/op/2003/03/ 25/stories/2003032500110200.htm [Accessed 26th June 2019]. Smaili, N. & Arroyo, P. (2017). Categorization of whistle-blowers using the whistleblowing triangle. Journal of Business Ethics, 1–23. Suzor, N., Pappalardo, K. & McIntosh, N. (2017). The passage of Australia’s data retention regime: national security, human rights, and media scrutiny. Internet Policy Review, 6(1), pp. 1–16. Tom, E. & Attai, A. (2014). The legislature and national development: the Nigerian experience. Global Journal of Arts Humanities and Social Sciences, 2(9), pp. 63–78. Transparency International. (2019). Corruption Perceptions Index 2018. Available from: https://www.transparency.org/cpi2018 [Accessed 26th June 2019]. Vandevelde, M. (22nd July 2016). 'Victorian workhouse conditions' at Sports Direct warehouse. Financial Times. Available from: https://www.ft.com/content/d4b 89c2a-4f65-11e6-8172-e39ecd3b86fc [Accessed 26th June 2019].

10 Vulnerabilities, obstacles and risks in reporting fnancial crimes Conundrum of whistle-blowers Alison Lui and Umut Turksen

Introduction As fnancial crimes have expanded both in terms of their volume and diversity and increasingly become transnational, so have the legal instruments which aim to counter them. The United Nations’ (UN) and the European Union’s sanctions regimes (European Commission, n.d.a.; EU Sanctions Map, 2019; UN, n.d.), asset freezing and confscation orders, minimum standards imposed by international organisations such as the Financial Action Task Force (FATF) (2012),1 the Organisation for Economic Co-operation and Development (OECD, 2018a, b, c), have all had a trickling effect on reforming not only national legal regimes but also the role of private actors in enforcing these legal provisions. The transposition of these developments in the form of legal requirements and/or policy developments have created new criminal offences (e.g. tax fraud and evasion, insider dealing, to name a few) whereby, if found guilty, defendants might see their right to liberty restricted by punitive sanctions, including prison sentences. This trend in turn brought new challenges for law enforcement agencies. For example, diverse approaches to corporate liability for fnancial crimes in different countries can pose challenges for cross-border or international cooperation in investigation and prosecution. In addition, attributing liability and/or culpability to a person who is suspected of fnancial crime requires a higher threshold for admissible evidence in criminal proceedings. This is even more complicated when one tries to attribute the crime to a corporation rather than a person. Accordingly, we have also witnessed not only a trend whereby the requirement for intent has diminished in certain contexts but also an emergence of the creation of strict liability offences (e.g. failing to prevent bribery, tax evasion and/or money laundering). Arguably, as a consequence of these trends, we have also seen the emergence of negotiated justice mechanisms vis-à-vis deferred prosecution agreements which are conducted as a ‘quasi-sanctions’ regime, sometimes, without the involvement of the judiciary (e.g. in the United States of America).

1 These have been amended several times and the Information on updates made to the FATF Recommendations can be found here: http://www.fatf-gaf.org/publications/fatfrecommen dations/documents/fatf-recommendations.html [Accessed 24 June 2019].

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Qualifed information and reliable evidence are necessary for pre-arrest investigation and initiating prosecution and in securing the conviction of criminal activities generally.2 In the context of fnancial crimes, traces and trails of fnancial crimes and transactions (hereafter fnancial information) through legitimate/ formal as well as informal institutions are crucial components in establishing any wrongdoing (European Commission, 2018a). While it is inherently diffcult to detect and produce evidence to prosecute fnancial criminals, it is known that the preferred medium both for fnancial crimes and laundering the proceeds of such crimes is often legitimate fnancial institutions (Masciandaro, 1999; Gill and Taylor, 2004; Sikka, 2007). Subsequently, a number of professionals in these institutions knowingly or otherwise hold the key to such crucial information. Hence, they have a legal duty to act as crime detection and prevention agents within the national anti-money laundering (AML), counter-economic crime and tax regulation regimes. This is often done by reporting suspicious or actual criminal activity to the relevant state authorities be they fnancial intelligence units or law enforcement agencies. It is clear that such professionals are dual-enablers in the context of fnancial crimes whereby they facilitate criminal activities and/or assist criminal prosecution of such crimes. While the importance of these enablers in countering fnancial crimes cannot be disputed (even though the success rate of convictions emanating from these key professionals in relation to fnancial crime in some EU countries is extremely low: Eurostat, 2013),3 some of the biggest fnancial crime schemes involving major fnancial institutions (e.g. UBS, HSBC, SwissLeaks, LuxLeaks, the Panama Papers, EULUX Leaks and DanskeLeaks) have come to the surface not by the reports of such enablers who have a legal duty to report, but by whistle-blowers who disclose crucial information in the public interest (Srividhya and Shelly, 2012).4 Generally speaking, a person who in good faith informs the public and the relevant authorities about any illegal, corrupt and/or malfeasant activity is called a whistle-blower (Glazer and Glazer, 1991: p. 4).5 While it is clear that whistle-blowers perform an important role in countering fnancial crime, there has been very limited analysis of the cases in which they have been instrumental for unfolding the crimes involved. Accordingly, this chapter aims to critically analyse some of the most recent and

2 The right to a fair and public hearing under Article 6 of the ECHR applies in relation to criminal charges and disputes concerning civil rights and obligations. Furthermore, pursuant to Article 47 of the EU Charter of Fundamental Rights, such rights apply to all types of proceedings relating to rights and freedoms arising from EU law. 3 For a detailed analysis of AML-related convictions rates across the EU see, Eurostat (2013). 4 It is important to note that there is an important difference between whistle-blowers and informants: informants use disclosure to clarify their own role in the malfeasant activity or to reduce their liability. Whistle-blowers, on the other hand, act because of the public interest and the common good at stake, which includes performing legal duties and enforcement of the law. 5 Glazer and Glazer (1991) defne a whistle-blower as one who: (a) acts to prevent harm to others rather than to himself or herself; and (b) possesses evidence that would convince a reasonable person.

Reporting fnancial crimes 163 controversial fnancial crime cases, namely the SwissLeaks and LuxLeaks cases, both of which involved whistle-blowers. The purpose of these case studies is to investigate the following issues: • • • •

What were the role, status and legality of the actions of the whistle-blowers involved? Were the whistle-blowers anonymous or self-identifying when giving intelligence for tax crimes? How and why did the evidence and information disclosed by the whistleblowers lead to prosecution of them and the fnancial institutions involved? How do jurisdictions involved in these cases (Switzerland and Luxembourg) hinder the fght against fnancial crime?

In doing so the chapter identifes a number of contentious areas of the law in these jurisdictions and provides potential solutions to overcome them.

SwissLeaks case The lack of harmonised legal defnitions and standards means that it is diffcult to give a precise answer to the role, status and legality of actions of Hervé Falciani, who was the key person behind the SwissLeaks case. Rather, the answer to the above questions depends more on the political culture and less on the legal defnition of a whistle-blower in a certain country (Hofmeister, 2010). Hervé Falciani, of French-Italian citizenship, was an IT systems engineer at the Geneva branch of HSBC. He stole and leaked sensitive client data (almost 600 fles with more than 100 gigabytes) (Ryle et al., 2015) from HSBC between 2006 and 2008. Falciani later set up a company called ‘Palorva’ with another HSBC employee, Georgia Mikhael, with whom he had a personal relationship. Falciani then tried unsuccessfully to sell client data to the Lebanese. After that, he gave the data to the French authorities and sought refuge there. In early 2010, the then fnance minister of France Christine Lagarde, prepared a list of names for other countries of people mentioned in the data taken by Falciani. The so-called ‘Lagarde list’ resulted in arrests in Greece, Spain, the US, Argentina and Belgium. In 2014, the Swiss Criminal Federal Court held a trial against Falciani for four offences: frstly, aggravated economic espionage (Article 273[2] Swiss Criminal Code); secondly, unauthorised obtaining of data (Article 143[1] Swiss Criminal Code); thirdly, breach of business secrecy (Article 162 Swiss Criminal Code) and fnally, violation of banking secrecy (Article 47 Banking Act 1934). In 2016, the Swiss Supreme Court sentenced Falciani in absentia to a fve-year jail term for aggravated economic espionage. He was cleared of data theft, breach of business and banking secrecy. Falciani continues to live in France where he is protected from extradition by his French citizenship. Is Falciani a whistle-blower? As he was an employee in Switzerland, the legal and political environments of Switzerland should be examined. Swiss law does not provide a clear defnition of a whistle-blower. Despite a number of

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incidents revealed by whistle-blowers in Switzerland between 1997 and 2006, Switzerland was reluctant to accept international standards on whistle-blowing. Such standards include the United Nations Convention against Corruption (UNCAC) (UN, 2003),6 the 2009 OECD Recommendation of the Council for Further Combating Bribery of Foreign Public Offcials in International Business Transactions (Anti-Bribery Recommendation),7 the OECD Recommendation on Improving Ethical Conduct in Public Service,8 the Council of Europe Civil and Criminal Law Conventions on Corruption (1999a, b), the Inter-American Convention against Corruption of 1996 (OAS, 1996),9 and the African Union Convention on Preventing and Combating Corruption of 2003 (African Union, 2003).10 There is no distinct legislation on protecting whistle-blowers in Switzerland, unlike in the United Kingdom where there is the Public Information Disclosure Act 1998. Those blowing the whistle in Switzerland therefore have to look to Swiss employment law. However, there are three main problems here. According to Hofmeister (2010), the defnition of the duty of good loyalty is unclear. There is a confict between loyalty to the employer and the requirement of reporting malpractice or breach of the law. Secondly, whereas in the UK whistle-blowers enjoy automatic unfair dismissal and unlimited compensation in a successful claim, whistle-blowers have very limited compensation in a successful unfair dismissal claim. Finally, there is a great deal of uncertainty on the legality of external whistle-blowing. The confict between the duty of good loyalty owed to the employer and the necessity of blowing the whistle is not an uncommon position. In the UK, whistle-blowers who disclose non-confdential information are seen to be breaching the common law implied duty of good faith and fdelity (Lewis, 2001). Traditionally, employees act as agents of their principals, their employers. If they complain about their corporation either internally or externally, they are perceived as disloyal and deviant (Larmer, 1992). Larmer (1992) stated that this is a very narrow approach to employment law and governance. At the other end of the spectrum, Duska argued that employees do not owe a prima facie duty of loyalty to their employers. Therefore, whistle-blowing does not have to be justifed on moral grounds (Duska, 1985). The authors believe that Duska’s submission is too extreme. Employees have to consider their employers’ interests although

6 7

United Nations Convention Against Corruption (UNCAC) 2005, Articles 8, 13 and 33. OECD Recommendation for Further Combating Bribery of Foreign Public Offcials in International Business Transactions 2009. Section IX.iii. and Section X.C.v., and Annex II to the Recommendation, Good Practice Guidance on Internal Controls, Ethics and Compliance, Section A.11.ii. Available from: http://www.oecd.org/daf/anti-bribery/oecdanti briberyrecommendation2009.htm [Accessed 15 January 2019]. 8 OECD Recommendation on Improving Ethical Conduct in the Public Service 1998. Principle 4, OECD/LEGAL/0298. Available from: https://legalinstruments.oecd.org/public /doc/129/129.en.pdf [Accessed 15 January 2019]. 9 Article III(8). 10 Article 5(6).

Reporting fnancial crimes 165 they are not under a duty to act in the latter’s interests under the common law implied duty of good faith and fdelity. The common law implied duty applies to all employees. Hierarchy within an organisation does not infuence the common law duty. In Switzerland, the confict is between general Swiss law and the Swiss Code of Obligations. Employees are generally required to report any concerns internally frst before approaching external stakeholders such as regulators or the public. It is clear, however, that the internal mechanisms for reporting are absent. In Switzerland, companies are not under any legal obligation to set up whistleblower hotlines. Nevertheless, there can be corporate liability if a company fails to ‘take all the organizational measures that were reasonably required in order to prevent such an offence’ (Article 102[2] Swiss Criminal Code). Disclosing confdential employer information or trade secrets is viewed by the Swiss Courts as a criminal offence. This is particularly so in the case of bank secrecy (Article 47 Banking Act 1934). The Swiss Code of Obligations bolsters this protective culture towards bank secrecy. Article 321a of the Swiss Code of Obligations states that: ‘The employee must perform the work assigned to him with due care and loyally safeguard the employer’s legitimate interests’. This duty of loyalty extends after the termination of contract under Article 334. As such, the inherent ethos of Swiss legislation has been very protective of the employer. The risks of whistleblowing to the public include the employee’s dismissal and a potential claim for libel. Recently, however, there have been improvements in whistle-blower protection. The Federal Council has proposed a new clause in the Swiss Code of Obligations which protects whistle-blowers by exonerating them from their duty of loyalty if they report the matter internally frst. There is also protection against criminal offences. Whistle-blowers will not be criminally liable for reporting malpractice externally. Finally, the Federal Police have set up a website which allows the public to report corruption anonymously (Lanzlinger and Huber, 2018). The proposed clauses are promising and commendable for increasing whistleblowers’ protection. However, they are too late for Falciani. If we apply Swiss legislation to Falciani’s case, he has breached both the Swiss Code of obligations and general Swiss employment law. By blowing the whistle externally to the French and German authorities, he has breached his duty of loyalty. There is no evidence that Falciani reported his concerns to HSBC frst before blowing the whistle externally. Indeed, HSBC have always insisted that he was not a whistle-blower. He did not start any investigation through HSBC’s own whistle-blower hotline (Naheem, 2015). Nevertheless, the timing, background and context of Falciani’s action have to be taken into account. Between 2010 and 2014, a number of large international banks were fned for fnancial crimes such as money-laundering, LIBOR manipulation, tax evasion and aiding terrorist funding. Against this backdrop, it is understandable why Falciani took his concerns externally. Falciani has also breached bank secrecy by stealing and attempting to sell sensitive data to the Lebanese. This issue is exacerbated by the fact that Switzerland’s economy is heavily reliant on its fnancial sector. Its fnancial sector contributes 10.5% of the country’s Gross Domestic Product (GDP). Banking assets in

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Switzerland account for 483% of its GDP. It also leads the global private wealth management sector with $2.2 trillion of assets being managed offshore (Nguyen, 2014). Blowing the whistle against HSBC is perceived by the Swiss authorities as not just an attack against one bank. Instead, it is against the entire country. As Eric de Montgolfer, the French Prosecutor in Nice summed up: ‘For them, Falciani’s attack on the data was not merely an attack on the bank. It was an attack on the whole of Switzerland’ (ARTE, 2015), which inadvertently points to the involvement of the Swiss state in the malfeasant activities revealed by Falciani. Under Swiss law, therefore, Falciani is classifed as a criminal rather than a whistle-blower. Falciani admitted that he has breached Swiss law: ‘Yes, I broke the law. But I broke a law that harms all of us’ (ARTE, 2015). Falciani’s admission that he broke a law that harms everyone is not quite accurate. Bank secrecy harms most people apart from the customers who have Swiss bank accounts. If the SwissLeaks incident took place in the United States of America (USA) or China where the protection given to whistle blowers is much stronger, he might have been hailed as a hero (Oei and Ring, 2018). In summary, Falciani was a criminal who stole HSBC’s confdential client data, thereby breaching Swiss Criminal Law and the Swiss Code of Obligations. He did not utilise HSBC’s whistleblowing hotline and passed the data to French and German authorities. Falciani’s act, however, is of public interest because the SwissLeaks case enabled investigative journalists to obtain a degree of transparency and insight into the world of offshore private wealth management and tax evasion. His disclosure led to the investigations of many accounts of HSBC clients. Due to the culture of private banking in Switzerland, bank secrecy is sanctimonious. Falciani was fghting against two giants: the Swiss fnancial industry and Switzerland at the same time when he blew the whistle. In the eyes of Switzerland and HSBC, he is a criminal, not a whistle-blower. In the authors’ view, Falciani’s is frst and foremost a criminal but he is also a whistle-blower since he reported confdential data to the relevant authorities. Falciani started off using pseudonyms when he leaked HSBC’s data. Between December 2006-February 2008, Falciani and Georgina Mikhael, another HSBC employee, formed a company called Palorva. The purpose of the company was to collect and sell data from wealthy clients. On his frst business trip, Falciani identifed himself as Ruben Al-Chidiak (ARTE, 2015). Georgina used her real name and a Swiss phone number. This proved to be a mistake as the Swiss authorities were able to track her down with the details. The business trip proved to be futile since they did not manage to sell the data. Falciani contacted various tax authorities and intelligence authorities across the EU under the pseudonym of Ruben Al-Chidiak. He offered a client list of one of the world’s biggest wealth management banks. Falciani did not stop there. He contacted Jean-Patrick Martini, an offcial at the National Directorate of Tax Investigations and sent him an encrypted list of seven HSBC clients in France. Falciani met with Martini twice but Falciani did not reveal his identity (Ryle et al., 2015). On 21 June 2018, Falciani sent an e-mail to German tax investigators. Using the pseudonym John Barack this time, he wrote: ‘I have been travelling a lot recently and before

Reporting fnancial crimes 167 meeting you, I’d prefer to know for certain whether or not you are interested in what I have to offer. […] I have 40 tables flled with data’ (ARTE, 2015). The turning point came in December 2018. The Swiss Police visited HSBC’s Geneva offce and interrogated Mikhael. There is then conficting evidence as to who revealed Falciani’s identity. Ryle et al. (2015) assert that it was Falciani himself who revealed his identity but ARTE believes that it was Mikhael. In her own words, Mikhael said that: ‘I was scared. I told the police that Hervé Falciani was behind the alias Ruben Al-Chidiak’ (ARTE, 2015). From ARTE’s video interview with Mikhael, it seems clear that Mikhael did reveal Falciani’s identity. Given that Mikhael and Falciani had a personal relationship, one can argue that Mikhael revealed Falciani’s identity. Realising that he would face prosecution, Falciani fed to France. His French citizenship protected him from extradition, which Switzerland demanded. Whistle-blowers often fnd some protection through anonymity. Anonymity is not always possible due to the nature of the information it may provide. Anonymity can also create practical diffculties such as gathering information and identifying relevant participants if the whistle-blower’s identity is concealed. It will however, give a ‘veil of ignorance’ (Elliston, 1982), which is a safeguard to whistle-blowers since the employment protection given to them is unsatisfactory. One of the most diffcult issues for employers and regulators to determine is whether a concern reported is genuine. Since anonymity provides protection to the whistle-blowers’ identities, one might question their motives in blowing the whistle. It should be noted, however, that the veil of anonymity is lifted if the whistle-blowing involves criminal offences including those identifed as predicate offences in all AML legal instruments in the EU (European Parliament, 2018).11 Ultimately, if there is alleged wrongdoing, then the motive of the whistle-blower should not be the deciding factor in investigating the allegation. However, the credibility of the whistle-blower may be called into question if the practical process of obtaining data is diffcult and the evidence provided is less accurate than when whistle-blowers’ identities are known (Price, 1998). Naturally, if the anonymous whistle-blower can provide concrete and reliable evidence, then credibility should not be an issue. Interestingly, research by Nayir and Herzig (2012) revealed that amongst 329 Turkish managers, the statement which had the highest consensus is the desire that they should be given anonymity if they blow the whistle. Whistle-blowers in the fnancial sector are vulnerable already due to the relatively little protection they receive (Lui, 2014). Falciani blew the whistle in the fnancial sector in Switzerland. He knew his life was in danger in 2012. According to Falciani, the US Senate warned him that ‘they would be launching serious allegations against HSBC because of its lax money laundering and terrorist fnancing controls and that the bank would be prosecuted. I was told that from then my life would be in danger. I had two choices: start a new life in the USA

11 The EU has proposed a list of 22 predicate offences under its proposed Sixth AML Directive. See European Parliament (2018).

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or travel elsewhere to buy some time’ (Ryle et al., 2015). It is not surprising that Falciani used pseudonyms to protect his identity. The information which was disclosed by Falciani acted like a treasure map whereby many law enforcement agencies (e.g. from the US, the UK, Belgium, Sweden, Spain, Germany, Italy, Canada, Australia, Russia, Argentina and India) have prosecuted and convicted individuals and companies for various fnancial crime offences. What is rather scandalous and blatantly against the intention of the international community to tackle fnancial crimes and protect whistle-blowers in this case is that while a fnancial settlement was reached between HSBC (which had net annual profts over $13 billion and could easily afford the fne) and the Swiss government, Falciani was given a fve-year prison sentence for disclosing illegal activities in the public interest. Falciani’s data revealed that HSBC opened accounts for arms dealers, traffckers in blood diamonds, as well as former and current politicians in Britain, Russia, Ukraine, Georgia, Kenya, Romania, India, Liechtenstein, Mexico, Lebanon, Tunisia, the Democratic Republic of Congo, Zimbabwe, Rwanda and Algeria. Clients also include footballers, royal family members and actors (Walkowski, 2016). HSBC was not simply passive in facilitating their clients’ wishes. They actively marketed a system for tax evasion, proactively contacted clients (in breach of the European Tax Treaties) (European Commission, n.d.b.) and reassured them that their account details will not be passed on to national authorities, even if there was evidence to show that the accounts were undeclared to tax authorities of the client’s home country (Naheem, 2015; Walkowski, 2016). France and Spain were amongst the frst to prosecute HSBC. When Falciani fed to Nice, the French state prosecutor, Eric de Montgolfer, played a signifcant role in prosecuting HSBC. De Montgolfer has a reputation for combatting serious corruption cases. Despite Swiss’s attempts to extradite Falciani and requesting materials ‘relevant to France’ (Ryle et al., 2015), De Montgolfer led the French authorities in scrutinising and assembling the data in a coherent fashion. They then shared the data with other EU countries such as the UK, Spain, Italy, Belgium and Greece. In 2015, De Montgolfer requested that HSBC Holdings Plc to be tried for tax evasion (a predicate offence) charges. HSBC appealed to have the charges dropped but the French Appeals Court rejected the appeal. The French prosecutors insisted on prosecuting HSBC Holdings Plc for tax evasion until HSBC agreed to pay €300 million to settle the matter in November 2017 (Reuters, 2017). Working with the US offcials on the data, Falciani was advised by them that ‘the only safe place in Europe would be Spain’ as Switzerland asked France to extradite Falciani. Therefore, Falciani fed from France to Barcelona. Under Spanish law, leaking confdential data regarding corruption due to bank secrecy is not a crime. Further, Falciani was assisting the authorities’ fght against corruption and tax evasion. Believing the ends of Falciani’s act justifed the means, the Spanish prosecutor opined: ‘We can’t punish people who, when they observe criminal conduct where they work, denounce it to the authorities’ (O’Brien, 2015). As such, the Spanish National Court denied the Swiss request for

Reporting fnancial crimes 169 extradition (Aguado, 2018). It is interesting to note that the Spanish Court has not brought any charges against HSBC. Although approximately 4,000 people with links to Spain are on the ‘Lagarde List’, many live in Switzerland and therefore not all of them are linked to tax evasion. However, the family of the former Head of Santander, Emilio Botin (now deceased), had to pay €200 million to the Spanish government as a settlement to the Spanish tax authority’s investigation into his tax affairs (Bowler, 2015). The US, Argentina, France, Belgium and Greece have accused HSBC of aiding tax evasion. Gaggero and Rua (2015) submit that Argentina’s lessons from capital fight in the 2001–2002 crisis meant that they were keen to curb capital fight out of Argentina. The Argentinian tax agency therefore charged the Argentinian branch and its employees for aiding tax evasion (The Associated Press, 2014). HSBC defended their position by stating that they do not have an account in HSBC Switzerland. By relying on local law, Argentina was able to charge HSBC Argentina for capital fight and tax evasion. The Belgian investigating judge charged HSBC Geneva with three offences: tax fraud by putting offshore companies in Panama and the Virgin Islands; money-laundering and forming a criminal organisation to the beneft of more than 1,000 clients. HSBC faced accusations that they facilitated wealthy clients in the Antwerp diamond industry (SWI Swissinformation.ch, 2014). The Bruges Special Income Inspection Unit also opened an investigation in 2015 into the Spoelberch family, the richest family in Belgium (Novak, 2015). In Greece, the then Greek Finance Minister Papaconstantinou received the ‘Lagarde list’ but no action was taken. There is a suggestion that this might be because some of the individuals on the Lagarde list include Greek elites (Oei and Ring, 2018). Two years later, the successors of Papaconstatinou became aware of this and re-examined the ‘Lagarde list’, although the list was short of three relatives of Papaconstantinou. Papaconstantinou was convicted of altering the evidence in 2015 but was acquitted of failing to take action on the Lagarde information (Oei and Ring, 2018). The US and the UK have also brought cases against individuals. The UK however, has been criticised for being too passive (Gaggero and Rua, 2015). In 2010, HM Revenue and Customs was given the ‘Lagarde list’ and identifed 1,100 people from the list of 7,000 British clients who had not paid their taxes. To date, only one individual has been prosecuted (House of Commons, 2015). The poor conviction rate against individuals in Greece and the UK suggest that countries are unlikely to use leaked data to prosecute individuals of power and wealth. These individuals have great power and control over politics and fnance. The interests of such individuals therefore do not align with the tax authorities’ interests. In such situations, the examples of Greece and the UK showed us that they would back down in their fght against tax evasion. Switzerland could not prosecute HSBC for alleged aggravated money-laundering because HSBC had already settled by paying 49 million Swiss francs (Garside, 2015). Falciani was saved from extradition due to his French citizenship as well as the Spanish and French law on tax compliance and bank secrecy (Oei and Ring, 2018).

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The Swiss Federal Criminal Court in Bellinzona convicted Falciani to a prison term of fve years due to aggravated economic espionage (Art. 273 para. 2 of the Swiss Criminal Code). Falciani was, however, acquitted of data theft and breaching bank secrecy. The conviction is interesting. Article 273 of the Swiss Criminal Code states that: Any person who seeks to obtain a manufacturing or trade secret in order to make it available to an external offcial agency, a foreign organisation, a private enterprise, or the agents of any of these, or, any person who makes a manufacturing or trade secret available to an foreign offcial agency, a foreign organisation, a private enterprise, or the agents of any of these, is liable to a custodial sentence not exceeding three years or to a monetary penalty, or in serious cases to a custodial sentence of not less than one year. Any custodial sentence may be combined with a monetary penalty.12 According to this article, it is forbidden and punishable to inform a foreign entity about economic facts: (a) with regard to which there is a (direct) secrecy protection interest of Switzerland as a whole; or (b) with regard to which a third party that has not given its prior formal consent to the disclosure has a secrecy interest worthy of protection (Romerio and Ivell, 2012). Article 273 of the Swiss Criminal Code thus protects national public and economic interests in general. The sentence of aggravated economic espionage was changed in 2014 from three years to fve years – a clear attempt by the Swiss legislators to protect Swiss bank secrecy. Article 273(2)(b) is particularly clear as to how Switzerland hinders the fght against tax evasion and by the same token most of other counter fnancial crime activities. Bank secrecy is enshrined and protected under the Swiss criminal law, basic rights of citizens, banking and data protection laws. Nevertheless, bank secrecy does not extend to protecting clients who are suspected of breaking the Swiss Criminal Law. Falciani’s act of leaking sensitive HSBC client data thus falls within the remit of Article 273. He has damaged the national interest in protecting bank customer secrecy. No wonder he is regarded as a traitor by some. Despite the failed Swiss attempt to extradite Falciani in 2012, Switzerland has still not given up. They issued an arrest warrant in March 2018 and the Spanish Police have arrested Falciani. In September 2018, the National Court of Spain ruled against extraditing Falciani. This is on the ground that the Spanish Criminal Code does not have an equivalent offence of ‘aggravated fnancial espionage’. The judges added that Falciani did not reveal any secrets because he only shared them with the relevant authorities (Parra, 2018). The second attempt in extraditing Falciani appears to be politically driven – an attempt by Spain to ‘trade high-profle fugitives with Switzerland’ (Badcock, 2018). A month after the Swiss warrant for Falciani, the Spanish Courts have issued an arrest warrant for Marta Rovira,

12 English translation provided in: https://www.admin.ch/opc/en/classifed-compilation /19370083/index.html#a273 [Accessed 22 July 2019].

Reporting fnancial crimes 171 one of six fugitive Catalan separatist politicians wanted by Spain for rebellion and sedition charges. Marta fed to Switzerland whilst the Catalan leader Puigdemont fed to Germany. The Spanish Supreme Court dropped the extradition requests in July 2018. This is because the German court ruled that Puigdemont could not be sent back to Spain for rebellion. He could only be charged for the lesser offence of embezzlement connected to the alleged misuse of public funds for holding a referendum that a judge had not permitted. In July 2018, the Spanish Supreme Court dropped its extradition requests for Puigdemont, Rovira and the other separatist politicians. Two months later, the National Court of Spain ruled against extraditing Falciani. Falciani may be safe for now but it would not be long before the Swiss Court will try again. The SwissLeaks case reveals that the inherent Swiss law, judiciary and political culture are all very protective of the national interest in safeguarding bank customer secrecy. According to the Tax Justice Network’s Financial Transparency Index, Switzerland ranks frst in bank secrecy for three reasons. First, its banking secrecy is based on its history and tradition. Second, political stability and neutrality enabled Switzerland to establish its reputation as a fnancial safe haven. Finally, the concept of ‘fnancial consensus’ is ingrained amongst the Swiss, where they protect the Swiss interest in offering offshore fnancial services (Tax Justice Network, 2018). Bank secrecy laws in Switzerland date as far back as 1713. The Great Council of Geneva legislated against revealing client details by bankers. Amongst the client list were Catholic French Kings because the ‘heretical’ beliefs of Protestant banks did not appeal to them. Swiss bank secrecy laws were implemented in 1934 after the scandal of Basler Handelsbank in October 1932. Bank offcers of Basler Handelsbank were caught facilitating tax evasion for the French elite (ibid.). To protect the banking sector, Switzerland passed its bank secrecy laws in 1934. Enforcement of bank secrecy laws by the Swiss enforcement agencies and courts have been ruthless in pursuance of protecting Swiss interest. This is particularly clear in the case of Rudolf Elmer. Elmer worked for the Julius Baer Bank of Zurich in the Cayman Islands and blew the whistle on tax evasion and criminal activities facilitated out of the Cayman Islands. The Swiss authorities pursued Elmer for a decade and Elmer alleged that he was harassed by the Swiss authorities (Taylor and Bild, 2011). The lower and high courts of Zurich refused his request to supply a witness and evidence that he was working for a subsidiary (rather than Julius Baer Bank of Zurich) in the Cayman Islands. The Swiss prosecutors and courts were trying to rely on extra-territorial laws to convict Elmer under Swiss law. The prosecutors also tried to portray Elmer as a lunatic. They demanded him three times to be psychologically examined by psychiatrists appointed by the Court of Zurich. Elmer feels that his human rights were trampled on and that ‘crucifying whistle-blowers, to serve as an example to others, has become state policy, and prosecutors have become an arm of that policy’ (Shaxson, 2015). In his words, ‘Swiss bankers who support tax evasion, Libor abuse, currency manipulation, etc. simply do not go to court for their crimes. They are a protected species’ (ibid.).

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Elmer was ultimately released from prison because he was held to be an employee of the Cayman unit of Julius Baer Bank and did not have an employment contract with Julius Bear Bank of Zurich. Upon Elmer’s acquittal, the Head Judge Peter Marti made an extraordinary personal comment. He said that: ‘Now, I do have some personal remarks: You are not a whistle-blower, you are an ordinary criminal’ (Fowler, 2017). This personal comment on a case involving an alleged breach of bank secrecy (not whistle-blowing) goes beyond the remit of the judge. Understandably, Elmer was annoyed and brought defamation against the judge. To bring such a claim involves the approval of the Executive Committee of the State of Zurich. Approval was denied because two members of the Executive Committee served in Parliament at the same time as the Head Judge. Undeterred, Elmer brought the case in front of the Swiss Federal Court. Citing lack of bad faith and acting within the scope of the powers of the State of Zurich, the Federal Court rejected Elmer’s defamation claim. Yet, the Federal Court made an unusual decision not to charge Elmer any costs for his claim. Perhaps the Federal Court did not feel comfortable with the decision after all.

LuxLeaks case In 2011, Antoine Deltour and Raphael Halet disclosed to the International Consortium of Journalists more than 300 secret multi-million tax deals between Luxembourg and multinational enterprises. Multinational enterprises were able to cut their tax bills in countries other than Luxembourg. Deltour was a former employee of PricewaterhouseCoopers who worked as an accountant for the frm. He discovered these secret tax deals whilst copying documents at work. The European Competition Commissioner Margrethe Vestager praised Deltour for his efforts in tackling corporate tax avoidance (Valero, 2016). However, the Luxembourg authorities charged him with violation of bank secrecy laws, trade secrets and illegally accessing PricewaterhouseCoopers’ database to obtain 28,000 documents (Bowers, 2016). A French journalist by the name of Edouard Perrin contacted Deltour since Perrin hosted a show called ‘Cash Investigation’. Perrin later reported the leaked information (Robinson, 2015). Deltour initially received a 12-month suspended sentence and a fne of €1,500 in 2016. Halet received a nine-month suspended sentence and a fne of €1,000. On the frst appeal, the defendants were cleared of the offence of breaching trade secrecy (violation du secret d’affaires) and the suspended prison sentences were reduced from 12 months to six months for Deltour and nine months to zero for Halet. On 15 May 2018, in the second appeal trial, the Luxembourg Court of Appeal held that Deltour is a whistle-blower and therefore he was cleared of all charges regarding the copying and use of the LuxLeaks documents. Unlike the SwissLeaks case, the Luxembourg Court of Appeal did recognise Deltour’s status as a whistle-blower although one can differentiate between Deltour and Falciani (Comité de soutien, 2018). Deltour copied PricewaterhouseCoopers’ documents but he did not use or communicate the documents whereas Falciani tried to sell the leaked data before approaching relevant authorities.

Reporting fnancial crimes 173 It should be noted that from the outset, neither Deltour nor Halet had any malicious intent and/or any ulterior motive (e.g. fnancial gain) other than upholding ethics and the public interest, a fact which was acknowledged by the Appeal Court, which ruled that the defendants acted ‘in the general interest against morally dubious practices’ (Caravagna, 2017). It is also worth noting at this juncture the important legal principles that apply to whistle-blowers which have been developed by the jurisprudence of the European Court of Human Rights (ECtHR). It is clear that the Appeal Court was better versed on these principles (also known as Guja principles) (see Guja v Moldova [2008]) than the Courts at the frst instance. Had the Luxembourg courts not quashed the sentences of these defendants, then it would have been inevitable to challenge the government of Luxembourg before the ECtHR for breaching the freedom of expression (Article 10 of the European Convention on Human Rights: ECHR). Starting with the case of Guja v Moldova [2008], the ECtHR has ruled that protection from or justifcation for state interference with and/or restriction of a person’s freedom of expression are subject to a number of conditions. The ECtHR held that restrictions imposed on Guja could not be justifed as ‘necessary in a democratic society’ because the information disclosed by Guja contained ‘very important matters in a democratic society which the public has a legitimate interest in being informed about and which fall within the scope of political debate’. This would have applied to Deltour and Halet’s case. Furthermore, the Guja judgment established key principles to determine whether a whistleblower’s right to freedom of expression should be protected under the ECHR. These included, inter alia, whether the applicant had alternative channels for making the disclosure, whether the public interest was involved in the disclosed information, whether the disclosed information was authentic, whether the applicant acted in good faith, the detriment to the employer and the severity of the sanction. This jurisprudence was applied and confrmed in later cases such as Heinisch v Germany [2011], Bucur and Toma v Romania [2013], and to a certain extent also in Rubins v Latvia [2015]. An additional criterion which the ECtHR considered in these cases was whether the respondent states had specifc laws that protect whistle-blowers against detrimental treatment (e.g. criminalisation of the whistle-blower in the cases examined in this chapter) and a remedy against unfair dismissal. Transparency International rated Luxembourg as having an ‘advanced’ whistle-blower protection regime (Transparency International, 2013). However, as this case has illustrated, whistle-blowers in Luxembourg have to fght hard for effective protection and remedy for the consequences of whistle-blowing (known as ‘denunciation’ in Luxembourg). While Switzerland (similarly to Luxembourg) signed (in 1972) and ratifed the ECHR in 1974 (Council of Europe, 2019), Guja principles are unlikely to apply in Falciani’s case as he and his accomplice tried to beneft personally from the disclosure of information. This can be identifed as a gap in the jurisprudence and whistle-blower protection framework because, whistle-blowers in the fnancial sector are likely to face legal action and retaliation by their employers (in most cases by termination of their employment)

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and they need to secure funds to support their legal proceedings, clear their name and sustain their livelihoods. One of the signifcant outcomes of the LuxLeaks case is that it expedited a review of tax rulings practices of EU Member States by the European Commission (Marian, 2017). When Luxembourg’s tax practices were investigated, the government was defensive in its statement: ‘[t]he advance tax decisions issued by the Luxembourg tax administration are compliant with national, European and international law. Their legality is not contested’ (The Ministry of Finance Luxembourg, 2014). This is not entirely accurate since certain corporations such as Fiat and Starbucks used these tax deals, which the EU held to be illegal and violated EU state aid rules (Dalen, 2016). Jean-Claude Juncker, who served Luxembourg’s Ministry of Finance and later became the Prime Minister, insisted that the huge reduction in tax rates enjoyed by multinational enterprises is due to international tax arbitrage – the ability for countries to take advantage of different tax laws of jurisdictions. In Marian’s opinion, however, Luxembourg was not merely a passive bystander. Luxembourg was ‘a manufacturer of synthetic arbitrage opportunities’ (Marian, 2017). By providing itself as a vehicle for countries to choose between source and residence jurisdictions, Luxembourg actively played a role in tax evasion. Similar to Switzerland, bank secrecy is a major trait of Luxembourg’s fnancial sector as it expanded in the 1960s. For many years, Luxembourg, along with Austria and Belgium, had opted out of any bilateral exchange of tax information upon request. In exchange for being allowed to maintain their banking secrecy, Luxembourg, Austria and Belgium had to levy a ‘withholding tax’ on foreign savings. Since 2009, Luxembourg has negotiated several exchanges of information agreements. It can also access information held by Luxembourg banks in order to co-operate with foreign authorities on tax matters. In May 2013, Luxembourg signed the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This Convention facilitates the collection of taxes and information exchange. It has also signed a Foreign Account Tax Compliance Act intergovernmental agreement with the USA in March 2014 to improve tax compliance in both countries. Finally, Luxembourg has agreed to automatic exchange of information required under the EU Savings Directive 2003/48/EC. However, the OECD calls upon Luxembourg to improve its transparency on information in relation to the ownership of companies (OECD, 2011). Switzerland has also tried to improve its image and transparency in the banking sector. In August 2009, Switzerland amended its tax treaty with France (Johannesen and Zucman, 2014). This means that both countries are required to provide information upon the other country’s request for information for tax enforcement. In 2015, Switzerland signed the EU-Swiss tax transparency agreement (Fox, 2015). This enables the EU Member States to investigate the accounts of their citizens in Switzerland. Switzerland has also ratifed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, 1988 (OECD/Council of Europe, 2011). All these steps are to be welcomed but given the long history of bank secrecy in both Switzerland and Luxembourg,

Reporting fnancial crimes 175 reforms (if there will be any) would be evolutionary in the long term. Three hundred ffty economists from over thirty states, including Thomas Piketty, Ban Ki-Moon and Angus Deaton have signed a letter calling for governments, especially the US and UK governments, to make new global regulations requiring companies to report business activities subject to tax in each country that they operate. They have asked for transparency in ownership of companies and trusts (Walkowski, 2016). It is clear that more work is needed to tackle tax evasion, capital fight and income inequality. Importantly, following these high-profle scandals, one of the most signifcant developments was the publication of the EU’s draft Whistle-blowing Directive (European Commission, 2018b). This draft legal instrument followed the European Parliament Resolution of 24 October 2017 on legitimate measures to protect whistle-blowers acting in the public interest when disclosing the confdential information of companies and public bodies (EU Parliament, 2017). While it will not be applicable in Switzerland as a non-EU Member State; the proposed Directive, if adopted, will set the tone for whistle-blower protection in the EU. A detailed analysis of the proposed directive is beyond the scope of this chapter. However, the key positive provisions of the directive can be summarised as follows (Transparency International, 2018): •

•

•

•

The whistle-blowing protection required by the proposed Directive covers both the public and private sectors regardless of their status in the organisation and obliges them to set internal whistle-blowing mechanisms which are responsive. Whistle-blowers can disclose unlawful activities as well as abuse of law. This is particularly important in the context of tax crimes because acts or omissions which are not illegal per se but defeat the object or purpose of the law would be covered. It offers comprehensive protection against retaliation, including penalties on persons who hinder or attempt to hinder reporting, take retaliatory measures against whistle-blowers and breach the duty of maintaining the confdentiality of the whistle-blowers’ identity. It recognises interim relief and legal aid as essential elements of a successful whistle-blowing regime.

It should also be noted that despite such positive provisions, the proposed Directive does not consider and/or prohibit the criminalisation of whistle-blowers by the state authorities as has been the case in the examples analysed in this chapter.

Conclusion The LuxLeaks and SwissLeaks cases reveal that whistle-blowers can be treated as criminals and the enemies of the state. The treatment of the whistle-blowers in the cases examined here and offcial correspondences between state authorities were

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clear evidence of this trend. At the same time, these cases propelled international action against tax evasion (e.g. the Common Reporting Standard of the OECD, 2018c) and gave the impetus to create a more robust whistle-blower protection regime in a small number of countries including Germany (Orientierungshilfe der Datenschutzaufsichtsbehörden zu Whistleblowing-Hotlines: Firmeninterne Warnsysteme und Beschäftigtendatenschutz November 2018), France (Sapin II Law, 2018), the Netherlands (The House for Whistleblowers Act, 2016) and Italy (Law 179/2017). These cases also reveal that piercing the veil of offshore secrecy in tax havens such as Switzerland and Luxembourg is an extremely diffcult and dangerous task. Whistle-blowers such as Falciani and Deltour encountered harassment, reprisal, isolation and criminalisation when they blew the whistle on tax evasion. To date, whistle-blowers in the fnancial industry in tax havens still receive little protection compared to other industries and countries (Turksen, 2018).13 Ethics, of course, play a part in the cases of Falciani and Deltour. Are the means or the ends more important in achieving tax transparency and combatting fnancial crime? The answer to this depends on a country’s values, culture and history, which shape the legislation, enforcement authorities and the judiciary. It is regrettable that even in the twenty-frst century, whistle-blowers are still portrayed as bad and mad even when they disclose true information in the public’s interest. Whilst multinational enterprises can take advantage of regulatory and international tax arbitrage, whistle-blowers do not beneft from whistle-blowing arbitrage. Despite some jurisdictions are being more sympathetic and protective of whistle-blowers, whistle-blowers are rather vulnerable and often used as political bargaining tools. To this end, the culture of protecting bank secrecy and not protecting whistleblowers must change.

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5/07/01/guest-blog-how-switzerland-corrupted-its-courts-to-nail-rudolf-elme r/ [Accessed 15th January 2019]. Sikka, P. (2007). Enterprise culture and accountancy frms: new masters of the universe. Accounting, Auditing and Accountability, 21(2), pp. 268–295. Srividhya, S. & Shelly, S.C. (2012). Whistle blowing protection: a watch dog for the organisation. International Journal of Social Science & Interdisciplinary Research, 1(10), pp. 204–211. SWI Swissinformation.ch. (17th November 2014). Swiss HSBC faces dual FrenchBelgium threat. SWI Swissinformation.ch. Available from: https://www.swissinf o.ch/eng/business/more-bank-woes_swiss-hsbc-faces-dual-french-belgium-threa t/41120732 [Accessed 8th October 2019]. Tax Justice Network. (2018). Tax Justice Network: narrative report on Switzerland. Financial Secrecy Index. Available from: http://www.fnancialsecrecyindex.com/ PDF/Switzerland.pdf [Accessed 15th January 2019]. Taylor, J. & Bild, P. (17th January 2011). Wikileaks to 'disclose tax dodge fles'. The Independent. Available from: https://www.independent.co.uk/news/uk/ home-news/wikileaks-to-disclose-tax-dodge-fles-2186589.html [Accessed 15th January 2019]. The Associated Press. (27th November 2014). Argentina accuses HSBC of aiding people in tax evasion. The New York Times. Available from: https://www.nytimes. com/2014/11/28/business/international/argentina-accuses-hsbc-of-aiding -people-in-tax-evasion-.html [Accessed 15th January 2019]. The Ministry of Finance Luxembourg. (2014). The Ministry of Finance comments on the practice of advance tax decisions. 10 November 2014. Available from: https ://dublin.mae.lu/en/News/The-ministry-of-Finance-comments-on-the-pract ice-of-advance-tax-decisions [Accessed 8th October 2019]. Transparency International. (2013). Whistleblowing in Europe: legal protections for whistle-blowers in the EU. Available from: https://issuu.com/transparencyinter national/docs/2013_whistleblowingineurope_en [Accessed 15th January 2019]. Transparency International. (2018). Whistle-blower protection in the European Union: analysis of and recommendations on the proposed EU directive. Position Paper No. 1. Available from: https://transparency.eu/wp-content/uploads/20 18/08/Transparency-International-Position-paper-EU-Whistleblower-Directive003.pdf [Accessed 15th January 2019]. Turksen, U. (2018). Criminalisation and protection of whistle-blowers in the EU's counter fnancial crime framework. In: K. Ligeti & S. Tosza, eds., White Collar Crime. Comparative Perspectives. Oxford: Hart. UN. (n.d.) Sanctions. Available from: https://www.un.org/securitycouncil/sanct ions/information [Accessed 15th January 2019]. Valero, J. (2016). Vestager: we should thank the Luxleaks whistleblowers. EURACTIV Network. Available from: https://www.euractiv.com/section/digital/interview/ vestager-we-should-thank-the-luxleaks-whistleblowers/888198/ [Accessed 15th January 2019]. Walkowski, M. (2016). The problem of mounting income inequalities in the world vis-a-vis the phenomenon of harmful tax competition. The ICIJ tracking down the greatest fnancial scandals of the 21st century. Przegląd Politologiczny, 2016(2), pp. 137–153.

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Legal Instruments African Union. (2003). The African Union Convention on Preventing and Combating Corruption. 7786 Treaty No. 0028. Available from: https://au.int/en/treaties/ african-union-convention-preventing-and-combating-corruption [Accessed 15th January 2019]. Council of Europe. (1999a). Civil law convention on corruption. European Treaty Series (ETS). No. 174. Available from: https://rm.coe.int/CoERMPublic CommonSearchServices/DisplayDCTMContent?documentId=090000168007f3 f6 [Accessed 15th January 2019]. Council of Europe. (1999b). Criminal law convention on corruption. European Treaty Series. No. 173. Available from: https://www.coe.int/en/web/conventi ons/full-list/-/conventions/treaty/173 [Accessed 15th January 2019]. Council of Europe. (2019). Chart of signatures and ratifcations of Treaty-Convention for the Protection of Human Rights and Fundamental Freedoms (Status as of 17 January). European Treaty Series. No. 005. Available from: https://www.coe .int/en/web/conventions/full-list/-/conventions/treaty/005/signatures?p_aut h=BqNWss9r [Accessed 15th January 2019]. EU Parliament. (2017). European Parliament resolution of 24 October 2017 on legitimate measures to protect whistle-blowers acting in the public interest when disclosing the confdential information of companies and public bodies (2016/2224(INI)). Available from: http://www.europarl.europa.eu/sides/getD oc.do?pubRef=-//EP//TEXT+TA+P8-TA-2017-0402+0+DOC+XML+V0// EN (Accessed 15th January 2019). European Parliament. (2018). European Parliament legislative resolution of 12 September 2018 on the proposal for a directive of the European Parliament and of the Council on countering money laundering by criminal law. COM (2016)0826 – C8–0534/2016 – 2016/0414(COD) (Ordinary legislative procedure: frst reading). Available from: http://www.europarl.europa.eu/sides/getDoc.do ?pubRef=-//EP//TEXT+TA+P8-TA-2018-0339+0+DOC+XML+V0//EN &language=EN#BKMD-8 [Accessed 15th January 2019]. OAS. (1996). Inter-American Convention Against Corruption. S. Treaty Doc No. 105–39, 35. International Legal Materials (ILM), 724. Available from: http:// www.oas.org/en/sla/dil/inter_american_treaties_B-58_against_Corruption.asp [Accessed 15th January 2019]. UN. (2003). United Nations Convention Against Corruption. Treaty No. 42146. United Nations Treaty Series, 2349, 41; Doc. A/58/422, 2349. Available from: https://treaties.un.org/doc/Treaties/2003/12/20031209%2002-50%20PM/ Ch_XVIII_14p.pdf [Accessed 15th January 2019].

Cases Bucur and Toma v Romania, App No. 40238/02 [8 January 2013] ECHR 291. Guja v Moldova, App No. 14277/04 [12 February 2008] IHRL 3209 (ECHR 2008). Heinisch v Germany, App No. 28274/08 [21 July 2011] ECHR 1175. Rubins v Latvia, App No. 79040/12 [13 January 2015] ECHR 2.

Part V

Information as integrity: bank secrecy and nonfnancial reporting

11 ‘Follow-ing the money’1 ten years on Transparency and the fght against banking secrecy Elena Blanco and Miguel Jose Arjona Sanchez

Introduction Ten years ago, during the G-20 Summit in London on 2th April 2009, the leaders of the richest countries in the world declared an end to the era of banking secrecy (Barker et al., 2009; Watt et al., 2009). This message would be repeated periodically over the next few months in fora such as the OECD (OECD, 2011) and by politicians as ideologically apart as Gordon Brown (Wintour and Watt, 2009) and George Osborne (Houlder, 2012). The Western world was reeling from the fnancial crises that followed the collapse of Lehman Brothers and of the subprime mortgage market in the US and blame was squarely pointed towards the fnancial industry risky behaviour (Bastasin, 2015). Politicians tried to convince voters of the necessity to invest public money in a devastated banking system (Mason, 2015) while public opinion demanded the end of the systemic lack of regulation of the fnancial industry (Picciotto, 2009; Bell and Hindmoor, 2014). Against this backdrop, the twenty richest countries in the world tried to appease voters at home by declaring that they were ready to restrain fnancial risk, combat tax evasion and to restore healthy public accounts by waging a war against non-cooperative jurisdictions, including tax havens (IMF, 2009). Noncooperative jurisdictions and ‘tax havens’ were thus placed at the epicentre of a concerted international action to restrain fnancial risk and to combat tax evasion (Barker et al., 2009). But it was the publication of the ‘Panama Papers’ in 2016 by the International Consortium of Investigative Journalists exposing the operations of Mossack Fonseca in Panama, what turned the attention frmly towards

1 ‘Follow the money!’ is a catch phrase popularised by All the President’s Men, a 1976 Oscarwinning American political thriller flm about the Watergate scandal which suggests that political corruption could be brought to light by investigating capital movements.

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the use of legal structures, mostly corporate, to alter the balance between property, economic activity and the legitimate state expectation of contribution via the tax system, to the country where economic activity takes place. Ten years on, in Davos, at the annual World Economic Forum in 2019, the richest countries and individuals met to discuss inequality, social unrest and the unstable political scene in Europe and beyond. The ‘war against tax evasion’ was not mentioned until Bregman, a newcomer to the event, brought up taxes, or rather tax avoidance by the rich, as the missing link between equality and justice and the disaffection and inequality that harbour violence and division in Western democracies (Curr, 2019). Bregman argued that addressing tax avoidance was crucial for socio-economic justice (Bregman, 2016). This chapter considers the legal measures developed to end banking secrecy as promised at the G20 meeting in 2009 in the aftermath of the fnancial crisis and assesses which progress has been made in 10 years. The chapter begins by tracing the origins of banking secrecy and links its exponential growth since the post-war period to the creation of offshore fnancial centres (OFCs) – sometimes called tax havens. This proliferation of OFCs is situated against the backdrop and transformation of capitalism into a global over-fnancialised neoliberal system. OFCs are popularly identifed as ‘tax havens’ but low taxation and planned tax avoidance are only one aspect of the operations facilitated by these jurisdictions. In fact, we argue, that it is not only the concept of ‘secrecy’ but the lack of connection between the economic activity enabled by these countries and residence or nationality of the benefciaries of that activity -who choose the OFC with the intention of ousting the laws of the place of economic activity or residence- what remains problematic. In the second section we trace the geopolitical context which harboured the origins of two types of OFCs: those based on traditional banking secrecy such as Switzerland and, a more complex model of OFCs articulated largely around corporate vehicles and secret trusts led by the United Kingdom and its many Overseas Territories and Crown Dependencies. In the third part we examine international and national regulatory efforts during the last ten years addressed to end secrecy and situate them against the embedded regulatory framework that enables the continuation of ‘business as usual’ in fnancialised global capitalism. We argue that ‘secrecy’ and lack of transparency are at the centre of a very specifc type of ‘regulation’ that enables private and corporate groups to interact with quasi-public agencies to derail any transparency reforms. Instead a variety of legal instruments operating largely within the offshore fnancial system (OFS) have created an opaque, red-circled area where regulation is used to insulate economic fows and capital from democratic scrutiny and taxation. The fourth part focuses on the UK and the City of London which despite waging a public war against banking secrecy in public operates a small empire of OFCs through its relationship with British Overseas Territories (BOT) and Crown Dependencies (CD). We discuss how the legacy of an imperial territorial network and the fexibility of the common law have facilitated the creation of the

‘Follow-ing the money’ ten years on 187 world’s most sophisticated and secretive offshore centre, just a few miles away from Westminster and the successive but ultimately unfruitful efforts to increase transparency and regulate the fnancial services industry. We conclude that regulatory proposals that could address the nefarious impact of tax havens on global development, democracy, public services and the fght against poverty are not diffcult to implement but they lack true political commitment. The main claim of this chapter is that it is regulation and not lack of it, as it is usually assumed, what enables fnancial secrecy and tax havens. The type of regulation we refer to is the product of a carefully calculated and pervasive policy of isolation of regulatory spaces from the democratic process (Sousa Santos, 1987, 2002) enabled by the institutionalisation of an international constitution of and for capital (Gill, 2002; Gill and Cutler, 2014) that is at the core of the unaccountable, mostly corporate, capitalist elite that is ravaging the welfare state (Blanco and Grear, 2019). Offshore fnancial centres play a pivotal role in today’s globalised fnancial sector and enable the symbiotic relationship between questionable fnancial practices and global neoliberal techno-capitalism to the detriment of the poor and, ultimately, of democracy. We conclude by refecting that while regulation continues to be sponsored by the fnancial and banking industry it would remain an enabler of privilege.

Historical and geopolitical drivers of offshore fnancial centres, banking secrecy and tax havens Offshore fnancial centres and tax havens In this section we explore the concept of offshore fnancial centres (OFCs) commonly referred to as ‘tax havens’. We begin by tracing their origin and subsequent development linking it to historical, geopolitical and economic factors before moving, in the next section, on to the complex and carefully crafted regulatory framework that enables this practice. Before we proceed, we would like to clarify some terminological issues. Tax havens and OFCs are used indistinctively by the general public and mass media and, in most cases, both concepts are intertwined with the imagery of islands, mostly tropical. This misunderstanding is based on two factors, this frst one is the word ‘offshore’ which is associated with something ‘at sea’ even though in regulatory and fnancial terms it means something very different. The ‘offshore’ denomination, has little to do with the geographic location of the fnancial centre and, instead, a refers to fnancial and economic activity by non-residents. What is ‘outside the country or jurisdiction’ is the ‘nationality’ or ‘location’ of the fnancial activity or the nationality or residence of those benefting from it. The second factor at play in the popular association of tropical islands is the word ‘haven’ which although it refers to ‘benevolent’ or low taxation and thus a favourable destination for the tax evader, also resonates with the image of paradisiac tropical islands (Shaxson, 2010). In this chapter, we will use the term (OFC) as a more precise denomination.

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Historical drivers and geopolitical origins of OFCs Preoccupation with tax evasion through the mobility of capital can be traced back to the 1920s during the frst and ultimately failed globalisation attempt of the Twentieth century (Likhovsky, 2007). This preoccupation subsided temporarily during the post-war economic reconstruction project but in the 1980s the opening of capital fows began to raise alarm bells again for developed countries (Hudson, 2003). The expansion of globalisation, the progressive dismantling of barriers to capital and the opening of markets that ensued, as well as the advances in information technology brought a new dimension to tax evasion. Countries and ‘markets’ fought to attract capital and fnancial fows in an unashamed regulatory race to the bottom (Berkhout, 2016). In 2016 The Economist, following the uproar caused by the Panama Papers, published an article explaining the ‘uneven playing feld’ of corporate tax rates (The Economist, 2015). The United States charged 39% on global tax profts for American companies. Ireland 12.5%. Free movement of capital and freedom of establishment of companies enabling these to be registered in any jurisdiction irrespective of actual economic activity, encouraged a type of ‘regulatory shopping’ and ‘tax shopping’ of dangerous proportions. National tax policies struggled to discern the nationality or residence of the actual owners and benefciaries of entangled and carefully crafted legal instruments created with the intention of hiding benefcial ownership of assets and delocalising the source of economic activity.

Traditional tax havens and banking secrecy: Switzerland Traditionally, historians declare that anonymity guarantees and banking secrecy have their origin at the beginning of the twentieth century in a handful of states (Palan et al., 2010). Switzerland, a small, prosperous and neutral country in the heart of Europe is traditionally associated with ‘secret’ bank accounts. However, the history of this Alpine nation as a destination for untraceable deposits and low taxation started much earlier, when Geneva’s bankers received large quantities of money from their neighbouring elites due to the country’s historic neutrality. The frst ‘fnancial refugees’ could be traced back to the religious schism in Europe when many French Calvinist subjects became refugees in Switzerland from where they contributed to fnance different power factions in France frst and later in Europe sheltered by the country’s secrecy and discretion (Guex, 2000). The origin of Swiss banking secrecy was encouraged by local regulation at the canton level. As early as 1713 the Great Council of Geneva published banking regulations which ordered banks to maintain the secrecy of clients’ registers and transactions, except in exceptional circumstances (Jovanović, 2015). This regulation belonged to civil and commercial law and, accordingly, any potential claims for breach of confdentiality could only to be brought by the injured party in civil law courts which could only impose a fne in case of a breach (Guex, 2000). During the nineteenth century, Switzerland had the opportunity to consolidate its position as a tax haven as a consequence

‘Follow-ing the money’ ten years on 189 of the political instability and the constant armed confict in the continent. The Franco-Prussian war and the rising taxation in Europe encouraged some of the richest European families to move their capital to Switzerland while many French banks replicated this relocation by moving some of their branches to Geneva (Palan et al., 2010). At the beginning of the twentieth century, Switzerland’s reputation for discretion and neutrality became increasingly attractive to foreign capital, not least due to the dramatic increase in taxation in Europe, particularly in the years gearing to and during the Great War. It is important to clarify, at this point, that this attractiveness was not circumstantial nor was it an unexpected consequence of the political and economic instability in Europe at the time. On the contrary, it was part of a carefully crafted strategy. Indeed, the Helvetic Republic ran extensive propaganda campaigns in neighbouring countries publicising the benefts of the mountainous country as a tax haven (Guex, 2000). The Great War simply provided a timely and important opportunity to the already well-established banking sector and a large infux of money found its way into ‘secret’ Swiss bank accounts as European old money sought a safe haven from the economic convulsions of the European economies at the turn of the twentieth century (Berbenni, 2013). The pre- and inter-war period was characterised not only by uncertainty and fnancial convulsions but also by the continued raising of taxes in the continent as the struggling falling empires fought beggar-thy-neighbour economic battles (Shaxson, 2010). Against this turbulent background, Switzerland emerged as a solid destiny to the ‘European establishment’s’ capital. The stability of the Swiss currency against a backdrop of neutrality and political stability in the middle of a fast descent into chaos and violence Europe, coupled with soft tax regulations and banking secrecy were crucial to transform the Helvetic Republic into an important international fnancial centre. This transformation was sanctioned in 1930 by the establishment in Basel of the Bank of International Settlements and, a few years later, by the Swiss Federal Government when, in 1934, using a French tax evasion scandal as an excuse, approved a controversial law including new provisions on banking secrecy and confdentiality (Guex, 2000; Shaxson, 2010). Banking secrecy ceased to be regulated purely by civil law; instead, the new law proposed that any breaches of client confdentiality (aka secrecy) would constitute a crime punishable not just by a fne but by potential imprisonment (Guex, 2000) The new law would also be applicable at a federal level and thus beyond the competence of the different cantons and, as breaches of confdentiality constituted a criminal offence any violation could be automatically prosecuted by the legal authorities even if the injured party did not sue. In this way, banking secrecy became offcially part of the national or public interest (Guex, 2000). The impact of this regulation cannot be underestimated as it played a crucial role in the construction of Switzerland as an international fnancial ‘offshore centre’. The Helvetic country experienced an infux of money from abroad even though most of this money was then transferred on and eventually deposited in any of the many other OFCs. The Swiss banking system operated and still does

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as a crucial step – a ‘conduit’ in CORPNET’s typology (Garcia-Bernardo et al., 2017) in the route to hide the provenance of the money from domestic (mainly tax) authorities before being transferred to a different OFC. The identity of the owner and origin of the capital becomes untraceable after its journey through a Swiss bank account. As with maritime pavilions of convenience the money acquired ‘the Swiss fag’. Nevertheless, if Switzerland was the pioneer of banking secrecy embedded by law into the country’s legal system, it was a very different set of circumstances driven by the geopolitical battle for hegemony between the weakened post-colonial UK and the US in the post-war years which led to the creation and development of OFCs as we know them today.

The UK: the creation of an ‘imperial’ network of offshore fnancial centres The path which led the UK to transform its commercial empire, in clear decline, into a brilliant offshore centre was, in part, the result of a military defeat. In 1956, France and Britain had to come to terms with their decline as colonial powers after an embarrassing failed military intervention in the Suez Canal (Boughton, 2000). The pound suffered strong speculative pressures as a consequence of the war and of the ongoing independence movement in the colonies. Britain lacked the fnancial resources to maintain the sterling parity established in Bretton Woods Agreements and feared the ‘infationary consequences of having to pay expensive dollars for oil imports while the canal was closed’ (Boughton, 2000). With a poor short-term economic forecast, Britain requested fnancial support from the International Monetary Fund. Following the interpretation made by the IMF Executive Board (Decision 71-2, 26 September 1946) instructed by the Congress through Section 13 of the US Bretton Woods Agreement Act (22 US Code 286j) the fnancial crises intervention mechanism could be used ‘to give temporary assistance in fnancing balance-of-payments defcits on current account for monetary stabilisation operations’ to members (Chwieroth, 2010: p. 111). The US already had a clear plan for fnancial expansion and recognised an opportunity for capital liberalisation which was cleverly masked as help for Britain. The interpretation of the fnancial crisis intervention mechanism was thus changed to help struggling Britain: [g]iven the status of sterling as an international currency and the United Kingdom´s role as banker for a large trading area, its efforts to overcome its balance of payments diffculties and to follow a policy of extending the area of freer trade and payments could be undermined if confdence in sterling were weakened by further sustained losses of monetary reserves. Moreover, the danger would arise of serious repercussions on the volume of world trade and on the progress made in freeing trade and payments from external restrictions. (Boughton, 2000: p. 22)

‘Follow-ing the money’ ten years on 191 A year later, the Fund’s Deputy Director of Research, Jacques J. Polak, stated this rationale even more clearly in an internal memorandum: The main reason for the UK drawing last year and the only reason for the standby was the need to counteract speculative capital movements, […] it is obvious that the unprecedentedly large Fund assistance was given to counteract and, insofar as possible by its announcement effect to forestall, a fight of capital from sterling.2 (Memorandum dated 29 November 1957, cited in Boughton, 2000: p. 22) Britain understood that its old unilateralism was in crisis, and that it needed American support. It also learnt an important lesson: capitalism was changing and in order to retain any lasting geopolitical infuence its own economic focus needed to change. Mercantile capitalism based on overseas trade had started to decline and, instead, a new fnancialised version was emerging under US postwar economic hegemony. A new international fnancial system had been devised to facilitate the US’s market expansion through the Bretton Woods institutions. A year before the speculation pressures against the sterling area began, the Bank of England guessed that the Midland Bank, one of the four biggest banking groups in Britain, was operating in the exchange market seeking foreign currency deposits unrelated to its commercial transactions (Schenk, 1998). These new deposits were not connected with the bank’s clients or business in the UK. Rather, they appeared to represent an important fnancial innovation: instead of having branches overseas, the Midland Bank transformed its London offce in an overseas branch (Holmes and Green, 1986) an early form of OFCs servicing fnancial activity of non-residents. Those irregular operations alarmed British fnancial authorities because effectively funds were not being deposited in the Midland Bank’s US accounts or converted into foreign reserves in the central bank; on the contrary, funds were used to resolve some liquidity diffculties and to take advantage of investment opportunities in the UK. Obtaining dollar assets was not diffcult; it only required the offer of higher interests for deposits assets, exploiting the limits imposed by Title 12 part 217 of the US Code of Federal Regulations (informally known as Q norms) to US banks. The so-called Q normative established the limits imposed by the Section 11 of the Banking Act of 1933 (so-called Glass-Steagall Act) and the Banking Act of 1935 over commercial banks in or out the Federal Reserve system, respectively. A British bank, in London, had begun operating as an OFC, providing fnancial services to non-residents in foreign currency. Financial authorities in Britain were uneasy with this development and anxieties ran high. Faced with the dilemma of either combating or promoting this new type of ‘deposits’

2 See Use of the Fund’s Resources: United Kingdom, EBS/56/44, Sup. 1, 7 December 1956, p. 6. In: IMF/CF, C/United Kingdom/1760, Stand-by Arrangements 1952–1960.

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pragmatism prevailed (Gilbert, 1986). During the 1960s, coinciding with the US’s own economic pressures due to their failed overseas wars in Korea, Vietnam and Afghanistan, the Eurodollar market grew very fast. The British banking system was lending dollars massively to third parties, not only in Britain but abroad, creating an international source of capital which would change the structure of the international fnancial system forever (Gilbert, 1986). At the time, when the growth of the market in Eurodollars was obvious, such a traditional tax haven as Switzerland felt uneasy about this new development. The Swiss authorities guessed the risks associated with the rapid infow of ‘hot money’ and the pressure it could create on the banks’ liquidity. To discourage this uncontrolled growth the Swiss authorities decided this time not to impose mandatory regulation but to opt for a ‘gentlemen agreement’ (an early form of soft law): Swiss banks would not accept short-term foreign currency deposits and would charge a 1% commission in case of withdrawn deposits from the country within six months (Gilbert, 1986). Other European countries decided to opt for a stricter approach. France and Germany prohibited paying interest to nonresident deposits, and France and Italy prohibited swaps from Eurodollars to its currencies (Shenck, 1998). The schism between Britain and mainland Europe in fnancial practice was created. To understand this schism, we must remember that Great Britain was the head of an economic declining trading empire, an empire based on the crucial position of its currency, supported by commercial and fnancial transactions. Limits to the movement of capital would have negative effects on the rest of the sterling area. In addition, incoming dollars were excellent news to a country that suffered important capital unbalances. London was thus not interested in stopping the Eurodollars market. On the contrary, the City wanted to lead on the new source of international capital. This interest matched that of US strategists who regarded the Eurodollars as an important instrument in the consolidation of the US as the hegemon of a fnancialised globalisation. The providers of Eurodollars would, in certain ways, be part of the Federal Reserve system, providing the US Central Bank with important privileges, and reinforcing the US dollar as the world’s currency (Friedman, 1971). Eurodollars would play a crucial function in the growth and development of the offshore fnancial game. As states became wary of hosting such a volatile market inside their borders they decided to encourage the expansion of semiautonomous centres where this market could be developed ‘safely’ or with less risk to national monetary policy (Lewis and Davis, 1987). This was particularly important for the UK as it offered an opportunity to keep an important position in the world, transforming the remaining territories of its Empire into a network of offshore fnancial centres connected to the epicentre of the Eurodollars market – the City of London. It also provided a trial run for a type of policy that would gain traction as neoliberal fnancial globalisation progressed: a strategy of creating a ‘kind of permanent negative’ that would help the UK, in Varoufakis’s words, to ‘rule by unbalancing, to reign by destabilising and to prevail by unhinging’ (2011).

‘Follow-ing the money’ ten years on 193 From the point of view of legal vehicles, the versatility of the institution of the ‘trust’ in common law countries played an important role in embedding secrecy into its fnancial sector. The trust allows the management of wealth or capital to be dissociated from the benefcial enjoyment – the true owner, whose identity is unknown in the case of secret trusts. The true owner or benefciary’s interest is insulated from the tax authorities (Antoine, 2007; Palmer, 2016a, b). Alongside the use of offshore secret trusts the creation of offshore companies is especially easy in England (Shaxson, 2010). The use of corporate vehicles through the sophisticated mesh that is the modern multinational company added an extra layer of complexity and opacity to an already secretive system (Picciotto, 2011). The second factor in the construction of a very different type of fnancial centre was the geopolitical structure of the (old) British empire, which provided a readily available cluster of quasi-sovereign overseas territories, ready to trade their limited sovereignty and willing to offer their illusory ‘residence’ and ‘nationality’ to individuals, trusts and, increasingly, holding companies, in exchange for a seat at the fnancial banquet and a slice of the available earnings (Palan, 2015). The availability of these satellites, with ‘paper sovereignty’ but all dependent in greater or lesser degree from of the City of London enabled the expansion of what have been called ‘treasury islands’ (Halperin and Palan, 2015). At the centre of this network without any doubt is the City of London, the most brilliant supranational or international fnancial centre leading capital fows around the world (Cassis and Collier, 2006). This international division of work hides the reality behind the ‘paper sovereignty’ and autonomy of the overseas territories and Crown dependencies (Sagar et al., 2009) as these (limited) ‘sovereign’ territories operate according to uniform standards and regulations, enabled by the shielding infuence of powerful states like the UK. A good example of this controlled development is that provided by the Cayman Islands which was developed as a tax haven in 1965 with approval of the British colonial authorities according the UK Foreign and Commonwealth Offce 1972 (Picciotto, 2011). Of its more than 500 registered banks only a handful have a physical presence in the Cayman Islands and of those only eight do local banking businesses. Most of them, like in other OFCs are just ‘shell’ or ‘paper’ branches.

Contemporary OFCs, tax havens and secrecy jurisdictions Besides Switzerland and the UK almost every country in Europe has built an offshore fnancial centre using the variety of small principalities and overseas territories to operate ‘separate’ but clearly dependant (semi-sovereign) fnancial outlets. France has its own tax haven in Monaco, The Netherlands in the Netherlands Antilles and Luxembourg could be considered a tax haven that works preferentially with the Benelux and the European Union (Palan et al., 2010). Each of them operates in slightly different ways. The Netherlands or Ireland operate through giving foreign companies zero or very low tax rates. Ireland offers an effective tax rate of 0% to 3% on global profts re-routed

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to Ireland through its tax treaty network (Zucman et al., 2018). Across the Atlantic the New York International Banking Facility acts as a domestic tax haven and so does Delaware, a model replicated by Japan with the Japanese Offshore Market (Palan, 2017). From 2010 onwards, academics began to treat tax havens and OFCs as practically synonymous as most OFCs operated as tax havens. We consider that although most if not all OFCs function as tax havens for non-residents the main characteristic of OFCs is the fact that these jurisdictions intentionally create regulation for the primary beneft and use of those not residing in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction usually the regulation of the place where economic activity takes place (Murphy, 2013). In addition, secrecy jurisdictions create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identifed to be doing so. The IMF also focussed on non-residence as the defning factor of fnancial activities in OFCs considering them ‘a country or jurisdiction that provides fnancial services to non-residents on a scale that is incommensurate with the size and the fnancing of its domestic economy’ (Zoromé, 2007: p. 7). Rose and Spiegel (2007) similarly suggest that the ‘disproportionate level of fnancial activity by non-residents’ is what characterises OFCs explaining that this fnancial activity may be encouraged by low or non-existent taxation but it extends beyond that. In 2017, a study from the University of Amsterdam CORPNET group introduced a new and innovative approach to defning OFCs (Garcia-Bernardo et al., 2017). CORPNET’s study focused on corporate activity and analysed all available data on international corporate practice and the existence (or lack) of connections with the local economy of companies registered as resident but with little or no economic activity within that particular jurisdiction. The study revealed two types of corporate operations in OFCs: the frst one was the re-routing of profts and assets (the report referred to this as ‘conduction’); the second was the hiding of profts or assets in tax havens which the report called ‘sinks’ (GarciaBernardo et al., 2017). Garcia-Bernardo observed that with very few exceptions countries operated either as ‘traditional’ tax havens (sinks) or modern tax havens (conduits). For traditional tax havens banking secrecy was very important, for modern ones, corporate law and the availability of fnancial vehicles was more relevant. In fact, the study highlighted that modern tax avoidance is mostly corporate – including cases in which individuals use corporate vehicles for personal tax planning purposes. Corporate tax avoidance utilises the opacity and malleability of the corporate form to exploit tax avoidance schemes. But perhaps the most signifcant discovery made in the report was that the fve countries that top the ‘conduit’ OFC typology (the Netherlands, United Kingdom, Switzerland, Ireland and Singapore) were all developed nations, democratic (with the exception of Singapore) and with extensive regulatory frameworks and fnancial activity. The research displaced the common belief and image that associated tax havens with tropical, far-fung islands supported by the OECD classifcation.

‘Follow-ing the money’ ten years on 195

Transparency, information sharing and the battle against ‘uncooperative jurisdictions’ As we mentioned at the beginning of the previous section globalisation and the liberalisation of capital had already created new regulatory challenges prior to the onset of the fnancial crises. As early as 1998 the OECD had identifed ‘harmful tax competition’ as an emerging global issue enabled by the delocalisation of capital. In its 1998 report the OECD concluded that whether a particular national tax regime was ‘harmful’ depended on four main criteria (1) no or low taxation of income, (2) lack of transparency, (3) lack of effective exchange of information, and (4) the regime is ring-fenced from the local economy (OECD, 1998). Tax havens were defned as those countries or jurisdictions with ‘no or nominal income taxes […] that offer themselves as places to be used by non-residents to escape tax in their country of residence’ (OECD, 1998: p. 20). Both Switzerland and Luxembourg, identifed by part of the literature as tax havens, abstained on the Council vote of approval of the report and boycotted subsequent follow-up reports (OECD, 2000). After the fnancial crisis the OECD intensifed its special programme on international tax evasion working closely with the G20 focussing, mostly, on developing the exchange of information networks through the Global Forum on Transparency and Exchange of Information for Tax Purposes (GFT). It established an internationally agreed tax standard provided for ‘full exchange of information on request in all tax matters without regard to a domestic tax interest requirement or bank secrecy for tax purposes’ (OECD, 2009). The GTF provides information and support through a variety of resources and tools and elaborates reports for the G20 Leaders and G20 Ministers of Finance and Central Board Governors regularly. In 2008 and 2009, in the wake of the fnancial crises, the G20 called on the Global Forum to help secure the integrity of fnancial system through a uniform implementation of transparency standards. The progress report was issued by the Secretariat at the end of the G20’s London Summit and sought to appraise the mounting concern at the widespread ‘tolerance’ towards tax havens. The report covered those countries surveyed by the OECD’s Global Forum on Taxation and includes the thirty OECD members observer countries and jurisdictions that met the tax haven criteria (OECD, 2009). The 2009 progress report suggested that in order to comply with the standard countries would have to have signed at least twelve agreements on exchange of information that meet the OECD standard (i.e. not agreements between two countries considered to be tax havens), and show a degree of effectiveness on the implementation of the measures covered. The GFT was restructured in Mexico in order to create a more inclusive organisation. It currently has 154 members and 18 observers providing assistance and monitoring information exchanges on tax matters from its members. The GFT operates through on a peer review process whereby a group of experts and independent assessors reviews all member jurisdictions against the international standard of transparency and exchange of information on request (OECD, 2010, 2016). Jurisdictions are then given a rating as ‘compliant’ ‘largely compliant’, ‘partially compliant’ and ‘non-compliant’. The latest

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terms of reference to assess compliance with the OECD Common Reporting Standards (CRS) for exchange of information were published in 2018, shortly before the EU Commission report on automatic exchange of information on request for tax purposes (OECD, 2018). The 2018 CRS have been criticised as an instrument that has missed a much-needed opportunity to assess effective compliance (Knobel, 2018). They continue to allow countries to circumvent the mandatory disclosure of benefcial information. Regulating the fnancial industry, some would argue, remains a national phenomenon despite the transboundary nature of its transactions, proft and effects. The GFT aims to establish benchmarking that can then be introduced and enforced nationally. Much of its work is already discredited. Some of the critics argue that the standards are just a soft law mechanism that enables jurisdictions with very little actual efforts to address secrecy to continue operating as OFC under the cloak of pretending to be the process of improving the exchange of information in fnancial matters. Transparency and exchange of information for the OECD only require three basic components: availability of information, appropriate access to the information, and, the existence of exchange of information mechanisms (OECD, 2010). Berkhout argues that the OECD restrictive approach to what it considers a tax haven (requirements are cumulative for the OECD, zero tax rate plus no disclosure and secrecy) means that countries such as Bermuda, the world’s worst corporate tax haven may not feature on the list at all (Berkhout, 2016). A G20 blacklist, due to be published next year, will be weaker still as it only looks at criteria related to fnancial transparency and ignores many key tax policies that facilitate corporate tax dodging including zero corporate tax rates. The OECD standards on exchange of information on request also only apply in respect of a particular tax payer (OECD, 2009) but the real ownership of certain fnancial vehicles in offshore fnancial centres can still be easily concealed making transparency and information sharing a fallacy (Foot, 2009). Of course, as we highlighted in the introduction, the major drawback of the whole system is that the Model Rules are not mandatory and as such provide a regulatory smoke screen that isolates the space they aim to regulate. In addition, they award individual countries a choice as to the sanctions to impose on non-compliant parties. The OECD provides some ideas, mostly involving monetary sanctions. Unfortunately, potentially more dissuasive non-monetary sanctions involving criminal sanctions, prohibition to trade, loss of business licence, are not automatically included (Knobel, 2018). The EU as well as taking active part in the OECD efforts and being a full member of the GFT has introduced over the years a variety of instruments to encourage transparency and exchange of information as the single market and freedom of establishment produce a clear incentive forum shopping in tax terms. A number of Directives on cooperation and exchange of information facilitate administrative cooperation between Member States (Council Directive 2011/16/EU).3 More

3 Council Directive 2011/16/EU of February 15, 2011 on administrative cooperation in the feld of taxation and repealing Directive 77/799/EEC [2011] OJ L 64/1.

‘Follow-ing the money’ ten years on 197 recently efforts include the automatic exchange of tax rulings and advance pricing agreements (Directive 2015/2376/EU)4 and automatic exchange of country by country reports (Directive 2016/881/EU).5 An important step and one much contested by the UK was Directive 2016/2258/EU6 which allowed tax authorities to have access to benefcial ownership information collected pursuant to the anti-money laundering legislation and, more recently, Directive 2018/822/EU7 on automatic exchange of reportable cross border arrangements. In addition, the EU has signed agreements with fve European non-EU countries (Andorra, Liechtenstein, Monaco, San Marino and Switzerland) which introduce requirements similar to those of Directive 2014/107/EU8 on automatic exchange of fnancial account information. However and despite these plethora of regulation, Garcia-Bernardo’s CORNPNET 2017 Report included three EU countries – the United Kingdom, the Netherlands and Ireland – as the world’s biggest ‘conduit type’ OFCs. In order to understand this paradox is important to refer back, again, to the main argument of this chapter: it is regulation, and not lack of it what creates and enables OFCs and tax havens. In the case of the EU, despite the wide range of regulatory instruments aimed at advancing transparency, these transparency standards apply only to countries outside of the EU as ‘non-cooperative jurisdictions’. This is done by presuming that all EU members are subjected to the exchange of information directives and cannot, by defnition, be considered ‘uncooperative’ despite evidence from various independent reports that list the Netherlands, Luxembourg, Ireland and Cyprus among the world’s less cooperative corporate tax havens (Berkhout, 2016). Many EU leaders are also willing to exclude countries such as Switzerland from the blacklist merely because it is engaging with the EU on issues relating to exchange of fnancial information. Information and cooperation are weaponised into displacing actual performance or displacing in this way any further scrutiny and delegitimising calls for tougher regulation. Blacklisting is so limited to those jurisdictions that refuse any sharing

4 Council Directive (EU) 2015/2376 of 8 December 2015 amending Directive 2011/16/ EU as regards mandatory automatic exchange of information in the feld of taxation [2015] OJ L 332/1. 5 Council Directive (EU) 2016/881 of 25 May 2016 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxation [2016] OJ L 146/8. 6 Council Directive (EU) 2016/2258 of 6 December 2016 amending Directive 2011/16/ EU as regards access to anti-money-laundering information by tax authorities [2016] OJ L 342/1. 7 Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxation in relation to reportable cross-border arrangements [2018] OJ L 139/1. 8 Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxation [2014] Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxationOJ L 359/1.

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of information is meaningless. Knobel adds a call for greater due diligence and the monitoring of the so-called ‘Golden Visa’ schemes that distort the volume of offshore fnancial operations in specifc jurisdictions (2018). Pasculli and Ryder observed that law itself can sometimes be a cause of corruption (2019) either through poor law drafting or by creating unfair laws perceived to lack legitimacy. Our point, however, is slightly different. We suggest that the creation of OFCs is not the consequence of poorly drafted law but a purposive legislative intervention of the neoliberal project.

Creating a tax haven in plain sight: the City of London and its ‘dependencies’ In this section we consider how the UK through the City of London constructed a sophisticated OFC empire and how through the use of purposive regulation it has preserved areas whereby it can still operate as an OFC, mostly through its dependencies and overseas territories while being a stalwart in the ‘war against banking secrecy and tax haven abuse’. Before the fnancial crisis, fnance was highly infuential in British politics and succeeded at lobbying politicians in order to maintain a so-called ‘light touch’ regulation (Bell and Hindmoor, 2014). The fnancial crises partially changed that. In the City of London, the climate became one of politicisation and of ‘confronting the banks’, and the British government understood that reforms were necessary (ibid.). Despite an initial reluctance the banking and fnance industry opted for a route of willing collaboration underscored by an understanding that shaping any changes to its own needs was the most effective option. The process we foregrounded in the introduction whereby regulatory spaces are ‘carved out’ of the sovereign scrutiny of parliament and instead advanced by professional interests (under the guise of expert advice) began to take shape. Proposed mandatory standards were replaced by less intrusive measures in the form of ‘selfregulation’ and ‘codes of conduct’ (Picciotto, 2011). Reporting became a big trend and one that was carefully chosen to satisfy the international registers of secrecy jurisdictions. At the national level, UK tax legislation, despite Gordon Brown’s war on banking secrecy and uncooperative jurisdictions (Wintour and Watt, 2009) and George Osborne’s ‘moral repugnance towards … tax evasion, and, indeed, aggressive tax avoidance’ (Houlder, 2012); remains highly favourable to offshore banking. The ease of creation and purchase of off-the-shelf companies discussed previously (second section) and the extensive web of common law regulated OFCs make the UK highly attractive for those seeking to move assets to tax havens and to beneft from fnancial opacity. In fact, the UK has transformed its company taxation in the period from 2009 to 2012 from a ‘worldwide’ corporate tax system to a ‘territorial’ corporate tax system. This enabled the UK to become even more opaque and facilitates its role as a conduit OFC (cf. GarciaBernardo, 2017; and discussion in section 2). This should surprise no one as

‘Follow-ing the money’ ten years on 199 tax regulation in the UK is elaborated with advice of the big accounting frms: PricewaterhouseCooper, Peat Marwick McLintock, Ernst and Young, Deloitte Touche Tohmatsu, and Arthur Andersen (Strange, 1996). These frms will later advise multinational corporations on how to navigate the ‘loopholes’ of the system they just helped to create (Rose and Spiegel, 2007). While the country’s welfare system was ravaged through the relentless ‘austerity’ plans conceived by a small Etonian and Oxford-educated clique, the laws regulating corporate tax in the UK were changed to enable even a more effective tax avoidance than under the previous government. Isolated attempts such as the UK Corporate and Individual Tax and Financial Transparency Bill 2013 never made it into legislation. The Bill went much further than the usual and cursory required reports. It required a full disclosure not only of the shareholders but of the benefcial owners disguised through the corporate structure. One of the most innovative features of the bill was the sanctions to be imposed in case of non-disclosure of benefcial ownership. The companies that failed to effect such disclosure to HMRC or the Companies House would have limited liability removed and both directors and benefcial owners would be personally liable for the companies’ debts and liabilities. In this way, sanctions are properly dissuasive as the privileged construct of the corporate form and the shield from unlimited liability to members is not extended to opaque and secret structures, or, if already in place is swiftly removed. Needless to say, such provisions never made it into legislation. Instead, the UK was one of the frst countries to create a register of benefcial ownership of companies in 2016 but, research from Global Witness revealed that unfortunately much of the information provided is inaccurate or false and that the lack of effective sanctions for inaccurate disclosure limits the value to this initiative (Palstra, 2017).

Conclusion The word has changed a lot since the 1960s and the creation of the Eurodollars market and fnance represents not only an instrument of power for Western countries but also the battleground of new competition, that of fnancial hegemony on the twenty-frst century. OFCs play a crucial role in this geopolitical battle for power as they attract capital and fnancial fows that would otherwise circulate through other countries’ fnancial systems. Britain, the now old and largely dismantled empire understood the leverage that fnance could provide as well as the implications of China’s economy opening up to the world market. This time, unlike in the past, when it had to somehow treacherously debilitate the Chinese empire to gain access to Chinese markets during the Opium Wars, Britain came up with a simple but brilliant plan. It would ‘join the enemy’ by making Hong Kong an offshore fnancial centre that served two powers, China and Britain (Rossi and Jackson, 2011). Financialisation thus enabled Britain to remain globally relevant, a position that a large part of the electorate clearly misses and the political elite dreams about; however, it also deposits a ticking time bomb inside

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the economy by fnancialising it to a size that negatively affects other sectors and by attracting capital from unknown sources (Baker and Wigan, 2017). The City and its ‘dependencies’ further contribute to the so-called ‘fnance curse’ by redirecting wealth away from the treasury and public services and into the hands of an increasingly rich plutocratic elite. Unnecessary high salaries and bonuses for those operating within the City and operating within a crisis and risk paradigm contribute to the dangerous and unnecessary over-fnancialisation of the economy (Mansour, 2018). Fifty years after the now largely abandoned Bretton Woods consensus neoliberal politics have radically changed capitalism. The US may still be the most powerful country in the world although its geopolitical importance is fast declining. The UK continues to play an important role as an international banking and fnancial centre. Western countries by fnancialising their economies have retained important privileges but decades of liberalisation and Washington consensus policies have contributed not only to industrialise other countries and to the opening of large markets for Western surpluses, they have also created new economic powerhouses that now compete for capital (Varoufakis, 2011). In a world where the fnancialisation process has made Western economies increasingly unstable, the so-called emerging economies like China and India have expanded through a combination of investment in manufacturing and production. In other words, while Asia has become the factory of the world, Western countries have become increasingly dependent on fnancial operations, making their economies capital thirsty. The origin of this capital is, somehow, irrelevant. Money not only is welcome but desperately needed (Sagar et al., 2009). The expansion of globalisation from the 1980s enabled the transformation of ‘traditional’ tax havens and OFCs. The Swiss model, described in the second section above became relatively marginal. The British model consisting of an integrated and interconnected network of fnancial centres – overseas territories and Crown dependencies offered greater versatility and effciency mostly through the use of corporate vehicles. The fnancial crises did not change too much the approach to fnance as the motor of globalised fnancial capitalism, it merely entrenched an already subvert regulatory phenomena, that of subtracting spaces from democratic scrutiny through regulation. As we suggested at the beginning of this chapter the creation of OFCs is not the result of lack regulation; rather the opposite. It is the purposive intervention of powerful states to create a regulatory space to become fnancially attractive in a world driven by remorseless competition. Neoliberal policies are always supported by and enforced by strong state intervention (Brabazon, 2017). The perceived lack of regulation in some areas of economic activity is due to the intentional ‘isolation’ of regulatory spaces that are subtracted from democratic scrutiny. This strategy has many manifestations, from the creation of laxer regulations zones from foreign capital to the auctioning of residence or nationality for fnancial purposes. The common thread through all of these is the ‘commercialization of sovereignty’ (Palan, 2003), the extraction of proft and the increase of inequality as an integral part of the neoliberal politico-economic project. The fallacy of the potential loss of competitiveness of

‘Follow-ing the money’ ten years on 201 the neoliberal paradigm drives democratic countries to compete in a desperate ‘race to the bottom’ in regulatory terms (Berkhout, 2016; Gill, 2012). Again, as we argued earlier, the neoliberal (undeniably strong) state enables the global fnancial capital elite to maximise proft and minimise tax legally by creating the type of regulatory foil against which fnancial capital is privileged and removed from democratic scrutiny.

References Legislation Council Directive 2011/16/EU of February 15, 2011 on administrative cooperation in the feld of taxation and repealing Directive 77/799/EEC [2011] OJ L64/1. Council Directive (EU) 2015/2376 of 8 December 2015 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxation [2015] OJ L332/1. Council Directive (EU) 2016/881 of 25 May 2016 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxation [2016] OJ L146/8. Council Directive (EU) 2016/2258 of 6 December 2016 amending Directive 2011/16/EU as regards access to anti-money-laundering information by tax authorities [2016] OJ L342/1. Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxation in relation to reportable cross-border arrangements [2018] OJ L 139/1. Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the feld of taxation [2014] OJ L 359/1.

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OECD. (2018). Standard for Automatic Exchange of Financial Information in Tax Matters Implementation Handbook. 2nd ed. Paris: OECD. Available from: http: //www.oecd.org/tax/exchange-of-tax-information/implementation-handbook -standard-for-automatic-exchange-of-fnancial-information-in-tax-matters.pdf [Accessed 24th July 2019]. Palan, R. (2003). The Offshore World: Sovereign Markets, Virtual Places and Nomad Millionaires. Ithaca, NY: Cornell University Press. Palan, R. Murphy, R. & Chavagneux C. (2010). Tax Havens. How Globalization Really Works. Ithaca and London: Cornell University Press. Palan, R. (2015). The Second British Empire: the British Empire and the re-emergence of global fnance. In: S. Halperin & R. Palan, eds., Legacies of Empire Imperial Roots of the Contemporary Global Order. Cambridge: Cambridge University Press, pp. 40–68. Palan, R. (2017). Futurity, offshore and the international political economy of crime. In: J. Backet & M. Deway, eds., The Architecture of Illegal Markets: Towards an Economic Sociology of Illegality in the Economy. Oxford: Oxford University Press. Palmer, R. (22nd November 2016a). What does the UK benefcial ownership date show us? Global Witness Blog. Available from: https://www.globalwitness.org/ en-gb/blog/what-does-uk-benefcial-ownership-data-show-us/ [Accessed 24th July 2019]. Palmer, R. (2016b). The Panama Papers exposed a huge problem: what’s next. TED Talk. Available from: https://www.ted.com/talks/robert_palmer_the_panama _papers_exposed_a_huge_global_problem_what_s_next [Accessed 24th July 2019]. Palstra, N. (2017). 10 Lessons from the UK public register of real ownership of companies. Global Witness Blog. Available from: https://www.globalwitness .org/en-gb/blog/10-lessons-uks-public-register-real-owners-companies/ [Accessed 16th July 2019]. Pasculli, L. & Ryder, N. (2019). Corruption and globalisation: towards an interdisciplinary scientifc understanding of corruption as a global crime. In: L. Pasculli & N. Ryder, eds., Corruption in the Global Era. Abingdon: Routledge, pp. 3–23. Picciotto, S. (5th May 2009). How tax havens helped to create a crisis. Financial Times. Available from: https://www.ft.com/content/96ec9414-39a6-11de -b82d-00144feabdc0 [Accessed 29th July 2019] Picciotto, S. (2011). Regulating Global Corporate Capitalism. Cambridge: Cambridge University Press. Rose, A. & Spiegel, M.M. (2007). International fnancial remoteness and macroeconomic volatility. Journal of Development Economics, 89 (2), pp. 250–257. Rossi, V. & Jackson, W. (2011). Hong Kong’s role in building the Offshore Renminbi Market. Chatham House. Available from: https://www.chathamhouse.org/p ublications/papers/view/177329 [Accessed 24th July 2019]. Sagar, P., Christensen J. & Shaxson, N. (2009). British government attitudes to British tax havens: an examination of Whitehall responses to the growth of tax havens in British dependent territories from 1967 to 1975. Available from: https ://www.academia.edu/4335514/British_Government_Attitudes_to_British_Ta x_Havens_An_examination_of_Whitehall_responses_to_the_growth_of_tax_ha vens_in_British_dependent_territories_from_1967-75 [Accessed 10th July 2019].

‘Follow-ing the money’ ten years on 205 Schenk, C.R. (1998). The origins of the Eurodollar market in London: 1955–1963. Explorations in Economic History, 35(2), pp. 221–238. Shaxson, N. (2010). Treasure Islands: Tax Havens and the Men who Stole the World. London: Vintage. Sousa Santos, B. (1987). Law: a map of misreading. Toward a postmodern conception of law. Journal of Law and Society, 14, pp. 279–302. Sousa Santos, B. (2002). Towards a New Legal Common Sense: Law, Globalization and Emancipation. 2nd ed. London–Edinburgh: LexisNexis-Butterworths Tolley. Strange, S. (1996). The Retreat of the State. Cambridge: Cambridge University Press. The Economist. (10th October 2015). New rules, same old paradigm. The Economist. Available from: https://www.economist.com/business/2015/10/10/new-rules -same-old-paradigm [Accessed 24th July 2019]. Varoufakis, Y. (2011). Modern Political Economics. London: Routledge. Watt, N., Elliott, L. & Borger, J. (2nd April 2009). G20 declares door shut on tax havens. The Guardian. Available from: https://www.theguardian.com/world/2 009/apr/02/g20-summit-tax-havens [Accessed 2nd July 2019]. Wintour, P. & Watt, N. (17th March 2009). I should have done more to prevent bank crises. The Guardian. Available from: https://www.theguardian.com/po [Accessed litics/2009/mar/17/gordon-brown-recession-banking-regulation 24th July 2019]. Zoromé, A. (2007). Concept of offshore fnancial centers: in search of an operational defnition. IMF Working Paper. 07/87. Available from: https://www.imf.org/ external/pubs/ft/wp/2007/wp0787.pdf [Accessed 2nd July 2019]. Zucman, G., Torslov, T. & Wier, L. (2018). The missing profts of nations. National Bureau of Economic Research Working Paper. No. 24701. Available from: http:// www.nber.org/papers/w24701 [Accessed 24th July 2019].

12 Information, power and the fght against tax havens Stuart MacLennan

Introduction Tax havens are not a new problem. The increasingly free-fow of global capital throughout the twentieth century made the facilitation of tax minimisation an attractive option for developing countries that wish to grow their economic base. Although the existence of such jurisdictions, broadly described as ‘tax havens’, has long been acknowledged, there appeared to be little onus to do anything to curtail the practices of tax havens for much of the previous century. Indeed, at one time, there was a considerable body of literature (Slemrod, 2008) which took the view that tax havens were a somewhat benign phenomenon which actually mitigated the effects of large states’ ‘sub-optimal’ (read: ‘high’) levels of taxation. The focus of most of the contemporary debates on the challenges of international taxation has been on lawful, but harmful, tax avoidance. It should be noted that tax havens can be used entirely lawfully. A United Kingdom (UK) resident taxpayer might invest money in an offshore trust located in a tax haven so that they only pay tax on trust income on a remittance, rather than an arisal basis.1 Although the use of tax havens for such purposes is unlikely to meet with approval from either domestic revenue authorities or the general public, such a practice is not unlawful. While action is being taken by states to curtail such arrangements (see, most recently, Sched. 8, Finance [No. 2] Act 2017), undesirable, but legitimate, utilisation of tax havens is not the subject of this chapter. This subject matter of this book is corruption. The majority of the chapters in this book focus on regulating the conduct of corrupt private parties. The concept of enablers is a familiar one in the study of corruption – intermediate parties who use their knowledge and expertise, or their position, to facilitate corrupt practices. In general, these enablers are private parties – often professionals working in fnance or legal services – however, in the fght against tax evasion the principal facilitators are, arguably, state actors. The focus of this chapter is therefore the role of states in facilitating tax evasion, the measures that states need to take in

1 It should be noted that the availability of such a scheme is now extremely limited in scope, applying principally to non-domiciled residents with foreign-source trust income.

Information, power and tax havens 207 order to combat tax evasion, and the efforts and methods used to compel state actors to implement those measures. According to Zucman, 8% of the world’s private wealth is held in tax havens, three-quarters of which goes unreported (Zucman, 2013). While offcial fgures establish the Eurozone as the world’s second-largest debtor, under Zucman’s analysis the currency bloc is actually a net creditor. While these fndings undoubtedly affect perceptions as to the relative fnancial positions of states, as the vast majority of this wealth goes unreported Zucman’s fndings also illustrate the magnitude of the problem of illicit fnancial fows. All efforts at tackling the use of tax havens for the purposes of avoidance have followed the same three steps: identifcation of tax havens; implementation of measures to curtail the viability of tax havens; and measures to compel compliance by tax havens. This chapter is, therefore, similarly structured. First, this chapter considers the characteristics that determine whether or not a state should be considered a tax haven. This chapter then proceeds to examine the principal weapon in the fght against tax evasion – information – and efforts at improving transparency in tax matters. Among tax haven states there have been varying degrees of resistance to these proposals, so this chapter goes on to consider what power exists to compel states to comply with these measures.

Defning tax havens There exists a widely recognisable stereotype of a tax haven: a small Caribbean island with a low level of natural resources, often with historical links to the British empire. While there is always, naturally, a considerable risk to relying upon stereotypes, evidence suggests that in the case of tax havens the stereotype is not particularly wide of the mark. Dharmapala and Hines (Dharmapala and Hines, 2009) fnd that tax havens share many characteristics in common. The necessity of being able to identify tax havens in order to take action against them is obvious. In 1998, the OECD outlined a number of criteria that can be used to identify a tax haven. These include: (a) No or only nominal tax rates (as a starting point). (b) Lack of effective exchange of information (whether in their tax administration or in their fnancial services). (c) Lack of transparency (in their legislative, legal or administrative provisions). (d) No requirement for any substantial economic activity in the jurisdiction. It is arguable that the above criteria are unduly broad. At the time, the primary concern about the use of tax havens was not their use for the purposes of criminal tax evasion. Rather, the OECD’s principal concern was tax competition, more broadly. In parallel to the OECD’s efforts on harmful tax competition, the European Union undertook its own work in the area through the Code of Conduct Group for Business Taxation. At its inception in 1998 the focus of the Code of Conduct

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Group’s attention was the perceived undercutting of the large, developed economies by low-tax jurisdictions – in particular within the EU itself. The Code of Conduct Group’s frst task was to identify criteria against which potentially-harmful tax regimes could be assessed. The Group identifed the following factors as being potential indicators of a harmful tax regime: (a) Whether advantages are accorded only to non-residents or foreign transactions. (b) Whether the regime is ring-fenced from the domestic tax base. (c) Whether the regime is made available without any real economic activity or substantial economic presence. (d) Whether the regime uses non-standard transfer pricing rules. (e) Whether the regime lacks transparency, for example, by relaxing legal requirements at an administrative level (Code of Conduct Group [Business Taxation], 1999). The work of the Code of Conduct Group did achieve some success in engendering a common approach to harmful tax practices among EU Member States. With consensus emerging, the EU increasingly turned its sights beyond its own members to third states. In 2015, the European Commission published ‘A Fair and Effcient Corporate Tax System in the European Union: 5 Key Areas for Action’ (European Commission, 2015). Under action 4, on tax transparency, the Commission proposed ‘a more common approach to third country non-cooperative tax jurisdictions’ (2015: p. 12), while under action 5 on improving coordination, the Commission proposed reforming the Code of Conduct on Business Taxation. While the Commission had previously recommended Member States maintain individual blacklists of uncooperative tax jurisdictions, the 2015 proposal envisaged the EU throwing its collective weight behind a common blacklist of tax havens. In 2016, ECOFIN2 agreed on the criteria (Council of the European Union, 2016) against which jurisdictions are to be assessed for the purposes of blacklisting. The criteria fall into three categories, the frst of which is tax transparency. States should have taken steps to implement automatic exchange of information (the ‘Common Reporting Standard’) by 2017, with the frst exchanges of information taking place by 2018. States should have a ‘largely compliant’ rating by the Global Forum with respect to OECD exchange of information requests. Sovereign states should have ratifed OECD Multilateral Convention on Mutual Administrative Assistance3 (‘the Multilateral Convention’) or should have an equivalent network of conventions in place. Non-sovereign territories should be

2 Economic and Financial Affairs Council. 3 Developed jointly by the OECD and the Council of Europe in 1988 and amended by a new Protocol in 2010. Available at: https://dx.doi.org/10.1787/9789264115606-en [Accessed 17 August 2019].

Information, power and tax havens 209 participating in the Multilateral Convention or an equivalent network of conventions. Until 30 June 2019 meeting two out of three of these sub-criteria is suffcient to be regarded as compliant with respect to tax transparency. The Council also agreed that a fourth category on benefcial ownership registers should be agreed and adopted at a later date. The second criterion concerns fair taxation. States and territories should not operate harmful preferential tax regimes as set out in the EU Code of Conduct, nor should they facilitate offshore structures aimed at attracting proft shifting without any real economic activity. Finally, states should have committed to implement to the OECD agreed minimum anti-BEPS standards by the end of 2017. Implementation of the OECD minimum standards will be incorporated as an independent criterion at a later date. A total of 20 states and territories were placed on the EU blacklist – the majority of which are located in the Caribbean, although this total has dwindled somewhat at the time of writing.4 Even beyond the Caribbean presence on earlier drafts of the list, the blacklisted states and territories shared a remarkable number of characteristics in common. Of the twenty states that have appeared on the blacklist, fve are currently overseas territories (in some form or other) of the United States, thirteen were either colonies or protectorates up until the latter half of the twentieth century and ffteen are small island groups. Of the 16 former colonies or protectorates, eight are formerly territories of the British Empire. According to Dharmapala and Hines: tax havens have open economies, in that they are physically close to major capital exporters, are unlikely to be landlocked, are likely to be islands, and large proportions of their populations live close to coasts. They are also likely to have British legal origins and parliamentary systems, and to use English as an offcial language. Finally, tax havens have substantially smaller natural resource endowments than non-havens. (Dharmapala and Hines, 2009: 1059) One startling aspect of Dharmapala and Hines’ research is the quality of governance of tax havens. Having assigned states a governance rating ranging from −2.5 to 2.5, the mean rating for tax havens is more than a whole standard deviation removed from the mean for non-havens (2009: p. 1061). Furthermore, according to Eden and Kudrle ‘[h]avens typically have low or zero tax rates on personal and/or corporate income, secrecy laws on banking and other fnancial transactions, and few or no restrictions on fnancial transactions’ (2005: p. 101). According to Slemrod (2008) there is a degree of correlation between those states that are money laundering states and those that are tax havens.

4 As of January 2019, only two Caribbean territories – US Virgin Islands and Trinidad & Tobago – remained on the EU blacklist, with the remaining three territories – American Samoa, Guam and Samoa – all being Pacifc islands.

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Given the number of characteristics that havens appear to share in common, it is tempting to conclude that setting-up as a haven state is a natural consequence of these characteristics. Furthermore, Dharmapala and Hines fnd poor governance scores in non-haven states (particularly in Africa), so while it can be observed that tax havens often have poor governance institutions, poor governance structures, alone, do not a tax haven make. It does not appear to follow, therefore, that the decision by a state to establish itself as a tax haven is a natural consequence of meeting certain geographic, historical, political, or economic criteria. Rather, it appears that there is a degree of rational choice in the decision to become a haven state. This is supported by Eden and Kudrle’s (2005) assessment of tax havens as ‘renegade states’. Eden and Hermann defne a renegade state as a state whose practices are salient to an international regime but whose behaviour does not comply with the descriptive norms and practices of the regime (Eden and Hermann, 1996). The decision to operate as a tax haven is not always as easy as it might appear. While there are potentially lucrative revenue opportunities for haven jurisdictions, there are also signifcant potential costs. States that establish as tax havens risk considerable reputational damage. Furthermore, tax havens, increasingly, fnd themselves losing access to development aid. From a taxpayer’s perspective, too, concealing money in a haven jurisdiction is not free. There are signifcant costs associated with setting up evasion schemes. It is necessary, therefore, for taxpayers to balance the costs of evading tax against the cost of simply reporting to revenue authorities and paying taxes accordingly. Prudence requires that any cost-beneft assessment of offshoring income or wealth should include an assessment of risk. In order for a haven to be attractive, therefore, havens have to offer a degree of stability – in effect, guarantees that the tax regime will not substantially change. In this context, tax havens’ resistance to international pressure makes considerable sense.

Information and the fght against tax evasion Contract theory and economics tell us that one of the most powerful advantages one party can have over another is a favourable asymmetry of information. A classic example is the purchaser of a used car who believes they are getting a good deal because they don’t know what the dealer knows – that the vehicle in question is a lemon soon likely to break down. Such asymmetry is generally regarded as highly ineffcient and, as such, the law intervenes to level the playing feld – in this example by requiring certain information to be made available and that certain warranties be given. Both tax avoidance and tax evasion involve information asymmetry – a taxpayer gains an advantage over revenue authorities by virtue of the fact that they are better informed about their own fnancial position. Naturally, revenue authorities do not simply take taxpayer accounts of their fnances on trust, and the law intervenes to empower revenue authorities to compel the production of evidence, requires taxpayers to maintain adequate records, and imposes sanctions

Information, power and tax havens 211 for non-compliance. As in contract law, the purpose of such rules is to address the asymmetry that exists between revenue authorities and taxpayers. These rules are (at least arguably) effective in a domestic context, however, while revenue authorities are limited to working within their respective state’s jurisdictional bounds, few boundaries exist insofar as taxpayers are concerned. The extent to which domestic laws can compensate for information asymmetry is, therefore, severely curtailed. Revenue authorities can compel compliance insofar as an individual or company’s domestic dealings are concerned, but compelling compliance insofar as overseas activities are concerned is rather more diffcult. Such compliance is even more diffcult to compel where overseas third parties are involved. It is in this latter scenario that tax evasion schemes are most often to be found. Secrecy is the principal tool of the tax evader. As discussed above, a low tax rate, alone, does not lead to the conclusion that a state is a tax haven. The principal attraction of a tax haven is usually the secrecy that accompanies low tax rates. The secrecy afforded by tax havens can be exploited for the purposes of tax evasion in a number of ways, including concealing income-generating assets or investments, concealing the true source of income (thereby depriving that income’s source jurisdiction of the power to tax it), and concealing income from illegal sources. Although that fnal category of income is principally of concern with respect to money laundering, to launder money is, almost always, to evade tax as well. Tax havens have typically operated strict bank secrecy laws such that national revenue authorities are not permitted access to information about deposits held or transactions undertaken by their domestic fnancial institutions. The OECD identifes the principal harm caused by bank secrecy as the fact that it undermines states’ ‘ability to determine and collect the right amount of tax from their taxpayers, both domestic and foreign’ (OECD, 2000: p. 9). Other harms identifed by the OECD include fostering the ‘inequity of taxation between mobile capital and income derived from labour and immovable property’; discouraging voluntary tax compliance; and hampering international co-operation between tax administrations. There exists, therefore, a pressing need to tackle the problem of secrecy in tax havens. Radon and Achuthan (Radon and Achuthan, 2017) point out that although tackling the issue of secrecy will not, of itself, solve the problem of tax havens, it is a necessary prerequisite for more effective tax laws and administrative practices in dealing with tax havens.

Exchange of information One solution to the problem of secrecy has been exchange of information. Double taxation conventions (DTCs) normally contain provision for exchange of information,5 however, the conclusion of DTCs often involves complex and lengthy negotiation. Since the early 2000s, states have been concluding bilat-

5 See Art. 26 of the OECD Model Convention.

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eral tax information exchange agreements (TIEAs), which are stand-alone agreements to exchange information without dealing with the broader issues addressed by DTCs. TIEAs, like DTCs, principally provide for exchange of information by request. One key faw with exchanges under DTCs and TIEAs is that a request for information by the revenue authority of one state to that of another requires prior knowledge on the party of that frst authority. Such prior knowledge is, obviously, extremely hard to come by, and it is reasonable to assume that the most valuable tax evasion schemes will also be among the best hidden. In 2005, the OECD updated Art. 26 of the Model Convention so that information to be exchanged no longer needs to be ‘necessary’ but rather need only be ‘foreseeably relevant’ to the administration or enforcement of domestic tax laws. The signifcance of these reforms can be easily overstated, however, with the Commentary to Art. 26 noting that the change was for clarifcation purposes and is not intended to alter the effect of the provision. The commentary explicitly rules out the use of Art. 26 for ‘fshing expeditions’ (OECD, 2012). The effectiveness of TIEAs has been subject to criticism. Lynne Oats describes TIEAs as a ‘costly diversion’ (Oats et al., 2017). Johannesen and Zucman (2014) fnd that tax treaties, in particular exchange of information, have only a modest impact on the use of tax havens by tax evaders. They postulate that tax evaders have, not unreasonably, concluded that exchange of information only modestly increases their odds of detection. A further issue is that much of the wealth in question is held by shell companies, the benefcial owners of which are unknown.6 Johannesen and Zucman’s analysis (2014: p. 75) reveals that a signifcant response to the conclusion of bilateral tax treaties by tax havens is for depositors to simply shift their deposits to a different tax haven. Although this may make the conclusion of such treaties seem like a futile exercise, the number of tax treaties in force year-on-year has only ever gone up. On this basis, it is arguable that as more and more such treaties are concluded there will be commensurately fewer and fewer jurisdictions to which evaders can shift their funds. In order to address these concerns, the OECD has shifted its attention from the bilateral approach of TIEAs to a new Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Although the Multilateral Convention was concluded between the members of the OECD and the Council of Europe in 1988, in 2011 the Multilateral Convention was repurposed to address the issue of global tax evasion through expansive exchange of information. Unlike Art. 26 of the OECD Model and most TIEAs, the Multilateral Convention provides for more than mere exchange of information on request. The Multilateral Convention provides that states may agree to share information that was previously only shared on request automatically. Furthermore, Art. 7 of the Multilateral Convention provides that signatories shall spontaneously share information with each other. The situations in which information should

6 See below.

Information, power and tax havens 213 be exchanged spontaneously include those in which one state ‘has grounds for supposing that there may be a loss of tax’ in another state. This represents a signifcant expansion of information exchange in tax matters. While the Multilateral Convention was, originally, open to member states of the OECD and Council of Europe, following the 2011 amendments to the convention the treaty was opened up to third countries to accede either by invitation or request. By April 2019, 128 jurisdictions participate in the Multilateral Convention, including a number of states widely regarded as tax havens. Nevertheless, there exist a number of limitations to the effectiveness of information exchange in tackling some of the most harmful tax behaviour. These limitations largely take two forms. The frst limitation is the substantive shortcomings of information exchange as a method of tackling tax havens. Despite the fanfare surrounding the OECD’s efforts at pursuing TIEAs, Robert Kudrle found that information exchange has ‘no discernible impact’ on the use of tax havens (Kudrle, 2008). Although the Multilateral Convention provides for more comprehensive exchanges of information than was is required under TIEAs, few states, at present, gather what is arguably a key piece of information where tax evasion is concerned – the benefcial ownership of assets and legal persons. A second limitation is the existence of hold-out jurisdictions. Not only does the existence of hold-out jurisdictions undermine the effectiveness of measures (as there will always be somewhere to where a tax evader can shift their activity); as more jurisdictions sign-up to information exchange the greater the incentive for hold-out jurisdictions not to comply. As Avi-Yonah noted in 2006: [a] principal problem of dealing with tax havens is that if even a few of them do not cooperate with information exchange, tax evaders are likely to shift their funds there from cooperating jurisdictions, thereby rewarding the noncooperating ones and deterring others from cooperation. (Avi-Yonah, 2006: p. 7) In addition to more comprehensive information exchange rules it is also necessary, therefore, to fnd methods of compelling the compliance of those jurisdictions that continue to hold-out.

Benefcial ownership registers The overwhelming majority of companies are established and operated for legitimate purposes. Furthermore, even where a company is not a trading company in the conventional sense, there are a number of reasons why businesses might establish shell companies or holding companies. These reasons include taking advantage of favourable legal regimes for protecting assets (such as intellectual property), compliance with national regulatory requirements, providing a legal structure for joint ownership of assets, or establishing a vehicle for future planned investments.

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Such companies can also be used, however, to conceal the true owners of assets or investments for a variety of nefarious purposes, including money laundering and tax avoidance. For example, a jurisdiction may not require companies to keep registers of share ownership or to register shareholdings with public authorities. Many jurisdictions permit companies to issue bearer shares.7 For the purposes of combating tax evasion, it is, therefore, increasingly important for authorities to know the benefcial owners of companies, partnerships and trusts. The UK’s Money Laundering Regulations 2007 defne a benefcial owner of a company as any individual who owns either more than 25% of the share or voting rights in a company, or ‘otherwise exercises control over the management of the body’.8 Similar regulations exist with respect to partnerships and trusts. At their summit in St Petersburg in 2013, the G20 encouraged: all countries to tackle the risks raised by opacity of legal persons and legal arrangements […] regarding the identifcation of the benefcial owners of companies and other legal arrangements such as trusts that are also relevant for tax purposes. (G20, 2013) By the end of 2016, 53 countries had committed to implementing public registers of benefcial ownership (House of Commons Library, 2019). In April 2018, the Sanctions and Anti-Money Laundering Act 2018 received royal assent, requiring the UK’s Overseas Territories under s. 51 to develop and publish registers of companies’ benefcial owners. While s. 51(1) requires the Secretary of State to assist the Overseas Territories to do so on a voluntary basis, s. 51(2) of the Act requires the Secretary of State to prepare a draft order to compel compliance on the part of any territory that has not complied by the end of 2020. Furthermore, the Council of the European Union agreed in 2016 that failure to implement benefcial ownership registers could be considered a future criterion for inclusion on the EU’s blacklist of non-cooperative tax jurisdictions (Council of the European Union, 2016). Those states that have implemented, or have committed to implement, benefcial ownership registers thus far are overwhelmingly European. While a handful of Caribbean jurisdictions have done so, they are almost all overseas territories of EU Member States. The overwhelming majority of sovereign haven jurisdictions have not implemented benefcial ownership registers, and do not appear to be in any rush to do so. Nevertheless, as this chapter discusses, below, these states may fnd themselves subject to considerable pressure from powerful international actors.

7 The United Kingdom only prohibited the issuance of bearer shares in the Small Business, Enterprise and Employment Act 2015. 8 Regulation 6, Money Laundering Regulations 2007.

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Power in global governance The very existence of tax havens, and the fscal structures extant therein, is a consequence of those states’ sovereignty over their own tax affairs. This is refected in both their internal and external sovereignty. Internally, insofar as these states are free to construct their own tax regimes as they see ft. Externally, insofar as these states are at liberty to decide to what extent, if any, they are willing to cooperate with other sovereigns in tax matters. Double taxation conventions, as articulated above, are states’ principal weapon in the fght against tax havens. Prior to 2008, most tax havens refused to participate in these treaties (Johannesen and Zucman, 2014)(Johannesen and Zucman, 2014). Since then, however, haven states have come under sustained pressure to fall into line with increasingly broadly accepted international norms. At the G20’s 2009 London Summit, the G20 leaders heaped pressure on tax havens to fall into line, threatening sanctions ‘to protect our public fnances and fnancial systems’ (G20, 2009). Power in global governance comes in multiple forms. Broadly speaking, such power can be dichotomised as being derived either from social interaction or constitutive power. The latter can be characterised as ‘power over’, while the former can be characterised as ‘power to’ (Barnett and Duvall, 2004). While this taxonomy describes the origins of power in global governance, it does not describe the nature of that power.

Compulsory power By far the most authoritative form of power in international relations is compulsory power. Such power relationships go beyond the example of vassal states, instead involving one state to have direct mandatory power over another. Barnett and Duval reject Dahl’s suggestion (Weber, 1964) that compulsory power requires intention on the part of the compeller, arguing that ‘[compulsory] power is present whenever A’s actions control B’s actions or circumstances, even if unintentionally’ (Barnett and Duvall, 2004: p. 14). In the present discourse, however, Dahl’s conceptualisation of compulsory power is, arguably, preferable to Barnett and Duval’s as the power exercised over the smaller states that are the subject of this chapter is quite deliberate. An example of compulsory constitutive power can be seen in the relationships between colonial powers and their overseas territories. In April 2018, the Sanctions and Anti-Money Laundering Act 2018 received royal assent, to the near-universal dismay of the UK’s Caribbean territories. The Act places a requirement on Overseas Territories under section 51 to develop and publish registers of companies’ benefcial owners. While section 51(1) requires the Secretary of State to assist the Overseas Territories to do so on a voluntary basis, section 51(2) of the Act requires the Secretary of State to prepare a draft order to compel compliance on the part of any territory that has not complied by the end of 2020.

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Institutional power Institutional power is rooted in the relationship dynamics within international institutions and organisations and can be characterised as ‘power within’ rather than ‘power over’. Although institutional frameworks may provide a source of institutional power (for example by granting a state larger voting weights), institutions can also serve as conduits for the exercise of power.9 It is broadly acknowledged that certain Member States within the EU wield considerable power over others within the institutions even where their legal voting weights are equal. Institutional power is socially removed. While compulsory power over another actor is direct, institutional power is often indirect. While the UK, as we have seen, evidently wields power over its former colonies, Germany’s power over Malta primarily exists through the EU. An example of institutional power with respect to tax havens is Luxembourg’s eventual adoption of the EU’s Savings Directive after a decade of resistance.

Structural power and productive power Structural power exists in the relationships between parties. It allocates differing roles and capacities, as well as shaping parties’ perceptions of their self-understanding and subjective interests. Productive power shares much in common with structural power. However, while structural power exists in the relationships between particular parties, productive power can be found in the context in which those parties exist. Such power can be seen on a transactional basis as well as in the ways in which states unilaterally structure their behaviour in response to others. As Bradford explains: without resorting to international institutions or seeking other nations’ cooperation, the EU is able to promulgate regulations that become entrenched in the legal frameworks of developed and developing markets alike, leading to the “Europeanization” of important aspects of global commerce. (Bradford, 2015: p. 170) Likewise, the ability of the OECD to exert pressure on states is increasingly apparent. Under direct pressure from the OECD Global Forum, Niue repealed its offshoring legislation in 2006 (OECD, 2016). Beyond these specifc examples, a broader general shift towards normative tax behaviour among haven states is also apparent. Viewed through the prism of structural and productive power the rationale underpinning this shift becomes clear.

9 It is worth noting that institutional frameworks can often serve to limit the power of certain actors.

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Conclusion There has emerged in recent years a clear conception of what constitutes a tax haven. Low tax rates alone do not make a tax haven. The key characteristics of tax havens are regimes that are designed to attract foreign investment, often offering a degree of special treatment. Arguably, the key characteristic of a tax haven regime, however, is secrecy. While tackling information asymmetry alone will not solve the problem of tax havens, it is arguable that it is not possible to tackle the problem of tax havens without frst addressing the problem of secrecy. To that end, developed countries, in particular in the OECD, have sought to improve the fow of information coming from tax havens through the conclusion of TIEAs. It is arguable, however, that TIEAs are somewhat limited in their usefulness where the information held by states about the investment vehicles located therein remains incomplete. Registers of benefcial ownership are therefore necessary to ensure that tax authorities have a more complete understanding of the true owners of assets. While there remains a long way to go in the implementation of benefcial ownership registers, and while there remains a long way to go in the implementation of benefcial ownership registers, and some states will undoubtedly seek to gain an advantage by holding out against implementation, it is possible, as we have seen, for powerful states and international organisations to exert their will over smaller jurisdictions. We have already seen the use of compulsory power with respect to overseas territories, as well as the use of institutional power over EU Member States. We have also seen, however, that the use of structural power and productive power can be effective in coercing haven states to fall into line. Although it will doubtless be a lengthy process, we may, therefore, be witnessing the beginning of the end for tax havens.

References Avi-Yonah, R.S. (1st August 2006). Prepared Testimony of Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan Law School before the US Senate Permanent Subcommittee on Investigations, Hearing on Offshore Transactions. US Senate. [Online] Available from: https://www.hsgac.senate.gov/imo/media/d oc/STMTAviYonahUofMI.pdf [Accessed 27th April 2019]. Barnett, M. & Duvall, R. (2004). Power in Global Governance. Cambridge: Cambridge University Press. Bradford, A. (2015). Exporting standards: the externalization of the EU’s regulatory power via markets. International Review of Law and Economics, 42, pp. 158–173. Code of Conduct Group (Business Taxation). (1999). Report to the Council. Brussels: Council of the European Union. 14313/99. Council of the European Union. (2016). Criteria and Process Leading to the Establishment of the EU List of Noncooperative Jurisdictions for Tax Purposes. Brussels: Council of the European Union. 14166/16. Dharmapala, D. & Hines, J.R. (2009). Which countries become tax havens? Journal of Public Economics, 93, pp. 1058–1068.

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Eden, L. & Hermann, C. (1996). Renegade states in international affairs: a conceptual exploration. Annual meeting of the International Studies Association Southwest Region, 20–23 March 1996, Houston. Eden, L. & Kudrle, R.T. (2005). Tax havens: renegade states in the international tax regime? Law & Policy, 27, pp. 100–127. European Commission. (2015). A Fair and Effcient Corporate Tax System in the European Union: 5 Key Areas for Action. COM(2015) 302 fnal. G20. (5th September 2013). St Petersburg Summit: Leaders’ Declaration. Available from: http://en.g20russia.ru/news/20130906/782776427.html [Accessed 25th April 2019]. G20. (2009). London Summit: Leaders’ Statement. London: G20. House of Commons Library. (2019). Registers of Benefcial Ownership. No. 8259, 15th March 2019. Johannesen, N. & Zucman, G. (2014). The end of bank secrecy? An evaluation of the G20 tax haven crackdown. American Economic Journal: Economic Policy, 6, pp. 65–91. Kudrle, R. T. (2008). The OECD’s harmful tax competition initiative and the tax havens: From bombshell to damp squib. Global Economy Journal, 8(1), pp. 1–23. Oats, L., Miller, A. & Mulligan, E.A. (2017). Principles of International Taxation. London: Bloomsbury Professional. OECD. (2000). Improving Access to Bank Information for Tax Purposes. Paris: OECD. OECD. (2012). Model Tax Convention on Income and on Capital 2010 (Full Version). Paris: OECD. OECD. (2016). Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews: Niue 2016 Phase 2: Implementation of the Standard in Practice: Phase 2: Implementation of the Standard in Practice. Paris: OECD. Radon, J. & Achuthan, M. (2017). Benefcial ownership disclosure: the cure for the Panama Papers ills. Journal of International Affairs, 70, pp. 85–108. Slemrod, J. (2008). Why is Elvis on Burkina Faso postage stamps? Cross-country evidence on the commercialization of state sovereignty. Journal of Empirical Legal Studies, 5, pp. 683–712. Weber, M. (1964). The Theory of Social and Economic Organization. London: Free Press. Zucman, G. (2013). The missing wealth of nations: are Europe and the US net debtors or net creditors? The Quarterly Journal of Economics, 128, pp. 1321–1364.

13 The communication of nonfnancial information according to the Directive 2014/95/EU as an instrument for the promotion of corporate integrity in Europe Marco Cristiano Petrassi Introduction On 22 October 2014 the European Council adopted the Directive 2014/95/ EU1 (the ‘Directive’) which mandates the Member States to issue regulations on the subject of non-fnancial information within the December 2016 and with effects starting from fnancial years ending on 31 December 2017. This was the further step of the European policy on transparency and business reporting, whose implementation begun with Directive 2003/51/EC.2 Generally, the increasing political attention of European Union for transparency was caused by political concerns regarding (a) the long-long term necessity to provide the conditions for sustainable economic growth, and (b) the need to rebuild the trust of consumers and investors on the performance of undertakings also with regard to ethical behaviours in the context of the economic crisis (Gaztea and Fernandez, 2017). Despite the frst legislative initiative on non-fnancial reporting was adopted in 2001, the decisive acceleration to the European policies on this subject was given by the communication from the Commission on A renewed EU strategy 2011–2014 for corporate social responsibility (‘CSR’) of 25 October 20113 and

1 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-fnancial and diversity information by certain large undertakings and groups Text with EEA relevance [2014] OJ L330/1. 2 With the Recommendation of 30 May 2001, the Commission invited Member States to adopt the appropriate measures for the detection and assessment of environmental costs in the annual and consolidated accounts of companies. Subsequently the directive n. 2003/51/ EC amended the Directive on annual accounts (Directive 78/660/EEC) and that on consolidated accounts (Directive 83/349/EEC) by introducing non-fnancial information requirements. Currently these obligations are established by art. 19 of Directive 2013/34/EU which contains the regulation of the content of the management report. 3 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – A renewed EU strategy 2011–14 for Corporate Social Responsibility COM(2011)681 of 25 October 2011.

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two resolutions issued by the European Parliament: Corporate social responsibility: accountable, transparent and responsible business behaviour and sustainable growth4 (2012/2098[INI]) and Corporate social responsibility: promoting society’s interests and a route to sustainable and inclusive recovery (2012/2097[INI]), both approved on 6 February 20135 (Assonime, 2017). Especially the last two resolutions pointed out the importance of a proper communication by undertakings on non-fnancial issues, such as sustainability, social and environmental factors, in order to make investors and consumers able to make aware decisions; therefore, the European Parliament asked the Commission to arrange a specifc legislative proposal which combined fexibility and proportionality of transparency measures in relation to the sizes of enterprises with the need for comprehensive information to the market. Indeed, there had been criticisms concerning: (1) the lack of transparency, both from the qualitative and quantitative perspective, on non-fnancial information (Aureli, Masnaghi and Salvatori, 2018); (2) the insuffcient diversity in the composition of the boards of directors, as well as the lack of transparency in this regard, often at the origin of the mismanagement of companies, their limited inclusive and innovative character and, ultimately, their reduced contribution to growth (Bellisario, 2017). Therefore, with its Action Plan 2011–2014 on CSR, the Commission announced its program to improve the disclosure of information on social and environmental issues and uniform rules for all the market players to such respect; indeed, non-fnancial disclosure was deemed as an across-the-board issue for the development of CSR, as it is able, on one hand, to ease the engagement with stakeholders and the identifcation of risks for sustainability, and, on the other hand, to increase the trust of investors and consumers on enterprises and, thus, help the arrangement of an effective remedy to the economic crisis (European Commission, 2011; Gaztea and Fernandez, 2017). As it was brightly summarised: The key concept that is often repeated through the Impact Assessment document prepared by the EU Commission is the idea that large undertakings should report on their capacity to create ‘shared value’ rather than ‘shareholder value’. (Monciardini, Dumay and Biondi, 2017: p. 10)

4 European Parliament resolution of 6 February 2013 (2012/2098(INI)) on corporate social responsibility: accountable, transparent and responsible business behaviour and sustainable growth [2016] OJ C24/28. 5 European Parliament resolution of 6 February 2013 on Corporate Social Responsibility: promoting society’s interests and a route to sustainable and inclusive recovery (2012/2097(INI)) [2016] OJ C 24/33.

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The Directive and its implementation A brief description The immediate purpose of the Directive is to increase the transparency of corporations in non-fnancial issues reporting. But this is only a means, the end is more ambitious, i.e. to contribute to a sustainable global economy. (Gaztea and Fernandez, 2017: p. 292) Indeed, the Directive obliges large companies6 which are public-interest entities7 to include in the management report a non-fnancial statement containing information to the extent necessary for an understanding of the undertaking’s development, performance, position and the impact of its activity, relating to, at least, environmental, social and employee matters, respect for human rights, anticorruption and bribery matters. The statements must include: a) a brief description of the undertaking’s business model; b) a description of the policies pursued by the undertaking in relation to those matters, including due diligence processes implemented; c) the outcome of those policies; d) the principal risks related to those matters linked to the undertaking’s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those areas, and how the undertaking manages those risks; e) non-fnancial key performance indicators relevant to the particular business. The disclosure of the non-fnancial information is to be compliant with specifc national, Union-based or international reporting standard which the statement must expressly mention and identify.

6 The entities obliged to publish the non-fnancial statement are those that exceed on their balance sheet dates the following criteria: (a) balance sheet total: Euro 20,000,000; (b) net turnover: Euro 40,000,000; (c) the average number of 500 employees during the fnancial year 7 According to Directive 2013/34/EU, by public-interest entities it is meant undertakings which are: (a) governed by the law of a Member State and whose transferable securities are admitted to trading on a regulated market of any Member State within the meaning of point (14) of Article 4(1) of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in fnancial instruments; (b) credit institutions as defned in point (1) of Article 4 of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions, other than those referred to in Article 2 of that Directive; (c) insurance undertakings within the meaning of Article 2(1) of Council Directive 91/674/EEC of 19 December 1991 on the annual accounts of insurance undertakings; or (d) designated by Member States as publicinterest entities, for instance undertakings that are of signifcant public relevance because of the nature of their business, their size or the number of their employees.

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Member States are required to ensure that the statutory auditor or audit frm checks whether the non-fnancial statement has been provided; in addition to such auditor’s check, the states may require that the information in the nonfnancial statement be verifed by an independent assurance services provider. The obligation imposed on companies is a duty of mere disclosure; no company shall be obliged to undertake a human rights policy or to take actions against corruption; however, in case no action is taken or no policy implemented, ‘the fnancial statement shall provide a clear and reasoned explanation for not doing so’.8

The Commission’s non-binding guidelines On 26 June 2017 the Commission published, according to art. 2 of the Directive, guidelines for the arrangement of the non-fnancial statement9 (hereinafter, the ‘Commission Guidelines’). As clarifed both by the Directive and by the Commission Guidelines themselves, the instructions provided by the Commission are not binding, nor mandatory but aim at being best practices for all the undertakings that publish the non-fnancial information either on a mandatory or voluntary basis. The Commission Guidelines set forth important clarifcations as to the criteria to be used for the arrangement of the statement and the content to be included. With respect to such criteria, the Commission specifed that the statement should: •

•

disclose material information: by material information is meant an information ‘whose omission or misstatement could reasonably be expected to infuence decisions that users make on the basis of the fnancial statements of the undertaking’ and is ‘necessary for an understanding of the […] impact of (the company’s) activity’. Since the materiality of information must be assessed in a context, the Commission Guidelines recommend to evaluate the materiality also by directly comparing relevant non-fnancial disclosures among companies in the same sector or industry; be fair, balanced and understandable: the non-fnancial statement should inform both on favourable and unfavourable aspects, in an unbiased way. In this respect, the statement should (a) distinguish facts from views and interpretations; (b) be arranged on the basis of: (i) appropriate corporate governance arrangements, (ii) robust and reliable evidence, (iii) internal control and reporting systems, (iv) effective stakeholder engagement, and (v) independent external assurance; (c) use a plain language and consistent terminology; (d) provide an appropriate context to make it easier to understand materiality of the information, for example, by presenting it with reference to company’s strategies and broader goals, as well as its long-term strategy, principal risks and policies;

8 See Directive, art. 19, paragraph 1. 9 Communication from the Commission – Guidelines on non-fnancial reporting (methodology for reporting non-fnancial information), Brussels, 26.6.2017 C(2017) 4234 fnal.

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•

•

•

be comprehensive but concise: the statement should cover at least environmental, social and employee matters, respect of human rights, anti-corruption and bribery matters. Companies should also disclose any other material information useful to provide a comprehensive picture of a company in the reporting year; nevertheless, the non-fnancial statement should avoid immaterial information, since the disclosure of immaterial information may veil the material information and make the non-fnancial statement less easy to understand; be strategic and forward-looking: the statement is expected to provide insights into a company’s business model, strategy and its implementation, and explain the short-term, medium-term and long-term implications of the information reported; be stakeholder orientated: the disclosure should focus on the information needs of stakeholders as a collective group, rather than on the needs or preferences of individual or atypical stakeholders, or those with unreasonable information demands; be consistent and coherent: the statement should be consistent with other elements of the management report. Moreover, the Commission Guidelines recommend making clear links between the information presented in the non-fnancial statement and other information disclosed in the management report in order to make the information more useful, relevant and cohesive.

The Commission Guidelines provide also clarifcations concerning the content of the statement. Taking into consideration the scope of this book, from this perspective it seems appropriate to limit the analysis to the ‘anti-corruption and bribery matters’. In such respect, the Commission Guidelines recommend companies to disclose material information ‘on how they manage anti-corruption and bribery matters and occurrences’; according to the Commission, material information is that concerning ‘organisation, decisions, management instruments’ and ‘the resources allocated to fghting corruption and bribery’, as well as the actions taken ‘to prevent or mitigate adverse impacts, monitor effectiveness and communicate on the matter internally and externally’. Of course, the information on anti-corruption matters should be provided according to the above-mentioned criteria and, therefore, it should be material, fair, comprehensive but concise, stakeholder orientated, consistent and coherent. It is noteworthy that the Commission Guidelines expressly suggest the companies to identify relationships and linkages between their business model and corruption and bribery aspects in order to make information ‘consistent and coherent’.

Implementation of the Directive All the Member States have implemented the Directive (CSR Europe, 2017); having exercised the faculty granted to them by the Directive itself, some States slightly differ from the others with regard to: (i) the wideness of the scope of

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companies subject to the non-fnancial reporting duties, and (ii) the need for an assurance by a third party on the report.10 It is worth highlighting that, in some countries, the national law already provided the duty of disclosure of non-fnancial information. Therefore, the implementation of the Directive by some Member States required just a few adjustments. As a matter of example, since 2001, in France the law established the duty of disclosing on the environmental and social impact of listed companies; in 2010, such duty of disclosure has been extended also to companies, which, although not listed, have either a balance sheet total or a turnover greater than €100.000,00 or a number of employees greater than 500 (Andriola et al., 2016; Consob, 2017). In 2003, the United Kingdom enacted a reform of business reporting11 which mandated the listed companies to publish a ‘strategic report’ – namely, a comprehensive report on business strategy, business model, human rights and environmental issues; notwithstanding its legislation was at the forefront for the business reporting, only by implementing the Directive did the United Kingdom include within the scope of the issues to be reported measures and policies adopted by companies on fghting corruption. The United Kingdom does not require the strategic report to be assured by a third independent entity; however, the Companies Act 2006 provides that auditors, in the course of their audit, have to verify and check, on the basis of the information gained by them, whether: • • •

the information provided by the strategic report is consistent with the fnancial statutory accounts; the strategic report has been prepared in compliance with applicable law; within the limits of their knowledge of the undertaking and its environment, they identifed material misstatements in the strategic report.12

The Italian government implemented the Directive through legislative decree (‘D.Lgs.’) 254/2016.

10 Some Member States provide a different defnition of ‘large undertaking’ or ‘public interest entities’; the States have differently regulated also the need for a verifcation of the reports by an independent assurance services provider, or the imposition of penalties to organisations which fail to report adequately. 11 The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. 12 The Companies Act 2006, Section 496 (Auditor’s report on strategic report and on directors’ report):‘ (1) In his report on the company’s annual accounts, the auditor must a) state whether, in his opinion, based on the work undertaken in the course of the audit:– the information given in the strategic report (if any) and the directors’ report for the fnancial year for which theaccounts are prepared is consistent with those accounts, and– any such strategic report and the directors’ report have been prepared in accordance with applicable legalrequirements, b) state whether, in the light of the knowledge and understanding of the company and its environment obtained inthe course of the audit, he has identifed material misstatements in the strategic report (if any) and the directors’report, and c) if applicable, give an indication of the nature of each of the misstatements referred to in paragraph (b)’.

The communication of non-fnancial information 225 Italy did not enlarge the scope of the undertakings mandatorily subject to the duty of disclosure on non-fnancial issues. However, the Italian law expressly provided the possibility for companies other than those obliged by the Directive to publish the non-fnancial statement on a voluntary basis; with the aim to spread such policy, the Decree granted some simplifcation in case of publication of a voluntary non-fnancial statement. Noteworthy is also the system of controls arranged by Italy on the non-fnancial statements. Indeed, the law provides three levels of control. The frst level of control is entrusted to corporate bodies: while the drafting of the statement is the task of the directors, the statutory auditing body is in charge with monitoring compliance with the provisions of the Decree and with reporting it to the Annual Report to the Shareholders’ Meeting. The second level of control consists of the judgement on the compliance of the non-fnancial statement with the legal provisions; such judgment is entrusted by the law to the person or entity in charge of the statutory audit. Finally, the third level of control is carried out by the Commissione Nazionale per le Società e la Borsa (National Commission for Societies and Stock Exchange: henceforth, ‘Consob’), both on mandatory and voluntary non-fnancial statements; more in particular, the Consob will have the power to request changes or additions to the declaration and may also exercise the right to request information and/or documents even through direct consultation with corporate bodies (or senior executives such as the general manager or executives responsible for the preparation of company documents) or to carry out inspections. The effectiveness of the system is then pursued also through the fnes established by the law. The failure of directors to comply with the obligations under the Decree is subject to fnancial penalties, for the case of a failure to publish the declaration or for the case of a declaration that does not comply with the provisions of the Decree or for the case of a declaration containing relevant material facts do not correspond to the actual or omit relevant material facts. The same penalties apply to members of the supervisory body who fail to report to the shareholders’ meeting that the non-fnancial statement is not prepared in accordance with the provisions of the Decree or that it omits relevant material facts or contains some that do not correspond to the truth. Pecuniary administrative sanctions are also provided for the person responsible for issuing the conformity assessment which fails to verify that the declaration has been prepared or omits to fle a declaration of non-compliance.

The impact of the Directive on the management of undertakings The impact of the Directive on corporate policies First of all, it should be pointed out that what the Directive expressly requires is to inform on what actions and policies have or have not been taken and the reasons for the lack of intervention on certain areas.

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This normative approach is known as ‘comply or explain’. Apparently, public interest entities are not required to carry out responsible actions or policies. However, while it is true that the ‘comply or explain’ approach leaves an area of entrepreneurial autonomy for those who are subject to the duty of disclosure, the law clearly indicates actions to be taken; with respect to this, public interest entities have the burden of justifying their choice not to comply with the legal requirement. Therefore, it seems that the effect of the law provision cannot be described as that of mere moral suasion, but it should still be framed in the category of the obligation and duty. It follows that public interest entities will have to adopt a sustainability policy unless they communicate and motivate the different choices made in this regard. Therefore, only apparently the obligation to adopt sustainable practices remains unchallenged or unsanctioned. Indeed, the interest in effectively communicating non-fnancial information is not only the sole managers’ care. These must prepare the report on non-fnancial aspects, but such a report is subject to verifcation and judgment by the auditors. If the report does not contain suffcient reasons to explain the choice of directors not to adopt a policy or not to adjust the corporate organisational model, the auditors will either indicate this in their report or deny the compliance judgment to the statement. In addition to such internal controls, some Member States have given independent authorities the power to request information, carry out inspections and impose sanctions. The deterrent effect of such controls can be better understood when one considers that the mandatory content of the declaration must concern circumstances and elements that proper management of the company must necessarily evaluate. The Directive asks companies to describe their impact by describing, inter alia, ‘the main risks generated or suffered by the above-mentioned issues [i.e. social and environmental issues related to personal, respect for human rights, the fght against active and passive corruption] and arising from business activities, products, services or business relations, including, where relevant, supply chains and subcontracting’. The Directive’s wording implies an enterprise that is fully involved in the socio-economic environment and which, in such a context, may cause risks or suffer risks caused by someone else (Bruno, 2018; Monciardini, Dumay and Biondi, 2017). These are business-related risks that arise from the production and marketing of products or services and relationships with customers and suppliers. Information on signifcant risks for reporting purposes, of course, requires (i) a prior identifcation by the administrative body of stakeholders of the business activity and the risks that they and the enterprise are subjected to each other by

The communication of non-fnancial information 227 this relationship, (ii) the consequent adoption of appropriate policies to eliminate and contain such risks. The adoption of sustainability policies, therefore, becomes an additional element on which to measure and evaluate the effectiveness of administrative action. The neutrality of administrative action in relation to sustainability policies will, therefore, be possible and justifable only if the business activity by its nature does not have signifcant impacts on the environment, community, corruption, respect for human rights It is therefore diffcult to imagine that a public interest body may actually choose not to launch any action on respect for human rights, gender equality and the fght against corruption.

The impact of the Directive on corporate governance The frst immediate impact of the Directive shall necessarily be on corporate governance. The need to identify and manage the risks caused or suffered by the company requires an appropriate organisation of the management; namely, identifying and managing risks is a task which cannot be implemented without having previously organised appropriate corporate governance. This is a principle highlighted also by the Commission Guidelines13 which state: Information can be made fairer and more accurate through, for example: •

• • •

appropriate corporate governance arrangements (for instance, certain independent board members or a board committee entrusted with responsibility for sustainability and/or transparency matters); robust and reliable evidence, internal control and reporting systems; effective stakeholder engagement; and independent external assurance. (Commission Guidelines, 2017: par. 3.2.)

From this perspective, consistently with the traditional defnition of the powers of company bodies,14 the directors should establish a continuous process of assessment of the adequacy of the organisational and administrative structure of

13 Communication from the Commission, n. 9. 14 In Italy, art. 2381 of the Italian Civil Code, third paragraph, provides that: ‘the board of directors fxes the content, the limits and the modalities, if any for the exercise of the delegated powers; it may always give directives to the delegated bodies and bring back to the board transactions falling within the delegation. On the basis of the information received, it evaluates the adequacy of the company: when drafted, it reviews the strategic, industrial and fnancial plans of the company; evaluates, on the basis of the report of the delegated bodies, the general trend of the management’ [our translation].

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the company and in particular its suitability to identify the risks indicated by the Directive. Depending on the breadth and complexity of such assessment, the Board of Directors could entrust it to a specifc committee or establish a manager responsible for the audit on non-fnancial issues. In some legal system the establishment of committees within the board of directors and managers specifcally in charge of the audit on determined risks is already provided by laws regulating specifc industries;15 moreover, such a solution is also a best practice recommended by the Corporate Governance Code of the Italian Listed Companies which states: In the companies belonging to the FTSE-Mib index, the board of directors assesses the opportunity to set up a special committee dedicated to the supervision of sustainability issues related to the company’s business and its interaction dynamics with all stakeholders; alternatively, the board evaluates to group or distribute these functions among the other committees [our translation]. (Comitato per la Corporate Governance, 2018: p. 22) Such committee and managers could be entrusted also with the identifcation of the risks on the issues highlighted by the Directive. This is the choice made by some big Italian companies, such as Iren S.p.A. and Enel S.p.A., which already charge the auditing committee with a) assessing, together with the function of the competent group and the legal auditor, the correct use of the standards adopted for the purpose of nonfnancial information, b) assessing the sustainability report, in order to verify its completeness and reliability [our translation]. (Assonime, 2017: p. 11). It is necessary to make some additional comments with regard to groups of companies in which the parent company is the entity obliged to publish a consolidated non-fnancial statement. Given the obligation to arrange a consolidated statement, it is important for the parent company to properly govern the fow of the information; the group organisational structure and governance will be therefore expected to take into account the need of the parent company to collect information. To such respect, it seems appropriate that the parent company reviews the group regulations in order to ensure that the information on subsidiaries fow into the consolidated report and the subsidiaries align themselves to the parent companies’ instructions and policies on non-fnancial issues (Assonime, 2017).

15 This is required for Italian listed companies by D.lgs. 58/1998.

The communication of non-fnancial information 229 Group regulations could provide the duty of the subsidiaries to give information to the parent company; a similar obligation is already provided, for example, by the Italian Code on Bank and Credit Matters16 which, at art. 61, states: The parent company, in the exercise of management and coordination powers, issues provisions to the members of the group for the execution of the instructions given by the Bank of Italy in the interest of the group’s stability. The directors of the companies of the group are required to provide all data and information required for the issuing of the provisions and the necessary collaboration for compliance with the rules on consolidated supervision. [our translation] Remarkable is also, to such respect, the rules set forth under article 151-ter of the Italian Code on Financial Matters:17 The control committee on management, or a specifcally delegated member of it, is entitled to proceed at any time to inspect and control and to exchange information with the corresponding bodies of the subsidiaries regarding the administration and control systems and the general trend of social activity. [our translation] An interesting rule on the fow of information is set by the Italian Corporate Governance Code of the Italian listed companies (Comitato per la Corporate Governance, 2018); indeed, in order to receive detailed information on matters on the agenda The chairman of the Board of Directors, also upon request of one or more directors, may request to the managing directors that certain executives of the issuer or the companies belonging to its group, in charge of the pertinent management areas related to the Board agenda, attend the meetings of the Board, in order to provide appropriate supplemental information on the items on the agenda. The Corporate Governance Report provides information on the effective attendance of the Board meetings. [our translation] (Comitato per la Corporate Governance, 2018: par. 1.C.6)

The impact of the Directive on corporate governance and stakeholder engagement Perhaps the most signifcant impact caused by the Directive on corporate governance concerns a greater development of stakeholder engagement policies.

16 D.lgs. 385/1993. 17 D.lgs. 58/1998.

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Indeed, the Commission Guidelines itself suggest the ‘involvement of stakeholders’ in communication and transparency policies. Similarly, the Global Reporting Initiative (GRI) standards ask to highlight the ways in which stakeholders are involved (Global Reporting Initiative, 2016a). Furthermore, the prediction of an impact of disclosure on stakeholders’ engagement fnds some grounds on the last development of corporate governance and narrative reporting in the UK. It should be noted that, at the same time as the consultations for the Directive, in the UK the debate on the discipline of corporate governance and, in particular, on the role of the stakeholders, on the weight of their interest in the decisionmaking process and in any case on their involvement in the administration of the company was also reignited. This is a debate that was grounded, over the last ten years, in section 172 of the Companies Act 2006, which states: (1) A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the beneft of its members as a whole [italics added], and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term; (b) the interests of the company’s employee; (c) the need to foster the company’s business relationship with suppliers, customers and others; (d) the impact of the company’s activities operations on the community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct; and (f) the need to act fairly as between members of the company. (Companies Act 2006, section 172). According to the leading opinion among scholars, section 172 does not provide a specifc obligation for directors but allows them to take into account – in the decision-making process and implementation – also interests other than the shareholders’ interest to proft (Al-Hawamdeh et al., 2013). More in particular, it is argued Although it is still correct to say that s. 172 does not impose a positive duty to act in stakeholders’ interests, the legislative enshrining of a requirement to give some consideration to them may arguably constitute a legal duty to ‘consider’. (ibid.: p. 430) Moreover, The consideration of the stakeholder issues in the process of executive decision making may be regarded either as going toward establishing ‘good

The communication of non-fnancial information 231 faith’, or as meeting an objective standard, if that may be going towards establishing ‘good faith’, or as meeting an objective standard, if that may be imposed. Further, the requirement to have regard to stakeholders’ interests may be adopted as the legal proxy for determining whether the quality of the executive decision ‘promotes the success of the company for the beneft of its members as a whole’. (ibid.: p. 431) As a consequence, The courts may scrutinize the corporation’s engagement with stakeholders’ interests as legal proxy for discharging the legal duty of promoting the company’s success. (ibid.) To such respect, the White Paper Company Law Reform specifed that: The statement of duties will be drafted in a way which refects modern business needs and wider expectations of responsible business behaviour. The [Company Law Review] proposed that the basic goal for directors should be the success of the company for the beneft of its members as a whole; but that, to reach this goal, directors would need to take a properly balanced view of the implications of decisions over time and foster effective relationships with employees, customers and suppliers and in the community more widely. The Government strongly agrees that this approach, the CLR called ‘enlightened shareholder value’, is most likely to drive long-term company performance and maximize overall competitiveness and wealth and welfare for all. (Department of Trade and Industry, 2005: pp. 20–21) However, this does not mean that such different interests do have the same level of importance as the shareholders’ interest. What section 172 recommends to directors is to consider the shareholders’ interest not as an independent goal but in the view of gaining in the best way the primary achievement of making the value for the shareholders increased on a long-term basis (Calandra Buonaura, 2011) or according to the pattern of the enlightened shareholder value (Al-Hawamdeh et al., 2013). As it has been correctly noted, the opening of the Company Act to interests other than shareholder value implies an enrichment of the elements that directors can (or must) consider; as a downside, this leads to an increase in the complexity of the decision-making process and a wider extent of the discretion (and substantial unquestionability) of the decisions (Calandra Buonaura, 2011). However, the debate on the most appropriate role of the stakeholders on corporate governance never stopped and was restarted also by the need to implement the Directive. In autumn 2016, the British government launched a public consultation on a possible reform of corporate governance (Department for Business, Energy and

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Industrial Strategy, 2016, 2017); also, the possibility of strengthening the weight of the stakeholders in corporate governance was one of the topics of the consultation. In this regard, the Green Paper asked participants to indicate their choice among one or more of the following alternative means of stakeholder engagement: (a) the participation of the stakeholders to advisory panels, (b) entrusting non-executive directors with the task to give voice to some groups of stakeholders (for example, workers) in the Board of Directors, (c) giving categories of stakeholders the right to appoint one or more directors, (d) strengthening the reporting obligations of the directors on how to involve stakeholders (Department for Business, Energy and Industrial Strategy, 2016). At the end of the consultations, the Government stated that they wished to regulate, at the secondary regulatory level, the obligation of the directors to report on how they took into account the interests of workers and the development of relations with suppliers, clients and other stakeholders (Department for Business, Energy and Industrial Strategy, 2017). The debate on new corporate governance has therefore crossed the task of the Financial Reporting Council (‘FRC’) concerning the drafting the new guidelines for the strategic report following the implementation of the Directive. In the FRC Guidance published in 2014, it was clarifed that the main goal of the strategic report was to: Provide shareholders with relevant information that is useful for making resource allocation decisions and assessing the directors’ stewardship. (Financial Reporting Council, 2014: p. 10) Of course, it was admitted that: Other stakeholders such as customers employees and members of society more widely may also wish to use information contained within it. (ibid.: p. 8) However, the main recipients of the disclosure remained shareholders, namely those who made equity investments. The new Guidance published in July 2018 (Financial Reporting Council, 2018a) seems to strengthen the position of stakeholders (including entities external to the company, such as clients or supplier). Indeed, the Guidance expressly acknowledges the importance of the stakeholders for the success of the company in the long term. To such respect, it remarkably provides that: •

•

‘the success of a company is dependent on its ability to generate and preserve value over the longer term. Companies do not exist in isolation; they need to build and maintain relationships with a range of stakeholders in order to generate and preserve value’ (ibid.: p. 16); ‘The purpose of the strategic report is to provide information for shareholders and help them to assess how the directors have performed their duty, under

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•

section 172, to promote the success of the company […]. This includes considering the interests of other stakeholders which will have an impact on the long-term success of the entity’ (ibid.: p. 4); ‘In meeting the needs of shareholders, the information in the annual report may also be of interest to other investors (such as debt investors and potential investors) and creditors. Other stakeholders such as customers, employees and members of society more widely may also wish to use information contained within it’ (ibid: p. 10).

Finally, the FRC Guidance recaps: The purpose of the strategic report is to inform members of the company and help them to assess how the directors have performed their duty under section 172 of the Act. (ibid.: p. 17) To such respect, it is remarkable that the new FRC Guidance on strategic report contains an entire section dedicated to the description of the ways directors implement their duty to promote the success of the company according to section 172 of the Company Act 2006; one of the main content of this section shall concern the relationships among companies and stakeholders and the engagement means implemented by directors. The reading of the new FRC Guidance shows, therefore, a strengthened legitimacy of stakeholders as both subjects affected by the company’s activity and, as much as shareholders, recipients of the information provided by the strategic report; the acknowledgement of the stakeholders’ legitimacy is, of course, the frst step of their engagement. Furthermore, the debate developed in the UK around section 172 of the Companies Act 2006 demonstrates the existence of mutual infuence between reporting and transparency, on one hand, and stakeholders’ engagement, on the other hand. This is confrmed not only by the emphasis put by the new FRC Guidance on the possible interest of the strategic report also for subjects other than shareholders but by the provisions of the new UK Corporate Governance Code on the role and the task of the board of directors (Financial Reporting Council, 2018b). The new Corporate Governance Code expressly suggests taking measures for stakeholder engagement such as: For engagement with the workforce, one or a combination of the following methods should be used: • • •

a director appointed from the workforce; a formal workforce advisory panel; a designated non-executive director. (Financial Reporting Council, 2018b: p. 5)

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The pressure for actual stakeholder’s engagement is so strong that in case the Board does not implement any of the above measures, it is compelled ‘explain what alternative arrangements are in place and why it’ (ibid.). Coming back to the main topic of this chapter – that is, the effects of the new duty of disclosure on integrity and CSR policy – it is possible to draw the conclusion that the UK is on the same page of the Directive and, at the same time, a step forward. Indeed, the new disclosure duties under section 172 and related policies is, similarly to the disclosure of non-fnancial information imposed by the Directive, a tool for the development of CSR actions by enterprises; on the other hand, the scope of the disclosure is considerably greater than that of the Directive since it concerns the duty to promote the success accordingly to section 172 and goes, therefore, beyond the determined issues indicated by the Directive. As it was argued with reference to the business review (Lowry, 2009), the strategic report (and, generally any narrative reporting) summarises the essence of CSR.

The liability of directors With regard to the possible liability of directors for not having implemented CSR policies, the starting point of any research remains that the judgement could never concern the opportunity of management choices but only the accuracy on forestalling and appreciating possible risks. Therefore, directors should be deemed liable just in case they have not adopted any precautionary measure or asked information to the extent normally required for decisions such as those under judgement. Substantially, the possible judgement shall draw attention to the respect of good business practice in the decision-making process. Such criteria will govern the query on the behaviours of the directors also with regard to the disclosure of non-fnancial information; indeed, this area is intrinsically characterised by a principle of materiality and this widens the scope of discretion of the administrative body. We have highlighted above the role of auditors (and, when established by national law, of the independent authority) in the control of the accuracy of the non-fnancial statement. As to the response to the negligence or wilful misconduct by directors in drafting the non-fnancial statement, the frst remedy to be mentioned is the legal action of the company against the directors. Indeed, providing false information or omitting information is, certainly, a breach of the duty of the directors towards the company. Furthermore, negligence (or wilful misconduct) on disclosure jeopardises the trust of shareholders on the directors; therefore, such misconduct could justify not only the fling of a claim for indemnifcation but also, according to the national legal system, the revocation of the directors from their offce.

The communication of non-fnancial information 235 The claim could be triggered either by the company itself (after a shareholders’ resolution) or by a qualifed minority of shareholders as generally granted in both civil and common law systems (Moore, 2013; Bruno, 2018). Of course, triggering these legal actions shall suffer various formal and practical impediments, such as the close connection among directors and the majority of shareholders or, within the context of the public companies, the diffculty to establish an actual shareholders’ engagement and commitment to the corporate life, or, under the English law, the evidence that the misconduct ‘was suffciently serious in substance to constitute “fraud on the minority”’ (Lowry, 2009).18 Nevertheless, the liability of the directors toward the company fnds a possible path in the remedies already granted by legal systems across Europe. What seems to be lacking within the system drafted by the Directive is the empowerment of the stakeholders to react against either the failure to adopt CSR policies or a negligent disclosure. However, from this perspective, at least under civil law systems, it is possible to identify some remedies to the beneft of the stakeholders. This is the case of the right to compensation granted by Italian law (art. 2395 of the Italian civil code) to the single member or third party who have been directly damaged by culpable or malicious acts of the directors. The action can be triggered by the third party (or the member) who suffered direct damage to their assets as a result of an act committed, with negligence or wilful misconduct, by the directors. The typical example of such claims is the case in which the directors induce, through false fnancial statements or other false statements, a third party to grant a loan or to subscribe shares in the company. Therefore, if the directors of the company prepare a non-fnancial declaration containing false material facts, they may be responsible to the stakeholders. However, they must have suffered direct damage to their assets, consequential to the falsity of the non-fnancial statement. Precisely the necessity of damage as a fundamental requirement of the responsibility of the directors narrows the scope of the art. 2395 of the Italian civil code to the case of a false fnancial statement. However, at least in theory, the remedy could be triggered also in case of charitable contributions made by third parties or subsidised loans granted to the company based on the responsible policies and actions described in the nonfnancial statement. In this hypothesis, the damage to the third party could be identifed in the missing (or lower) remuneration of the sums granted; the directors could be deemed liable, jointly with the company, for such loss of proft.

18 This requirement, consisting of negligence committed by way of dishonest appropriation of assets or opportunities or directors’ self-beneftting deeds, precludes that the mere wrong drafting of the non-fnancial statement is actionable by minority shareholders.

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In the end, if it is true that the action envisaged by art. 2395 of the Italian civil code grants to stakeholders the instruments of protection of their own interests, it must be pointed out that the assumption remains, however, the erroneousness or the falsity of the non-fnancial statement. This confrms that no protection is granted to stakeholders for the mere missing or failure on the adoption or implementation of CSR policies.

The duty of disclosure of non-fnancial and possible interferences with and criminal law In the previous paragraphs, by describing the implementation of the Directive in Europe, it has been pointed out that some Member States established sanctions for directors and auditors who fail to comply with their respective duties about the disclosure of non-fnancial information. For example, Italy established, according to D.Lgs. 254/2016: • •

• •

a fne from € 20,000.00 to € 100,000.00 for directors who do not publish the statement within the terms required by the law; a fne from € 20,000.00 to € 100,000.00 for directors who publish a statement not compliant with the criteria set forth by the law. The same fne is applied to statutory auditors who, in breach of their reporting duties, omit to report to shareholders meeting as to the non-conformity of the statement to the law; a fne from € 50,000.00 to € 150,000.00 for directors and statutory auditors, in case the statement on non-fnancial contains false material information or omits material information to be disclosed pursuant to the law; a fne from € 20,000.00 to € 100,000.00 for those in charge of the check on the completion of the publishing and drafting of the statement and who omits to perform such check and control. The same fne is applied to those who fail to certify the conformity of the statement to the law.

According to D.lgs. 254/2016, the above fnes concern administrative offences which do not preclude the application of worse sanction provided by the law in case of crimes. Consequently, one might argue that, for example, a statement containing false material information or omitting material information constitutes should be deemed as a case of ‘false corporate communication’ regarded by the Italian law as a crime. Italian scholars and practitioners have unanimously confuted such idea. Indeed, according to Italian law, the crime of ‘false company communication’ punishes the publication of a statement containing false material information or omitting material information. From this perspective, the behaviour falling within the scope of the crime of false corporate communication is similar to the one regarded by the D.lgs. 254/2016 with respect to the disclosure of non-fnancial information.

The communication of non-fnancial information 237 However, whereas the administrative offences provided by D.lgs 254/2016 concern ‘non-fnancial information’ or fgures, the crime of false corporate communication aims at punishing false or omitted information on the patrimonial, fnancial and economic situation of the company. This difference leads to excluding the non-fnancial information from the scope of the false corporate communication. (Jannone, 2017; Assonime, 2017). Nevertheless, some authors wonder also whether a false or omitted non-fnancial information could realise other crimes and, namely, the crime of ‘hindered control’ provided by art. 2625 of the Italian Civil Code19 or the crimes on market abuse (such as abuse of privileged information and market manipulation pursuant to art. 184 and 18520 D.lgs. 158/1998) (Jannone, 2017).

Conclusions As it has been highlighted in the previous paragraphs, the Directive obliges the biggest companies to report on non-fnancial information concerning ESG issues; in theory, no obligation is placed on companies about the completion of positive actions on such themes beyond what is already required by mandatory national law provisions. However, it has also been demonstrated that, indirectly, the duty to report pushes enterprises to include CSR and ESG issues in their strategic plans and agenda. Therefore, it might be argued that the Directive represents an effective tool for the development of corporate integrity across Europe. Such conclusions seem well-founded when we consider some of the topics the disclosure of which is required by the Directive. Indeed, the Directive requires disclosure, inter alia, on matters related to the respect for human rights and anti-corruption and bribery, requiring to report ‘a description of the policies pursued by the undertaking in relation to those matters, including due diligence processes implemented’ and ‘the outcome of those policies’.

19 Art. 2625 (Hindered control). ‘The administrators who, concealing documents or other suitable devices, prevent or in any case hinder the carrying out of the control activities legally attributed to the shareholders or to other corporate bodies, are punished with a pecuniary administrative sanction of up to Euros 10,329. If the conduct has caused damage to shareholders, the offenders are punished with imprisonment for up to one year and criminal proceedings are initiated only upon request of the victim. The penalty is doubled in the case of companies with securities listed on regulated markets in Italy or in other EU Member States or widely distributed among the public pursuant to Article 116 of the Consolidated Law referred to in the Legislative Decree of 24 February 1998, n. 58’ [our translation]. 20 This provision punishes ‘anyone who disseminates false information or engages in simulated transactions or other artifces concretely capable of causing a signifcant alteration in the price of fnancial instruments’.

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The need to provide the public with this information will probably encourage effective implementation of the organisational models aimed at fghting against corruption and bribery (Jannone, 2017). Indeed, from this perspective, it is noteworthy to point out that the GRI standards – which is amongst the international standards recommended by the Commission Guideline – expressly require to provide information on (i) the percentage and number of the departments supervised for risks related to corruption, (ii) the percentage of employees who have been trained on anti-corruption policies and procedures, (iii) the actions taken to respond and react against cases of corruptions and bribery (Global Reporting Initiative, 2016b). Transparency on such information (and, more in particular, on cases of bribery) would be dangerous for the reputation of the enterprise, unless the commitment of the company to anti-bribery policies and procedures is effectively implemented within the organisation and the relevant tools made known to the public by way of the non-fnancial statement (Jannone, 2017). The contribution of the Directive to the spread of corporate integrity in Europe will be likely to operate also on a more general perspective. Indeed, the inclusion of ESG issues in the strategic plan of the enterprise builds, on a long-term basis, corporate culture and identity on topics such as gender diversity, anti-corruption, protection of the environment; this will foster the commitment of the employees at whatever level to the adoption of the responsible behaviours and would be able also to mitigate the lack of law remedies directed to the effective enforcement of CSR policies and actions. Nevertheless, the process which leads to the building of corporate culture is a long one and requires a persisting consistency of the corporate policies on these sensitive issues. Therefore, it might be argued that it is necessary that the European Union and the Member States fll, as soon as possible, the current lack of law remedies for the failure on CSR policies by the enterprises and, for example, make it the regime of liability of the directors stricter or enlarge the scope of the subjects entitled to bring derivative claims by including also some strategical stakeholders such as employees, trade unions or public authorities. This is, of course, an appealing idea. However, the strengthening of law enforcement remedies seems to be in contrast with the essence of the CSR which remains a voluntary commitment of companies and entrepreneurs on responsible behaviours. Thus, the political choice to promote CSR policies by providing new business reporting duties seems appropriate to balance the stakeholders’ demand for responsible behaviours with the innate freedom of enterprises on such topics.

References Al-Hawamdeh, A., Chiu, I.H-Y, Goergern, M., Mallin, C. & Mitleton E. (2013). The interpretation of the director's duty under section 172 Companies Act 2006, insights from complexity theory. Journal of Business Law, 4, pp. 417–433.

The communication of non-fnancial information 239 Andriola, L., Jorizzo, M. & Sabelli, P. (2016). Sustainable Investor Relation: comunicare agli investitori, tramite le strategie di sostenibilità ambientale. Ambiente and Sviluppo, 11, pp. 743–747. Assonime. (2017). Gli obblighi di comunicazione delle informazioni non fnanziarie. [Online] Available from: http://www.assonime.it/attivita-editoriale/circolari/Pa gine/Circolare-13-2017.aspx [Accessed 24th November 2018]. Aureli, S., Magnaghi, E. & Salvatori, F. (2018). The transportation of the nonfnancial reporting Directive in the UK, France and Italy. Symphonia, Emerging Issues in Management, 1, pp. 48–67. Bellisario, E. (2017). Rischi di sostenibilità e obblighi di disclosure: il D.lgs. 254/16 di attuazione della Dir. 2014/95/UE. Nuove Leggi Civili e Commentate, 1, pp. 19–46. Bruno, S. (2018). Dichiarazione ‘non fnanziaria’ e obblighi degli amministratori. Rivista delle società, 4, pp. 974–1020. Calandra Buonaura, V. (2011). Responsabilità sociale dell'impresa e doveri degli amministratori. Giurisprudenza Commerciale, I, pp. 526–548. Comitato per la Corporate Governance. (2018). Corporate Governance Code. Available from: https://www.borsaitaliana.it/comitato-corporate-governance/c odice/codiceeng2018rev.en.pdf [Accessed 24th November 2018]. Consob. (2017). Disposizioni attuative del Decreto Legislativo 30 dicembre 2016, n. 254 relativo alla comunicazione di informazioni di carattere non fnanziario. Available from: http://www.consob.it/web/area-pubblica/consultazioni?viewId=consu ltazioni_concluse [Accessed 1st August 2018]. CSR Europe & GRI. (2017). Member State Implementation of Directive 2014/95/ EU. Available from: https://www.csreurope.org/new-csr-europe-and-gri-public ation-implementation-eu-directive-non-fnancial-information#.W_kkXehKg2w [Accessed 1st October 2018]. Department for Business, Energy and Industrial Strategy. (2016). Corporate governance reform. Green Paper. Available from: https://www.gov.uk/govern ment/consultations/corporate-governance-reform [Accessed 24th November 2018]. Department for Business, Energy and Industrial Strategy. (2017). Corporate Governance Reform: Government Response. Available from: https://www.gov .uk/government/consultations/corporate-governance-reform [Accessed 24th November 2018]. Department of Trade and Industry. (2005). Company Law Reform. Available from: https://webarchive.nationalarchives.gov.uk/+/http:/www.dti.gov.uk/cld/ WhitePaper.pdf [Accessed 24th November 2018]. European Commission. (2011). Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. A renewed strategy 2011-14 for Corporate Social Responsibility. Available from: https://eur-lex.europa.eu/legal-content/EN/TX T/?uri=CELEX%3A52011DC0681 [Accessed 18th November 2018]. Financial Reporting Council. (2014). Guidance on the Strategic Report. Available from: https://www.frc.org.uk/accountants/accounting-and-reporting-polic y/clear-and-concise-and-wider-corporate-reporting/narrative-reporting/guida nce-on-the-strategic-report [Accessed 24th November 2018]. Financial Reporting Council. (2018a). Guidance on the Strategic Report. Available from: https://www.frc.org.uk/accountants/accounting-and-reporting-polic

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y/clear-and-concise-and-wider-corporate-reporting/narrative-reporting/guida nce-on-the-strategic-report [Accessed 24th November 2018]. Financial Reporting Council. (2018b). The UK Corporate Governance Code. Available from: https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4 f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF [Accessed 24th November 2018]. Gaztea, J. & Fernandez, A. (2017). ‘Comply or explain’ in the EU or the new human rights reporting obligation: an analysis of Directive 2014/95/EU. Cuadernos de Derecho Transnacional, 9(1), pp. 285–299. Global Reporting Initiative. (2016a). GRI 102: General Disclosures. Available from: https://www.globalreporting.org/standards/gri-standards-download-cente r/?g=10f8afb5-581b-4d1d-a3ad-4c81f85e6f17 [Accessed 24th November 2018]. Global Reporting Initiative. (2016b). GRI 205: Anti-corruption. Available from: https://www.globalreporting.org/standards/gri-standards-download-center/ [Accessed 24th November 2018]. Jannone, A. (2017). D.lgs. 254/2016 No fnancial reporting: rifessi sul modello organizzativo. La responsabilità amministrativa e degli enti, 4, pp. 265–277. Lowry, J. (2009). The duty of loyalty of company directors: bridging the accountability gap through effcient disclosure. Cambridge Law Journal, 63(3), pp. 607–622. Monciardini, D., Dumay, J. & Biondi, L. (2017). Integrated reporting and EU law: competing, converging or complementary regulatory framework. University of Oslo Faculty of Legal Studies. Research Paper Series, 23, pp. 1–19. Moore, M. (2013). The scope and dynamics of corporate governance regulation. In: A. Flecker & K. Hopt, eds., Comparative Corporate Governance. Cambridge: Cambridge University Press, pp. 913–955.

Part VI

Beyond ethical codes: reshaping culture and values

14 The fght against and prevention of corruption The case of Switzerland and implications for Swiss frms with business activities abroad Giang Ly Isenring Context Corruption is nothing new and has become a commonplace theme of discussions over the last decade. Many legislative changes have been implemented in most Western, third world and Eastern European countries with the intent to curb corruption. Multinational organisations have put tremendous efforts in preventing corruption, most notably the initiative of the Organization for Economic Co-operation and Development (OECD) to criminalise foreign bribery (Convention on Combating Bribery of Foreign Public Offcials in International Business Transactions). The OECD Anti-Bribery Convention was signed in December 1997 and has been ratifed by 44 countries (including the United States). Another international initiative was the UN Convention against Corruption (UNCAC) ratifed by 186 countries and includes requirements for member states covering both preventive measures and the criminalisation of a wide range of corrupt acts, including the bribery of foreign offcials. The Council of Europe’s Criminal Law Convention on Corruption is also of particular importance to multinational businesses. Two other important regulatory acts against overseas bribery and corruption in the international landscape are the US Foreign Corrupt Practices Act 1977 (US FCPA) and the UK Bribery Act 2010. The US FCPA was enacted in 1977, amended in 1988 and in 1998 and has extraterritorial reach. Switzerland has one of the most export-oriented economies. In Switzerland, 29.5% of the GDP is produced by exportations to other countries. The three main economic sectors for exportations are chemical and pharmaceutical industry, jewellery and clocks, machineries, technical tools and electronic systems. Switzerland, operating in these economic sectors and with different foreign countries as export partners, is likely to be exposed to corrupt practices within these countries. Across the European Union, Germany and Italy are the main partners of Switzerland for exportation. As far as it is known, Italy ranks quite high in the TI Briber Payers Index (Transparency International, 2011). Outside the EU, the major export partners are the US, China, Hong Kong, Japan, Singapore, Russia and India. Russia and India are among the countries showing the higher levels of

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‘bribery paid abroad’ (Transparency International, 2013). Therefore, Switzerland has always played an active part in all the international developments concerning the fght against corruption and has always supported the international efforts and collaborates actively in these developments.

The state of research on corruption and anti-corruption programs Studies on corruption have largely discussed the defnition of all forms of corruption and corrupt practices. Even though numerous, literature on corruption has remained an overview and compilation of legal approaches, leaving policymakers without insights into the effciency of anti-corruption interventions. When it comes to evaluating the effectiveness of anti-corruption interventions in different regions of the World, only a small body of evidence assessing their outcomes quantitatively is available. The majority of anti-corruption interventions have been developed in the public sector at the legislative and administrative level (World Bank, 1997; USAID, 2009). Indeed, during the last decades, important anti-corruption legislative reforms have been ratifed (e.g. the OECD Anti-Bribery Convention 1997, the UN Convention against Corruption 2003, etc.). As a consequence, a lot on anticorruption deterrence programs has been written. Among these programs, the sanctions regime has been developed by the World Bank and played a signifcant role within the national sanctioning systems. However, it is found that the sanctions regime has limited effect in reducing corruption risks as sanctions target private suppliers while governments are not held responsible for corruption (Søreide et al., 2016). Alt and Lassen (2010) examined public corruption and enforcement among US prosecutors and also found limited evidence for the deterrent effect of increased prosecutions. Another extensive scholarly work on corruption has focused on other types of intervention than deterrence ones. The study of Cuervo-Cazurra (2004) focused on 36 countries where the OECD Convention was implemented and analysed its effectiveness against bribery abroad. The fndings showed that the Convention established in countries with good institutions can help to reduce the supply of bribes. Another study prepared by the Independent Evaluation Group of the World Bank described the challenges, effects and limits of the World Bank Support program in promoting anti-corruption initiatives, drawing on the results of 19 country case studies covering developing and transitional countries (Fjeldstad and Isaksen, 2008). The work of Johnson et al. (2012) showed that public fnancial management reforms could be effective in reducing corruption in public administration. Some more studies cover a broad set of reforms related to budget planning and management. For instance, the computerized integrated fnancial management systems suggested to donors have contributed to preventing fraud and increasing transparency in developing countries (NORAD, 2011). There have also been some systematic reviews of studies on corruption and anti-corruption measures. The systematic review of anti-corruption approaches of

The fght against corruption in Swiss frms 245 Disch et al. (2009) included about 150 studies to highlight new dimensions that can enrich the foundations for future evaluations regarding ‘what works and what doesn’t’. According to Disch et al. (2009), most of the anti-corruption interventions address two issues: support to the introduction of key laws such as anticorruption legislation, and programs and projects strengthening the basic state of the institutions of enforcement such as the police, the courts, the prosecutorial organs, and special anti-corruption entities. Another systematic review of Hanna et al. (2011) on ‘The effectiveness of anti-corruption policy’ has demonstrated that existing studies on the effectiveness of anti-corruption measures present two major shortcomings. They are mainly focused on the incentives and advantages of not engaging in corrupt practices, but there remains a dearth of knowledge in relation to the assessment of administrative reforms adopted to reduce the ‘need’ (or the ‘market’) for corrupt behaviour. Secondly, they use a very broad defnition of corruption, which sometimes even includes theft and fraud. Banerjee et al. (2007) also suggested that a structural change in the organisation and rules of specifc services could reduce the ‘market’ and the ‘need’ for corruption. Case studies at the country-level are also often used to evaluate anticorruption interventions. For instance, Gong and Wu (2012) studied the case of China and found that corruption increased sharply between 1999 and 2008 despite salary increases. The study of Yongqiang (2011) includes interviews of 600 business graduates (EMBA and MBA), working in different Chinese companies, in order to understand if there is any relationship between government intervention (in the forms of licenses, quotas, permits, approvals, authorisations, franchise assignments, etc.) and bribery/corruption, and if this relationship was somehow mediated by the frm’s perceived beneft it can get from the corrupt practice. The results show that government intervention causes bribery/corruption indeed, but a frm’s perceived beneft fully mediates this relationship. Another study examining the effect of police reform on corruption in Georgia (Light, 2013) highlighted that a signifcant reduction of corruption in the police force was possible as a result of the need for the country to free itself from the Soviet regime. Another example of practical intervention is the case of Italy. In November 2012, the new anti-corruption law was ratifed in Italy and was specifcally addressed to the reduction of administrative corruption through the increase of transparency and dissemination of information by public administration. Within the three-year national anti-corruption and integrity action plan addressed to all administration bodies, some practical interventions have been developed such as reducing the likelihood of corruption through a public e-procurement system to manage public bid processes online and increase transparency together with regular shifts of management staff, increasing the detection of corruption cases by reinforcing whistle-blowers’ protection through the development of informatics systems within public administration to reporting any suspected operation online or creating a corruption-proofed environment through the development of code of ethics for the public administration (European Commission, 2014).

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More recently, the evidence paper of the UK Department for International Development (UK DFID, 2015) as a literature review on corruption, assessed, among other research questions, what anti-corruption interventions are likely to be effective and under what conditions. In the case of Switzerland, there is a small body of quantitative research on corruption. The project of Quéloz et al. (2000) contained an analysis of statistical data and the contents of criminal and disciplinary fles relating to events of corruption; interviews with informers (judges, politicians, policemen, businessmen); a study of procurement contracts in the construction sectors and case studies on the ‘grey areas’ of corruption processes such as trading in infuence. Another study is Becker et al. (2012), which used the data collected from a survey of 510 Swiss frms doing business abroad and looked into the following issues: how often these frms have to deal with corruption, which measures are already implemented and how effcient they are.

The present study: research questions, methodology and characteristics of the responding frms Switzerland with its highly intertwined economy offers an interesting starting point to study the outcomes of anti-corruption interventions. Indeed, many Swiss frms have been and still are doing business in countries that rank high on corruption according to all indicators. It can, therefore, be presumed that Swiss export frms that are present on such markets have developed strategies to deal with the contradiction between strict anti-corruption statutes in Switzerland, and widespread corruption in many of these countries. In 2014, the Swiss International Corruption Survey (SICS) was conducted and completed in 2016. The survey collected data on bribery incidents experienced by Swiss frms from 2010 to 2013. The Swiss survey covered a total of 3,359 Swiss actives companies of all sectors, with at least one subsidiary abroad, randomly selected from the ORBOS Bureau van Dijk (BvD), a comprehensive database of 14 million companies across Europe and more than 500,000 across Switzerland. Data collection was performed through three main methodologies: (1) web-based questionnaire compiled by owners of the companies, Heads of Compliance, Security Managers, Chief Executive Offcers (CEO), Heads of Legal, covering all sampled companies; (2) postal survey, as frst reminder, covering part of the companies which did not answer the frst round of the survey; (3) face-to-face interviews, addressing key Swiss companies to gain more insights on their issues with corruption abroad. The SICS questionnaire was designed to investigate the anti-corruption programs implemented in the company from 2010 to 2013, as well as its effciency and costs. Perception of obstacles while doing business abroad over some specifc corrupt behaviours were also explored. The SICS particularly focused on the experiences of corruptions of Swiss frms with public authorities abroad. Questions from the survey were developed to understand whether or not contacts with public offcials might have occasioned bribe requests and if yes, to which extent, Swiss frms have accepted to pay bribes. Furthermore, the SICS

The fght against corruption in Swiss frms 247 examined in depth the most serious incident of bribe request happened while doing business in a foreign country. Among 530 respondent frms, 26% belong to the manufacturing sector, following by the wholesale trade and retail trade (13%), fnancial and insurance activities (6%). Big companies with more than 250 employees were more than 21% to have participated in the survey as well as those with an annual turnover of more than 50 million Swiss Francs (26%). More than one-third have between two and fve subsidiaries abroad. Swiss companies were 34% to engage in local sale of imported products, 23% in providing services to locals and foreigners, 18% in local manufacturing, 16% in selling products locally manufactured to other countries, 15% in local sale of local manufactured products, 7% in capital investments in local companies and 5% in construction. One-third of the Swiss companies have invested from 10 to 25% of their annual revenues in the country where they have the most frequent and regular business activity. By evaluating the diffculties or obstacles confronted by the law-abiding Swiss companies, the survey aims at answering some of the following research questions: what are the choices for the Swiss frms facing corruption issues? How often do they lose business opportunities if they comply with Swiss standards? How often do they react by bribing public offcials or private third parties, either directly or indirectly? Do they ever report experiences of corruption to the police or any other agencies? What suggestions are being made by the companies on how to improve the situation? Mainly the study seeks to offer practical solutions preventing bribe requests in international business activities. On the basis of the data collected with respect to more than 500 Swiss businesses, this chapter portrays the areas of vulnerability to corruption for Swiss frms in the international business activities through the results of the Swiss study. Furthermore, the chapter offers insights on how Swiss frms perceive the problem on the foreign markets when doing business in countries with a high prevalence of corruption. First, the chapter presents some general fndings on the level of corruption experienced by Swiss frms in business transactions abroad. Then, it will analyse the risk of corruption for different types of frms, the perception of corruption experienced by the frms, the anti-corruption programs implemented and their effciency.

General fndings on the level of corruption experienced by Swiss frms while doing business abroad Three different bribery counts are essential to understand bribery levels and patterns: •

Prevalence of bribery refers to the proportion of people (or targets, e.g. households, businesses, properties or cars), in a specifc area, who are victimised at least once during a given period of time. Prevalence rate = number of victims divided by the number of potential targets.

248 • •

Giang Ly Isenring Concentration of bribery refers to the number of incidents per victim. Concentration = number of crimes incidents divided by the number of victims. Incidence of bribery is the product of crime prevalence and crime concentration. It refers to the number of bribe incidents that have occurred in a given area. Incidence is usually expressed as a rate per population (or per business).

Among Swiss responding frms, 45% had at least one contact with a public offcial abroad between 2010 and 2013. Among those that had contacts with a public offcial, 69% were requested to pay a bribe. Among those that were requested, 34% provided the requested bribe, 48% did not and 18% did not wish to answer this question of the survey. As shown in Figure 14.2, among frms having contacts with public offcials, 51% have been asked to pay a bribe during some random controls of authorities, or during a tax inspection (36%). The types of operations during which bribe requests are the most common are while the frms try to obtain some utility connections (45%), a building permit (37%), or an authorisation from a public institution (32%), to clear goods through customs (36%), during a bidding process (30%), a health/environmental inspection (29%). For the most serious incidents, requests from public offcial are most likely to speed up a procedure (31%), to fnalise a deal (31%), or to gain advantages on competitors (12%). This fnding corroborates the study of Svensson (2003) according to which frms typically

Figure 14.1 Contacts with public offcials (% on the total number of respondents); bribe requests by public offcials (% of the total number of companies who had a contact with a public offcial) and companies who provided the requested bribe (% on the total number of companies requested a bribe). Years 2013–2015

The fght against corruption in Swiss frms 249

Figure 14.2 Contacts with public offcials (% of the total number of respondents) and bribe requests (% on the total number of companies who had a contact with a public offcial) by type of business procedure. Years 2013–2015

have to pay bribes when dealing with public offcials whose actions directly affect the frms’ business operations. Such dealings cannot be easily avoided when, for instance, exporting, importing or requiring public infrastructure services as frms would have to bear consequences of non-payments of bribes. Transparency International (2011) emphasises that frms are more vulnerable to bribery when they are involved in public works contracts and construction projects. In the SICS, the most reported consequence is to lose a business contract (in 30% of the cases), following by the likelihood of longer process in obtaining a deal or contract (26% of the cases). Companies also report that 26% of the bribe requests were from custom offcers, following by municipal or provincial offcers (22%), tax offcers (13%), inspection offcials (10%), police offcers (6%). Although only 19% of the Swiss frms have regular business operations in Europe, 82% of bribe requests emanate from Europe. This fnding is not surprising if one refers to the Corruption Perception Index (CPI) of the Transparency International (2011), some European countries are by far not spared from corruption. Italy and Greece both score low on integrity. Frequent media reports featuring the disappearance of EU funds in Bulgaria or Romania or bribes extorted by Czech traffc police, or political corruption in Poland or Hungary (Batory, 2012). The study also indicates that frms doing business with Africa and Asia were respectively 32% and 44% to have experienced bribe requests in these regions.

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This higher percentage found aligns with the emphasis that networking and under-the-table corruption transaction have been considered to be one of the most effcient ways to do business in Asia (Peng and Zhou, 2005; Lee and Oh, 2007). With respect to the incidence of bribe, 35% of the Swiss frms in contact with public offcials have been requested to pay a bribe more than once between 2010 and 2013. Repetitions of bribe requests are more likely to happen and multivictimisation is frequent. Firms once being victims of bribe requests are more likely to become repetitive targets.

Predictors of bribe request for Swiss frms The following section is focused on the identifcation of the main predictors of corruption and bribe requests among Swiss companies with business activities abroad. Sutherland (1947) had already put forward that one of the explicative risk factors of the economic crime was the size of the business. The analyses show the association between the victimisation rate of bribe request and the size of the frm, as mentioned in several previous studies (Clinard and Yeager, 1980; Dalton and Kesner, 1988; Isenring and Mugellini, 2013). Indeed, 63.3% of the Swiss companies with more than 250 employees are more likely to have experienced bribe requests as compared to smaller frms. When focusing the analysis on microbusinesses, it emerges that smaller frms with less than ten employees are twice less likely to be exposed to bribes than larger frms (44.7% vs. 63.3%). In addition, larger frms with up to ten subsidiaries abroad are also more likely exposed to bribe requests by public offcials (94.1%). As indicated by Gill (1998), smaller businesses are less likely to have experienced crimes than larger counterparts and business size accounts for the victimisation rate. Furthermore, as known, largesized businesses are also those yielding higher turnover and revenues. However, in this sense, the fndings in the study do not point out the high annual turnover of the frm as a risk factor of corruption, neither the annual revenue abroad generated by the frm. Nevertheless, the presence of capital investments abroad is an indicator of risk of bribe requests, all frms with capital investments abroad are exposed to bribe requests. It is generally recognised that the pattern of crime victimisation experienced by frms depends on their sector of business activity (Isenring and Mugellini, 2013). The fndings of this study show that the distribution of bribe requests is higher for frms operating in areas of electricity, water and transportation supply (75%), even if the association is not signifcant statistically. Moreover, the frequency of bribe request is more important for some specifc activities such as capital investment, sale of imported products abroad, local manufacturing). This could be explained that corruption and bribe requests are nowadays widespread practices and no particular sector of activity is spared by this phenomenon.

The fght against corruption in Swiss frms 251 However, the construction sector is known to be more vulnerable to bribery due to the particular characteristics of this sector. Procurements, contract and investment decisions depend most likely on the goodwill of public offcials and governments (Transparency International, 2011). The regions where the Swiss frms operate constitute a risk factor for corruption. The study indicates a signifcant association between the region where Swiss companies have the most frequent and regular business activities and the likelihood of being asked for a bribe. Specifcally, at the aggregated level, Swiss frms operating in Europe have the highest probability of being asked for bribes by a public offcial (90% of frms surveyed) followed by frms operating in Africa (78.9%). This is not really a surprise that Swiss frms operating in Europe acknowledge the highest probability of risk of corruption. In 1996, Heidenheimer, in his comparative topography of corruption, explored the degree of corruption in the public services of some forty European countries. For instance, Italy stood out as being rated especially corrupt as compared to other countries of the Mediterranean area. The statistical analyses performed on the set of data also indicate two other risk factors of bribe requests abroad: the level of obstacles abroad and the perception of corruption. Swiss frms reporting a high or moderate level of obstacles (e.g. cumbersome labour regulations and health and safety regulations, etc.) abroad are twice more likely to be asked for bribes than frms reporting a low level of obstacles. Corruption is with no doubt more omnipresent in countries perceived as high-risk and with high levels of obstacles for business transactions. Likewise, frms perceiving corruption as the main obstacle are those that have been more exposed to bribe requests. At the bivariate analysis, the results of the study point out that frms with anti-corruption training and due diligence are more exposed to bribe requests. Although these fndings seem surprising, they should not be interpreted from the outset as the non-effciency of anti-corruption programs. One could understand that after some serious bribe requests incidents, frms might have adopted these measures to prevent potential new incidents and without these measures, the rate of victimisation might be even higher. A further analysis of binary logistic regression is carried out in order to estimate the likelihood for Swiss frms to have experienced bribe requests by public offcials. Variables considered for the analysis are the following: the specifc characteristics of the frms (size, turnover, subsidiaries, etc.), frms’ activities, regions of business, types of anti-corruption measures, perception of obstacles, types of operations with public offcials involved. As displays the regression model in Table 14.1, the association between the dependent variable which is the likelihood of being asked for bribes by public offcials and the independent variables such as the size of the frm (‘Microbusinesses’), types of anti-corruption measures (‘Control systems and due diligence’, ‘Reporting lines’), types of operations with public offcials involved (‘Contacts during bidding

−1.478 2.071 −4.071 −1.403 1.898 −1.893 1.841

MicroBusinesses ControlSystems_DueDiligence ReportingLines PO_Contact_BiddingPublicProcurement PO_Contact_AuthorizPublicInst PO_Contact_HealthInspections Constant

.516 .580 1.018 .512 .601 .556 .535

S.E.

8.221 12.728 15.983 7.508 9.959 11.599 11.848

Wald

1 1 1 1 1 1 1

df

Exp(B)

.228 7.931 .017 .246 6.670 .151 6.305

Sig.

.004 .000 .000 .006 .002 .001 .001

.083 2.542 .002 .090 2.052 .051

Lower limit

.626 24.739 .126 .671 21.672 .448

Upper limit

95% C.I. EXP(B)

N = 135; Model Chi-square = 45.381, p < .000. -2 Log-Likelihood = 144.494; Cox & Snell R-Square = 0.266, Nagelkerkes R-Square = 0.366

B

Variables in the equation

Table 14.1 Main results of the binary logistic regression – Bribe requests by public offcials (on contacts)

The fght against corruption in Swiss frms 253 public procurement’, ‘Contacts during specifc authorisation requests’, ‘Contacts during health inspections’) are statistically signifcant. Indeed, the regression model shows that the odds of being asked to pay bribes is almost fve times lower for micro businesses with less than ten employees than for larger frms and fve times higher for frms not having a reporting line (whistle-blowing) between 2010 and 2013 than for those equipped with this measure, when the other variables in the model are controlled. Companies with due diligence programs are more likely to be asked for bribes. Contacts with public offcials during bidding processes in public procurement procedures and during health/safety/environmental inspections are less likely a risk for bribes (six times less than during specifc authorisation requests).

Swiss frms and the perception of corruption Is perceived corruption related to the source of corruption? The study investigates to which extent the perception of corruption is correlated to either some specifc intrinsic characteristics of the frm (type of business activities, size of the business) or other external variables (types of obstacles, bribery requests experienced, contacts with public offcials, etc.). Shedding light into how perceptions of corruption are formed is important to prevent corruption and to alter when possible the perceived corruption about one country. The empirical results show that, among 371 responding frms, 14% consider the level of obstacles while doing business abroad is high. The most quoted obstacles are the burdensome and ineffcient administrative regulations (61%), following by the burdensome of labour regulations (41%). Political instability and cultural factors are also part of the obstacles for business activities, as well as health and safety regulations and some other types of violent crime. Contacts with a public offcial remain an indicator of how Swiss frms perceive corruption in a foreign country. Indeed, Swiss frms having contact with public offcials abroad are twice more likely to perceive corruption as an obstacle than frms that have no contacts with the authorities (26.4% vs 13.9%). This association is statistically signifcant. As a matter of fact, some business transactions could never be completed without authorisations of public offcials. As long as public offcials maintain control over frms through administrative procedures and regulations, the frms must either pay the required bribe or exit the market (Svensson, 2003). The perception of corruption increases following a bribe request from public offcials. As displays Table 14.3, frms that had been exposed to bribe requests are more likely to perceive corruption as a major diffculty in business abroad than those that had never been asked to pay (34% vs 11.8%). To further assess the likelihood that Swiss companies perceive corruption as an obstacle in doing business abroad, a binary logistic regression was performed. The likelihood is estimated on the basis of the independent variables such as size of the frm, turnover, number of subsidiaries, turnover in the foreign country, etc.), its activities, region of the most frequent and regular

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Table 14.2 Perception of corruption by frequency of contact with public offcials abroad. % of the total number of respondents. Years 2013–2015 Contact with a public offcial abroad in the past three years Corruption as obstacle No

Yes

No

106 73.6% 38 26.4%

Yes

167 86.1% 27 13.9%

Total

273 80.8% 65 19.2%

Chi-square = 8.276 DF = 1 P = 0.004, Phi = 0.156 P = 0.004, Cramer V = 0.156 P = 0.004, Odds ratio = 2.217 95% CI [1.279, 3.844]

Table 14.3 Perception of corruption by bribe requested by public offcials. % of the total number of companies who had contact with a public offcial. Years 2013–2015 Bribe requests by public offcials in the last three years

Total

Corruption as obstacle Not requested to pay a bribe Requested to pay a bribe No Yes

45 88.2% 6 11.8%

62 66.0% 32 34.0%

107 73.8% 38 26.2%

Chi-square = 8.485 DF = 1 P = 0.004, Phi = 0.242 P=0.004, Cramer V = 0.242 P=0.004, Odds ratio = 3.871 95% CI [1.493, 10.036]

business activity, presence of anti-corruption measures, frequency of contact with public offcials and frequency of bribe requests. As shown in the logistic regression model (Table 14.4), the association of the perception of corruption is statistically signifcant with three independent variables: the size of the frm (‘Microbusinesses’), the region of business activity (‘Region_Business_Asia’) and having been asked for bribes at least once by public offcials (‘PO_Bribe_ REQUEST_on_Contacts’). The analysis highlights that the odds of perceiving corruption as an obstacle abroad is twice higher for small companies with less than ten employees. Smaller frms might be less equipped in anti-corruption measures; therefore, corruption is more likely an important issue. Larger frms with more fnancial resources to invest in preventive measures against corruption are more likely prepared to face corruption. The regression model shows that frms having experienced a bribe request at least once from public offcials in the three years previous to the survey (2010 to 2013) are 14 times more likely to perceive corruption as an issue abroad.

2.802 −.826 2.662 −3.323

Step 3

.848 .423 .810 .899

S.E.

10.912 3.809 10.806 13.657

Wald

1 1 1 1

df

.001 .051 .001 .000

Sig.

16.484 .438 14.327 .036

Exp(B)

3.126 .191 2.930

86.928 1.004 70.065

Lower limit Upper limit

95% C.I. EXP(B)

N = 66; Model Chi-square = 27.402, p < .001. –2 Log-Likelihood = 56.589. Cox & Snell R-Square = 0.338, Nagelkerkes R-Square = 0.471

MicroBusinesses Region_Business_Asia PO_Bribe_REQUEST_On_Contacts Constant

B

Variables in the equation

Table 14.4 Main results of the binary logistic regression – Perception of corruption as obstacle in doing business abroad

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Investments in anti-corruption measures: reaction to corruption incidents? Only 39% of the Swiss frms declared they have invested in anti-corruption measures from 2010 to 2013. The majority of Swiss frms do not think that corruption is an issue (81%) and 12% of them believe that these measures are not useful considering the costs and times wasted in their investments. As shown Figure 14.3, among frms having invested in anti-corruption programs, 80% have decided to introduce specifc codes of conduct against corruption, 72% have developed practical systems of control (e.g. auditing systems, periodical controls in specifc countries/sectors, etc.), 70% have adopted specifc legal measures (e.g. specifc contracts with partners abroad), 20% of frms have specifc internet tools to detect corruption incidents. Some types of anti-corruption measures were less implemented than others, for instance only 12% have referred to external corporate intelligence specialist. In Switzerland, only 19% of the frms use reporting lines and whistle-blowing system in Switzerland. The lack of whistle-blowing protection law in European countries mostly explains the low rate of whistle-blowing in frms (Carr and Lewis, 2010). Even in the United States where whistle-blowing legislation were developed decades ago, there is no comprehensive federal law that prohibits employers from retaliating against employees who disclose potential corporate violations of law (Drew, 2003). Among frms having invested in anti-corruption programs, half of them run a risk assessment before starting business with a foreign country or a foreign

Figure 14.3 Type of anti-corruption measures adopted by Swiss companies operating abroad. % of the number of frms who had invested in anti-corruption measures between 2013–2015

The fght against corruption in Swiss frms 257 company. The risk assessments are used the most often in Europe (33%), following by Africa (31%) and Asia (17%). The likelihood for a Swiss frm operating abroad to invest in anti-corruption measures from to 2010 to 2013 is estimated on the basis of the following independent variables related to the specifc characteristics of the frm (size, turnover, number of subsidiaries, percentage of turnover in a foreign country), its activities, region of the most frequent and regular business activity, perception of corruption, frequency of contact with public offcials and frequency of bribe requests. The dependent variable indicates whether or not the frm had invested any resource to prevent corruption. The result of the binary logistic regression is shown in Table 14.5. The associations between the decision of investment in anti-corruption measures and the independent variables: perception of corruption ‘Perception_Corruption_Obstacle’, number of subsidiaries ‘N_Subsidiaries_4’, type of business activity ‘Sale_Abroad_LocalorImportedProducts’, the presence of capital investments abroad ‘Capital_Investments’ and having been asked for bribes at least once by public offcials ‘Bribe_Requests_TOT_OnContacts’ are statistically signifcant. The analyses show that the odds of investing in anti-corruption measures is almost 35 times higher for frms with more than ten subsidiaries. Firms specializing in sale of local or imported products abroad and with capital investments abroad (either minority or majority share) are respectively three times and 13 times more likely to have implemented anti-corruption programs. In addition, those having been requested for bribes in the past three years are also 2.4 times more likely to have resorted to anti-corruption measures. This fnding point outs that having experienced bribe requests in the past infuences the willingness of investing in anti-corruption measures. As found in the study of Isenring and Mugellini (2013) on white collar crime among Swiss frms, previous victimisations trigger the necessity of implementation of preventive measures against crime as 40% of the frms interviewed and which had experienced a crime incident, had adopted new measures of prevention in response to it. In order to evaluate the presence of each specifc anti-corruption program in frms, binary logistic regressions are also performed using respectively the dependent variables such as legal measures, codes of conduct, monitoring bodies, control systems and due diligence, anti-corruption training program and the same independent variables as in the analyses of predictors of bribe requests and perception of corruption. Legal measures are more likely to be used in companies with more than six subsidiaries and in those with the majority of capital investments abroad (40 times more). Similarly, companies with regular contacts with public offcials are also more likely to invest in legal measures than other frms. On the contrary, companies acted as providers of services abroad are less likely to have adopted legal measures in the prevention of bribery. Medium-sized frms with less than 250 employees are more likely to develop codes of conduct, monitoring programs, system of control and due diligence to prevent against corruption. With regard to the size of the frm, several studies found that the size of the organisation could be a good predictor of illegal acts

Perception_Corrupt_Obstacle N_Subsidiaries N_Subsidiaries(1) N_Subsidiaries(2) N_Subsidiaries(3) N_Subsidiaries(4) Sale_Abroad_LocalorImportedProducts Capital_Investments Bribe_Requests_TOT_onContacts Constant

.500 1.220 1.119 1.272 1.232 .440 1.220 .448 1.086

−.417 .728 2.132 3.566 1.169 2.628 .885 −2.751

S.E.

.978

B

3.823 29.521 .117 .423 2.808 8.372 7.057 4.642 3.898 6.419

Wald

1 4 1 1 1 1 1 1 1 1

df

.051 .000 .733 .515 .094 .004 .008 .031 .048 .011

Sig.

.659 2.070 8.430 35.366 3.217 13.844 2.423 .064

2.659

Exp(B)

.060 .231 .697 3.159 1.359 1.268 1.007

.998

7.203 18.540 102.004 395.893 7.619 151.167 5.832

7.090

Lower limit Upper limit

95% C.I. EXP(B)

N = 176; Model Chi-square = 85.909, p < .001. –2 Log-Likelihood = 151.655. Cox & Snell R-Square = 0.386, Nagelkerkes R-Square = 0.521

Step 5

Variables in the equation

Table 14.5 Main results of the binary logistic regression – Investment in anti-corruption measures

The fght against corruption in Swiss frms 259 and crime and could infuence the organisation’s decision or reaction in terms of implementation of specifc preventive measures (Yeager, 1986; Baucus, 1989). In parallel, frms that highly perceive corruption as a threat are also more equipped and resort more often to the mentioned measures. In his study on business executives involved in white collar crime (Gottschalk, 2011), Gottschalk clearly demonstrated that a clear and detailed code of conduct could signifcantly reduce the probability of crime. It would not be an exception with regard to corruption by external or internal entities. Results of the study also advance that frms operating in Asia and Africa are more likely to have invested in control systems and due diligence in business transactions. In particular, companies with business in Asia are 13 times more likely to have developed anti-corruption staff training. In point of fact, past studies fnd that corruption is everywhere but also widespread in some countries and regions of Asia. Especially, it is known that doing business in Asia requires networking practices resulting easily in corruption transactions (Lee and Oh, 2007). In this sense, this fnding confrms the idea that the exposure to corruption is more likely to be signifcant in Asia and that frms might need to train their staff with specifc anti-corruption strategies for business transactions in Asia. Likewise, corruption also appears to be on the rise in the third world countries, in particular in Africa. In some African countries such as Kenya, Sierra Leone or Nigeria there has been a high-level and systematic corruption (Musila and Sigué, 2010). This explains the more rigorous investments of frms in due diligence and control systems while doing business in Africa as suggested the analysis.

Strengths and limitations The analyses included in this article were based on a national representative sample of 3,359 Swiss active frms of all sectors, with at least one subsidiary abroad and having business activities in different regions and countries (Africa, Asia, Europe, Americas). With 530 companies participating in the survey, the response rate was 16% which could be considered a quite good rate given the diffculties in motivating frms and their managers to reveal sensitive information (even though anonymous). By using a rigorous methodology of data collection with several different types of reminders (letters, mails, phone calls), the quantitative survey was successfully completed and contributes to the feld of research on corruption, not only in Switzerland but also for other countries. The signifcance of this study is obvious. Besides the contribution to the empirical research on corruption, the main advantages of a survey such as the SICS are that key information on corruption and bribe requests were disclosed. The Swiss survey provides insights on bribe incidents similar to business crimes in general, which are rarely reported to law-enforcement authorities (Isenring, 2016b). More specifcally, the study addresses one of the key challenges of research on corruption by pointing out the main predictors of bribe requests for frms. Furthermore, the study allowed obtaining various information on the characteristics of frms having to deal with bribe requests, the regions where they operate, the types of business they are

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in, the characteristics of those who ask for bribe payments, the specifc situations where bribe incidents happened and on corruption prevention measures. Consequently, these data allow the evaluation of repeated and multiple victimisation. However, victimisation surveys are not infallible. Data collected through victimisation surveys like the SICS do not always refect the whole reality of crime victimisation in frms. Researchers will have to rely on the honesty and transparency of the answers from the frms’ managers. Some specifc types of crime, in order to preserve the reputation and image of the frm, are not revealed and might have been underreported. Another concern regarding the answers of the responding managers could be that they are subjective and refect a personal view or opinion. Nevertheless, facing an alarming issue such as corruption, it is most likely that the managers provided objective and solid information on bribery incidents experienced by their companies, considering that the ultimate goal remains how to prevent corruption abroad.

Discussion On the victimisation of bribe requests/corruption The victimisation rate of bribe requests for Swiss participant frms of the survey is 31%, it means that between 2013 and 2015, 31% of the responding frms have been requested by a public offcial to pay a bribe while doing business abroad, whether they have had contacts with public offcials or not. Almost half of the responding frms had at least one contact with public offcials and, among those, almost 70% were requested to pay bribes. The study reveals that not only frms in contact with public offcials are more likely to be asked for bribes, but also shows that multivictimisation is common: more than half of the frms being requested for payment have been asked more than once. The likelihood of repetitive bribe requests is higher with a previous victimisation.

On risk factors Of all risk factors, contacts with public offcials are one of the strongest predictors of bribe requests and corruption. In particular, contacts with public offcials during a bidding process are more likely to expose frms to bribe requests. Furthermore, considering the risk factors of the frm facing this phenomenon, we have looked at several variables related to the frm’s characteristics and checked whether the types of frms could infuence the likelihood of being exposed to corruption abroad. At the bivariate analysis, the fndings reveal that larger Swiss frms are more vulnerable to bribe requests from both public offcials in international business activities. Although frms specializing in manufacturing, wholesale activities seem to have been experienced more incidents of bribe requests, this assertion is not signifcant statistically speaking. Furthermore, the study fnds that the more subsidiaries the frm owns abroad, the more likely it is exposed to bribe requests since an expanded presence abroad

The fght against corruption in Swiss frms 261 clearly enhances the risk of being asked for bribe payments. When a frm operates in an area perceived as moderate to high level of obstacles for business activities, this also constitutes a signifcant factor of risk for corruption. In particular, when the main obstacle for the smooth running of business abroad is corruption, usually this is an indicator of high risk for bribe requests in that particular country. When performing the analysis of the effciency of certain types of anticorruption measures, such as monitoring bodies, codes of conduct seem to have more protective effects against bribe requests. In particular, having a reporting line (whistle-blowing) seems to protect frms from bribe requests as frms having these measures are fve times less exposed to corruption. On the other hand, frms with some measures such as anti-corruption training or due diligence seem to have experienced a higher level of requests for extra payments. As said above, this fnding should however be interpreted with caution and not as the ineffciency of anti-corruption programs in general. It is likely that frms’ victims of bribe requests have decided to implement anti-corruption strategies after bribe incidents and without these implementations, the rate of victimisation of corruption could be even higher. In addition, the risk of bribe requests depends on the region of the most frequent and regular business activities for the frm. It is true that some regions and countries seem to expose frms to higher risk of corruption than others. Moreover, bribe requests likely aim larger frms with an important annual turnover (more than ten million) and frms with a low percentage of revenue abroad. At the multivariate level, the fndings show that the risks of experiencing bribe requests also depend on the type of operations and activities in which the frm engages. For instance, during a bidding process, or during safety/health inspections by public offcials, the likelihood for frms to be asked for extra payments is higher.

On anti-corruption measures Not all responding frms in this study perceive corruption as a threat and not all frms have felt the need to invest in anti-corruption measures. Indeed, it is observed in the survey that Swiss frms are not very keen on investments of anticorruption programs. Only 39% of the frm participants declared having invested in anti-corruption between 2010 and 2013. Specifc codes of conduct are the most adopted by frms (80%) as well as auditing system of control within specifc regions and sectors and enhanced legal measures for specifc contracts. In Switzerland, whistle-blowing and the reporting line are not yet popular as well as the use of external corporate intelligence specialists in order to prevent and solve cases of corruption. Most of the Swiss frms interviewed think that corruption is not even an issue. This probably explains why only a few frms (12%) run a risk assessment systematically before starting a business in a foreign country. When analysing the decision of investments in anti-corruption measures, the study takes into consideration variables related to specifc characteristics of the frm. The results show that some characteristics did infuence the decision of the

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frm for implementing anti-corruption preventive measures or not. Firms with more than ten subsidiaries and with capital investments abroad are more likely to resort to anti-corruption programs. Likewise, frm victims of bribe requests as well as those selling local or imported products abroad also invest more in anticorruption measures. When corruption is perceived as an obstacle impeding the smooth running of the frm’s business, investments in anti-corruption programs seem to become a priority for the frm.

On the perception of corruption The perception of corruption as obstacle for business abroad varies according to various factors identifed such as the region where the frm has the most frequent and regular business activity, the percentage annual revenue earned in the foreign country of the most frequent and regular business, contacts with public offcials or the presence of anti-corruption measures in the frm. The perception of corruption is also infuenced by the experience of being asked for bribes. Firms having been requested for extra payment tend to view corruption as a major obstacle to their business abroad. In this study, fndings show that diffculties in some regions and contacts with public offcials that turn out to be bribe requests are elements that infuence the most the perception of corruption. Furthermore, small frms with less than ten employees perceive more corruption as an obstacle as compared to larger frms better equipped with anti-corruption preventive programs.

Conclusion Within the existing literature, it was found that corruption affects frms of both large and small sizes. The Swiss study recognised the same concern from all frms interviewed, regardless of their size and business activities. However, larger frms because of their more important presence of capital investments in business activities abroad, are more exposed to bribe requests. On the other hand, large frms have some advantages over small frms facing corruption. Larger frms have more resources and greater fnancial abilities to avoid paying bribes and to withstand various costs associated with taxes, fees or other compulsory fnancial obligations in the foreign country. In parallel, they are also better equipped with necessary and adequate anti-corruption measures. Fighting corruption remains a challenge if not one of the biggest for the next decades. However, like any other type of recurrent crime, no solution could just be brought up without a previous and serious assessment of the situation that might harbour and perpetuate the problem itself. The Swiss International Corruption Survey does not pretend to offer solutions for eradicating corruption. The study, however, reveals the continued risks of corruption for the Swiss frms. In this aspect, its contribution should be seen as

The fght against corruption in Swiss frms 263 an objective examination on how the Swiss frms are exposed to corrupt practices in some countries in the world, and on how they comply with Western standards as defned by numerous international law and regulations. Indeed, the strong presence of Swiss frms on the world economy and international markets do not alleviate this dilemma. The Swiss International Corruption Survey narrates the experiences of Swiss frms while doing business in foreign countries and brings to light one clear observation: the current approach in the fght against corruption does not eradicate the problem. Two decades of new regulations, guidelines and compliance programs that were regularly debated within countless seminars and workshops have obviously not succeeded in eradicating corruption in international trade. At this point, practitioners, policymakers might have to realise and admit that implementations of new laws and regulations are not necessarily the only answer and solution to the problem of corruption. Outlawing a situation without due consideration to other factors is an incomplete approach. Our survey points out some factors that would have played a signifcant role in bribe payments. Big frms are more exposed to corruption, but they could afford to not pay bribes and lose some contracts. But for how long could they do so? On the other hand, small frms are less exposed to bribe requests but how do they position when they do receive such requests? Could they survive and afford losing a contract in the same way as big frms? This is an example of one aspect that anti-corruption law had not considered as, before the law, all frms are equal and the size of the business has not been taken into consideration. A further result suggests that payments are often made in order to speed up operations, or rather to avoid unacceptable delays or bureaucratic hassles. One refection seems to be that looking for the solution only at the level of companies that pay bribes, either as individuals or as companies, might not be the answer to the problem and somewhat reductive. For some reasons, it seems that the law has completely left out the parties that ask for bribes and request the payment. Public offcials abroad or a local intermediary who ask for bribes should be prosecuted as such in their countries or before an international court if they could not be prosecuted in their countries. The sanctions should be given for both bribers and the recipients of bribery, with no exceptions. It is more than just equity that calls for such an approach – it is fnally the effciency of anti-corruption programs that depend on such a rule. Some countries and some regions in the world have a long tradition of corruption. Another refection could be an elaboration of a ‘blacklist’ of countries in which companies should avoid doing business because their governments do not comply with requirements to prosecute corrupt offcials. Another suggestion, a less radical way to be envisaged is to allow the Western companies to pay a fxed amount of offcial fees when starting a business or dealing with public authorities in some countries. The payment should not be seen as a bribe but as an offcial anticipation of the smooth running for the business

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operations. This offcial fee is known by the authorities and companies involved in the transactions. It should be declared offcially so that the transparency is guaranteed. There should be an equal treatment and the amount to pay should be equal for all types of frms, independently of their size and their sector of activity. Furthermore, and importantly, information about corrupt practices need to be constantly collected and disseminated. Companies should share their own experiences on corruption with other frms and the general public, on a platform where data could be easily accessed and collected, in order to develop more detailed analyses and provide pertinent recommendations. Guidelines and recommendations elaborated so far by the institutions such as the World Bank, the OECD or the Transparency International, might have been useful but remain general guidelines and not personalised enough for each case of corruption experienced by each frm. In parallel, the business community should recognise and encourage frms that are consistently doing their best to resist corruption in some high-risk regions. It is crucial to keep on informing the private and public sectors about guidelines, service standard and norms of service providers committed to the absolute non-bribery. Individual frms should strengthen the ability of doing business without having to pay bribes and to achieve this goal, there should be a collective action from the business community and not only from the enforcement. To conclude, fghting corruption efforts should be deployed not only in Western countries but also in countries where corrupt practices are common. An excessive deployment of law and regulations from the Western side without effective measurements of its effciency is a practice that needs seriously to be reviewed to better improve the current situation. As Daniel Kaufmann (2013) stated: We can no longer fght corruption by simply fghting corruption alone. Corruption is a symptom of a larger disease – the failure of institutions and governance, resulting in poor management of revenues and resources and an absence of delivery of public goods and services.

Funding The author discloses receipt of the following fnancial support for the research, authorship, and/or publication of this chapter: the research was funded by the Swiss National Funds Foundation from 2010 to 2013.

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15 The practice of anti-corruption and integrity of government On the moral learning side of the story Julien Topal

Introduction This chapter wants to make the case for installing moral learning processes ‘on the ground’, within government organizations in the fght against corruption and towards good governance. To do so, it takes the 2018 OECD report ‘Behavioural Insights for Public Integrity’1 as a starting point. The Report makes a case for more attention in anti-corruption and integrity efforts to human behaviour. Building on insights from behavioural ethics it shows how tweaks within a work environment or within work processes can control for psychological processes and environmental factors that invite unethical behaviour of those that would like to act ethically. While applauded for providing the shift in anti-corruption policies from ‘cost and capture-risk’ to ‘environmental nudges,’ the OECD report largely remains tied into, what can best be called, a negative, top-down approach. This is mainly so because of its focus on transgressive, unethical behaviour. Moral learning processes, as this chapter argues, add a positive bottom-up component to efforts to improve government. Distilling a range of necessary conditions from behavioural ethics, a model for moral learning is provided that engages each and every individual civil servant in the process of norm and identity construction within their workpractice. Moral learning is, thus, not frst and foremost about unethical behaviour but about a practice of investigating one’s (moral) professional decisions on their moral rightness. It directly engages and co-opts each individual’s knowledge and experiences into the shared quest – as civil servant – for good (enough) government or, in other words, the integrity of government. This chapter will start off with a short preliminary note on anti-corruption and integrity. The goal is to sketch the framework regarding good government/anticorruption within which the present argument is developed. With the frame set a short refection on the manner in which behavioural ethics enriches our thinking on ethics and morality in practice. A recent OECD report will provide the background for this refection. The chapter subsequently draws on some key concepts from behavioural ethics to draw up a set of necessary conditions to which any type of moral learning must answer. These conditions are formulated ex ante and any method of moral learning that answers to it provides an intriguing subject

1 I will refer to this report as the ‘OECD report’.

Anti-corruption and integrity of government 269 for further study. The conditions are made concrete by way of a seven-step procedure for moral judgment.

From anti-corruption to integrity Why should moral learning be a part of anti-corruption? The idea is simple: corruption or integrity breaches more generally is not simply an outcome of rational calculation. Government is operated by people and people’s decision-making is highly vulnerable for blind spots and environmental triggers. At the same time, we tend to be very good at self-justifcation. All of this is to say that we are not as ethical as we tend to think we are nor are we in control over our own actions as much as we think we are. Any approach to anti-corruption needs to take this into account and should engage the civil servant, or politician for that matter, into its strategy. Moral learning – structured the right way – is a means to obtain this goal. To forego misunderstanding of what I will be arguing, I shortly delve into the conceptual framework of anti-corruption. The main point to make is that focusing on a very limited (legal as well as negative) notion of corruption will prove ineffective in establishing the larger goal behind anti-corruption initiatives: good (enough) government. I take this as an important perspective switch that will later play a role in rethinking the lessons from behavioural ethics. Without dwelling too much on conceptual issues, it is clear that corruption as such remains diffcult to defne. For practical matters the defnition of corruption as an abuse of public power or of entrusted authority for private gains can be serviceable. In a sense, it limits corruption to the individual act of actively requesting or accepting a bribe in exchange for some good one provides from the position of their offce for the other party. I would like to suggest broadening the notion of corruption. In its essence, the application of the noun ‘corruption’ to an act lies with the effect of said act: the corrupting is done to the institution, or when it concerns a single act and recipient, the offce that a specifc individual holds (and thus abuses). Corruption then refers to those acts – corruptive acts – that undermine, divert or weaken the original intent, self-understanding, purpose and moral character of an institution or offce. Corruption along these lines cannot be equated anymore to merely those acts that are illegal and could even extend beyond those acts that are maybe legal but unethical. With regard to civil service (as an institution) this would boil down to an undermining of the proper execution of the monopolies of force and taxation to the beneft of all. The offce holder committing the corruptive act improperly executes its role as an agent in service of the institution's purpose, that is, the public good.2

2 Lawrence Lessig use of the notion of institutional corruption: ‘Institutional corruption is manifest when there is a systemic and strategic infuence which is legal, or even currently ethical, that undermines the institution’s effectiveness by diverting it from its purpose or weakening its ability to achieve its purpose, including to the extent relevant to its purpose, weakening either the public’s trust in that institution or the institution’s inherent trustworthiness’ (Lessig, 2013: p. 2).

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These two interlinked defnitions are wide but are so for a reason. The anticorruption agenda, namely, has a tendency to narrow itself down to those acts and practices that are deemed illegal or at least below a certain ethical threshold: bribery, fraud, embezzlement, nepotism or confict of interest. Bad judgment by public offcials in which the rights and interests of specifc groups are unfairly disadvantaged fall outside of the scope of these narrow defnition but quite often have a large (and maybe even larger) impact on the dependent citizens. These acts, at least as they become part of an institutions’ practices, corrupt as well in the sense that it’s the governments prerogative to serve the public’s interest, that is, fairly balance the rights and interests of all. The aim of this short conceptual excursion is practical: in the end, the suggestion is that anti-corruption efforts should not merely focus their attention on illegal and unethical behaviours but should directly engage the ethos of government as well, that is, the normative ideal that one stands when fulflling a public offce. To not confuse terms, I propose to speak of integrity instead of speaking of corruption and anti-corruption to capture this broader strategy. Integrity of government is not simply the nonexistence of (illegal) corrupt acts but concerns the general ethical quality of government in terms of servicing the public good and protecting individual’s rights. It is this broader perspective that informs the rest of this chapter. What it implies is a more positive approach to anti-corruption. An approach that seeks not only to target potential criminal elements within the organization but that requires an organization to set itself up in such a way that all those working within it, are set up to act with integrity. Installing a moral learning process is meant to service this goal by incorporating and engaging each and every public offcial – be it civil servant or politician. At this point I should make one last caveat to the chapter: in no way is this chapter to be read as downplaying the importance of large-scale, national and transnational legal or other initiatives against corruption. In the quest for public integrity City Hall or a ministry are simply the concrete nodes where corruptive acts will fnally play out. They are never self-standing nodes but always fgure in a broader environment of enabling and disabling practices and regulations. An intra-organizational moral learning process itself cannot change this environment and will, for the sake of its own success, also be dependent on it. To be somewhat bold in clarifying this point, the notion of anti-corruption itself has a certain normativity to it that links it to a specifc view of government as an instrument that serves all under its power in an equal and objective manner. In quite a few countries around the world where corruption is a grave problem, modern government has formally been installed but no semblance of the required public ethic to live up to this normative notion is present. As Lief Wenar (2017) notes on resource-rich clientelist states, they ‘stretch the word corruption to the semantic breaking-point’ (p. 37). This is so because ‘[w]hat is called “corruption” in clientelist states is a primary modality of governance […] the governance of a client state is corrupt’ (p. 38). ‘They are not mostly about effcient service provision. They are about relations of “personal subordination”’ (p. 39). ‘Such “clientelist corruption” is a taking of public funds, but it is also a giving in exchange for

Anti-corruption and integrity of government 271 loyalty – as above, it is a form of governance. … It is not remediable by replacing “bad” offcials with “good” offcials, but only by a large-scale transition to a more accountable form of governance’ (pp. 40–41). Clearly, installing moral learning processes will not do the trick under these conditions. However, this does not mean that it is only an applicable instrument within already established democracies with strong bureaucracies and the like. Its role could be different depending on the circumstance. A key aspect of moral learning, as we shall see, consists of constructing civil servants’ professional identities.3

A toolkit from behavioural science To have a measure of success, anti-corruption efforts will be various and differentiated. In light hereof, it is interesting that ‘human behaviour is often a neglected dimension in integrity policy making’ (OECD, 2018: p. 3). In the past two decades behavioural ethicists have intensively studied behaviour so as to see what drives people to act (un)ethically. Withdrawing from a simplistic rational choice model (Becker, 1968) – under which an unethical act will be the result of a weighing of costs (risk of getting caught and severity of punishment) and benefts (how much will I be rewarded?)4 – these researchers have focused their attention on the fungible nature of our minds by looking at the way our real-life decisionmaking is infuenced subconsciously by social and psychological factors. It turns out the subconscious mind plays many tricks on us, which in the case of (un)ethical behaviour might mean that we do the right thing even if no one is watching!5

3 Colleagues of mine have done admirable work together with City Hall in the city of Lviv, Ukraine. The country infamously corrupt to its core seems not the place to start an anticorruption effort by working on civil servant’s moral decision-making. This is exactly what they did in order to raise the ‘moral capital’ of the civil servants. Moral learning in this context served to make people aware of the choices behind and routes forward after their decisions, thereby creating a belief that things could possibly change for the better. Today, the City has its own Integrity Bureau in the making. For an anecdotal description of their work in an earlier stage, see Lozovsky (2015). 4 ‘According to this perspective, people would consider three aspects as they pass a gas station: the expected amount of cash they stand to gain from robbing the place, the probability of being caught in the act, and the magnitude of punishment if caught. On the basis of these inputs, people reach a decision that maximizes their interests’ (Mazar, Amir and Ariely, 2008: p. 633). 5 Haidt (2013) argues that we are mostly like Glaucon, Socrates’ interlocutor in the Republic: we act ethically only when not doing so has consequences for ourselves. Haidt thinks Glaucon is right since he ‘realized that the most important principle for designing an ethical society is to make sure that everyone’s reputation is on the line all the time, so that bad behaviour will always bring bad consequences’ (Haidt, 2013: p. 86; italics in the original). There are many experiments, however, that show that it is not this clear-cut. We have a sense of our moral selfidentity that does motivate us in our behaviour. In other words, most people have an intrinsic motivation to act ethically (Acquino and Reed, 2002; Mazar, Amir and Ariely, 2008; Shalvi et al., 2011). And while this self-identity will not per se lead to us foregoing unethical behaviour it certainly does limit our transgressions.

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This research is of great value to those in the feld of anti-corruption and governmental integrity. For one because it shows that relying on a set of rules, controls and sanctioning options are bound to fail.6 Well-executed, such instruments will limit transgressions by those that are unethically yet rationally-minded (as costs as well as the likelihood of these costs materializing are increased and opportunity is narrowed). It does very little, however, to address – and might even have an adverse effect on – the much bigger problem for all types of organizations: how to ensure that those who want to work ethically will do so. It is from this challenge that a behaviour-centred approach gets its cue. If behavioural ethics has shown us anything it is exactly the fungible nature of our moral compass, for the bad and the good. In recent years, policymakers have picked up on this body of work. An important publication in this context is the OECD’s 2018 report ‘Behavioural Insights for Public Integrity’, which seeks to translate experimental fndings into practical instruments to improve integrity within governmental organizations. The report is of great value to the extent that it will allow organizations to better protect7 their employees against potential unethical choices and behaviour – an important responsibility of the organization. The report, at the same time, is somewhat unsatisfactory. While not fully silent on the subject, it insuffciently engages the idea of the civil servant as a contributor to public integrity instead of risk to it. The report lacks a comprehensive perspective on one of the core components that any organization needs to develop in order to operate with integrity: a moral learning process. The main point to make is that a full-blown approach to the integrity of government needs to engage each and every individual operating within the organization as a responsible, moral agent. Such an approach to integrity starts by articulating a self-understanding as the civil servant as a particular

6 Besides being insuffcient, it can have harmful effects. See the Foreword to the OECD report: ‘Existing efforts to preventing corruption are still widely based on a rational decision-making model. Such an approach usually stresses the importance of increasing the costs and lowering the benefts of undesired behaviour. Common policy recommendations derived from this include control and sanctions and reducing the discretion of decision makers in order to diminish their scope for misbehaviour. Sometimes, this has led to over-regulation, the establishment of paralysing controls, and distrust in the public administration.’ Tenbrunsel and Messick (2004) show that overregulation can actually attenuate the effect for which it was brought to life in the frst place. By overregulating people lose sight of the moral dimension that lays behind the regulation, thereby approaching the following or not of a rule into a pure cost-beneft analysis. Schulze and Francke (2003), moreover, showed that including controls can undermine intrinsic honesty. As summarized in the OECD report: ‘The average amount of bribes was somewhat higher in the risk version then in the non-risk version of the experiment. On average, students behaved more corruptly with a risk of detection than without […] Control had reduced honesty. In other words, the intrinsic motivation for honesty had been crowded out […] Consideration of detection risks in an ethical decision implicitly turns an ethical question into a mere cost-beneft consideration’ (2018: pp. 19–20). 7 The word ‘protect’ is chosen carefully. Whereas under a rational choice model rules and controls are meant to stop unethically minded individuals, from a behavioural approach integrity policy is about the protection of individuals against potential transgressions.

Anti-corruption and integrity of government 273 moral agent and engaging them as such. To that extent, individuals within an organization cannot only be ‘recipients’ of integrity policies (‘nudges’ and the like) but have to always be ‘participants’ in them as well. This is not to say that willpower sometimes needs a helping hand – that becomes obviously clear in the behavioural ethics literature – but that engaging the individual’s power of judgment will give way to a more durable strategy. Certainly, critical questions need to be asked regarding the make-up of such a moral learning process. Before turning to a description of a moral learning process, over the next pages some key concepts that summarize a wide-range of experimental insights from behavioural ethics will be described. It is these types of insights that are central to the OECD report and its policy recommendations. The claim is that these insights make a case for installing a moral learning process, on the one hand, while providing leads as to which conditions need to be met for such process to be successful, on the other. These conditions will be central to the next paragraph. First, I try to summarize through a couple of key concepts what behavioural ethics brings to the table. The short answer is that it shows us that even with the best of intentions, engaged in rational analysis, our choices and actions might fy into the face of our moral self-identity. Behavioural ethics thus tells us much about ourselves, mostly that we are not as moral and in control as we might hope. Behavioural ethics makes us aware of this by studying the way in which individuals in real-life make moral decisions by focusing on: • •

the way in which ‘psychological shortcuts, misperceptions and temptations can often divert the best intentions’ (OECD, 2018: p. 9); the ‘environment’ in which we act impacts our decision-making – or ‘the ways in which social dynamics impact individual behaviour’ (ibid.).

The OECD report provides a useful summary of these studies. Partially for this reason, and for brevity’s sake this chapter simply tries to capture these fndings through a couple of key concepts. Most of us are intrinsically motivated to act ethically. Moreover, most of us will hold to a moral identity of ourselves as ethical beings. While this moral selfidentity does play a role in our choices and behaviour, a myriad of experiments have shown that oftentimes we act in opposition to our moral self-identity – both unintentionally and intentionally. In the case we do so with intentionality a certain discomfort comes over us that needs to be redeemed. In the literature this sensation is described as ethical dissonance and the means of redemption moral balancing. This process of balancing is intriguing. Since, while aware of the wrongness of our action – from our own moral point of view – we manage continuously to excuse our transgression through post-hoc and ad-hoc justifcations. There are many justifcatory strategies to be utilized: altruistic (white) lies (our lie not only serves ourselves), ‘licensing’ (a prior moral act allows me leeway now or prior suffering justifes an egotistic choice now), ‘distancing’ (from the act, for instance by pointing at transgressions of others), ‘compensating’ (donating

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after cheating) or ‘delegating’ (I was told to). Certainly, there are limits to moral balancing. Justifcatory strategies are most effective ‘when immediate benefts are appealing, and costs are remote, unlikely or in the future’ (OECD, 2018: p. 12) and when suffcient arbitrariness provide for the requisite moral ‘wiggle room’ (Bazerman, Loewenstein and Moore, 2002; Dana, Weber and Kuang, 2007). The experience of ethical dissonance requires a correction. This is a conscious act but one in which our self-interest allows us to excuse behaviour we would probably not accept of others. The main import of these two concepts become most apparent when they are looked at within a longer time frame. A ‘one-off’ white lie will not do too much harm but it is their repetition that causes the real harm as ‘our unethical behavior often occurs on a slippery slope. We excuse ourselves for committing one tiny infraction and then allow ourselves to commit increasingly unethical infractions as time passes’ (Bazerman and Tenbrunsel, 2011: p. 92). In the end, ‘this dynamic process gradually erodes the moral code along a slippery slope, numbs people’s sensitivity to moral dilemmas, shapes down social norms, and make us less ethical as individuals and society’ (Barkan, Ayal and Ariely, 2015: p. 159). An organization, then, that necessitates its people to balance the moral discrepancy between their self-image and the choices they feel they need to make within the organization travel on a slippery slope. This is one way in which ethical fading can take place – ‘a process by which ethical dimensions are eliminated from a decision’ (Bazerman and Tenbrunsel, 2011: pp. 30–31). The concept of ethical fading is not limited to the ongoing process of small justifcations effectively numbing us morally. It is meant to capture all infuences that subdue the ethical dimension from our choices and actions. This can be a result of being submerged in an ongoing practice in which committing tiny infractions – for instance using government-owned instruments for private purposes – depletes our resources to hold on to our moral self-identity, stimulating moral fatigue. But more banal interventions in our work environment can trigger fading. Experiments have shown that ‘ethical sinkholes’ such as time-pressure, physical fatigue, overburdening or a lack of employer appreciation also directly impact the ethical quality of behaviour (Bazerman and Tenbrunsel, 2011: pp. 164–165). Even techniques known from compliance and control such as implementing subdivisions within work processes to reduce risks can have the effect that an individual loses perspective of the larger whole she contributes to. The latter, in extremis, links into what Hannah Arendt (2006/1963) describes as the banality of evil: Eichmann hides behind the bureaucratic ordering within which he acted as a good civil servant. All ethical implications of his role as a tiny cog in a devastating machine were lost out of sight. Current bureaucratically organized organizations, albeit not in any such extreme way, still trigger the same such danger of ‘foating responsibilities’. The above instances play out at a somewhat conscious level in the sense that there is a feeling of dissonance. The justifcatory strategies themselves are also conscious albeit that one is not conscious of the problematic nature of the

Anti-corruption and integrity of government 275 justifcation. The effect that a repetitive practice of moral balancing has, however, plays out subconsciously. Ethical fading is not something one is aware of. Besides these conscious deviations there are many instances in which people make unethical choices without ever sensing any dissonance. A person is simply unconsciously biased in such cases. Unconscious bias ‘works by distorting how people interpret information’ (Bazerman, Loewenstein and More, 2002: p. 3). Particular desires, self-serving interests, frames of interpretation (cost-beneft, win-lose), proximity or personal closeness and representation all enable so-called ‘blind spots’ in the way we read and appreciate a situation. These types of unconscious bias are wellcaptured by the notion of bounded awareness, which in general terms describes ‘the common tendency to exclude important and relevant information from our decisions by placing arbitrary and dysfunctional bounds around our defnition of a problem’ (Bazerman and Tenbrunsel, 2011: p. 7). Put in layman’s terms, information or an argument that does not ft our preconceived, intuitive, judgment is simple fltered out subconsciously. Loewenstein et al. (1993) provide a widely cited experiment that abundantly shows the bounded nature of our information intake. Participants in the experiment were told they either represented the plaintiff or the defendant in a car accident case. Their task was to guess the proposed settlement of the judge in the case. Interestingly, even when knowing that they could earn money by being as correct as possible the participants would err on the side of their principal. Not even money as a stimulant for objectivity made much of a difference Loewenstein and his co-authors’ experiment is an example of a specifc type of bounded awareness, namely, motivated blindness (Bazerman and Tenbrunsel, 2011: p. 81). This type of blindness plays out when we are personally invested into another party. This can, thus, already be the case when we represent a party in a hypothetical situation, or in situations wherein you are monetarily, morally or personally invested in another. The notion of motivated blindness seems to offer an appropriate explanatory account of the infamous and eye-popping case of Enron. At frst sight a case of corporate greed and gaming, this perspective seems to be lacking in explaining how it could involve so many actors. Enron was, for one, audited by one of the largest and most respected accountancy frms. Bazerman and co-authors therefore write that ‘[i]ndeed, even seemingly egregious accounting scandals, such as Andersen’s audits of Enron, may have at their core a series of unconsciously biased judgments rather than a deliberate program of criminality’ (Bazerman, Loewenstein and Moore, 2002: p. 2). The problem in this case was that the auditors were not only paid by Enron for their auditing services, but these auditing services were at the same time also considered as an important means to landing more lucrative consultancy work (Bazerman, Loewenstein and Moore, 2002). What motivated blindness tells us is that disregard for false numbers was not so much the consequence of bad intentions on the side of the auditors; it was their self-investment into Enron that blinded them from the transgressions of the other party (Bazerman and Tenbrunsel, 2011: pp. 81–83). All stimuli in place ‘nudged’ the auditors into leniency towards

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the numbers reported. By the logic of ethical fading at frst small transgressions cumulated into what became known as one of the greatest corporate scandals. Since an individual is always ‘involved’ in a situation in one way or another this bounded nature of our awareness of any situation directly also implies that we are also bound in all our ethical choices. Bazerman and Tenbrunsel reserve the term bounded ethicality to describe the ‘systematic constraints on our morality that favour our own self-interest at the expense of the interest of others’ (2011: p. 8). This notion of self-interest should not be construed in a limited sense. A doctor, for instance, can be bound by the vested interest he has in offering his treatment as the best one not from fnancial gain but from his intellectual and personal investment in the value of the treatment (ibid.: pp. 20–21). Our ethicality is, thus, bound by our intuitive disposition towards a situation or issue, which makes that we enter each moral judgment in a (subconscious) biased manner. Additionally, as Haidt (2013) convincingly argues, it is not an easy task to release ourselves from our intuitive shackles. So, what do these concepts – ethical dissonance, moral balancing, bounded awareness, bounded ethicality, ethical fading and motivated blindness – tell us that is relevant to the quest for anti-corruption and integrity of government? First and foremost, these concepts describe a range of psychological and environmental triggers that undermine the ethicality of our choices and behaviour. Not only are we less moral than we tend to think we are – that’s the effect of successful justifcatory strategies – we are also not much in control of the ethical quality of our everyday moral decision-making. This ‘lack of control’ is caused by environmental triggers (and ‘nudges’ in the wrong direction) as well as subconscious blind spots that colour decision-making in a (generally) self-interested manner. This insight has direct and concrete implications for anti-corruption and integrity of government strategies. It shows that attention has to be given to the work practice of the average civil servant who wants to act with integrity but might fade into unethical behaviour unwillingly. In other words, those working on anti-corruption and public integrity should move beyond a focus on potential criminals and the policies of cost, opportunity and punishment that come with this focus. The OECD report takes the insights from behavioural ethics to heart and sets to translates them into a coherent set of policy advices to strengthen public integrity. Unfortunately, these policy recommendations are generally limited to instruments for foregoing unethical behaviour – a rather limited perspective on integrity. Where the report addresses the issue of moral learning it settles with references to some existing programs, without critical refection. This is unfortunate for a couple of reasons. For one, it makes that the OECD report does not live up to its own goals. There are two threads discernible in the report. The disjunction between these threads seems to follow from a lack of analytical distinction made between (un)ethical behaviour and moral decision-making. On the one hand, the OECD seems to focus its attention on risk-based policies that seek to control for behavioural risks to integrity. Already on the frst page we read: ‘Integrity is more than

Anti-corruption and integrity of government 277 a rational choice against corruption. Essentially, promoting integrity is encouraging behaviour in the public interest over self-serving behaviour such as corrupt and unethical practices’ (2018: p. 1). In this formulation the OECD seems to equate acting in the public interest with not transgressing the lowest threshold of behaviour: corruption. To a large degree, the literature from behavioural ethics provide the direct input for policies against (un)ethical behaviour. A few pages later we read the following: ‘Public integrity systems aim to generate decisions by public offcials that align with the public interest’ (ibid.: p. 9). Here the report goes beyond the lower bar of ‘integrity as decency’ (i.e. no unethical acts). Aligning decision-making with the public interest sets the bar much higher. There is something positive to that defnition which directly comes out in the term civil servant itself. It effectively asks civil servants to make morally right decisions, that is, to do right to all involved. The report deepens our understanding of ‘integrity as decency’. Much less is said, however, towards our understanding of what can be called ‘integrity as professionalism’. Certainly, the OECD speaks of a shift in focus towards a ‘culture of integrity’ (ibid.: p. 31). It even stresses ‘the importance of continuously strengthening and renewing […] efforts to establish integrity as a social norm and to integrate integrity into professional identities’ (ibid.: p. 26). The discussion of the means by which such a culture can be established, however, is underdeveloped. Reference to Codes of Conduct with ftting values relating to the offce is given and the importance of discussing ethical dilemmas is paid lip-service too. But there is nothing novel to these instruments. This is a missed opportunity. As the Report itself clarifes, integrity requires an acceptance of indirect reciprocity, that is, trust that obeying formal institutions and ethical norms will overtime pay its dividends, over direct reciprocity. The acceptance of indirect reciprocity in society broadly requires that those in offce accept those social norms that ground the formal institutions, that upholding them is an intricate part of what they consider their, not only professional, but social identity. Constructing such identities needs work and maintenance. What the insights discussed in the report, and summarized through a set of key concepts above, beg for is a means to engage individuals in their roles as moral agents, as civil servants, that are tasked with serving the public good. The question is how to prime such a professional identity, how to ensure the responsibilities of offce do not remain ‘foating’ and how to make integrity in its broad understanding into an informal yet indiscernible social norm within the organization. The risk-minimizing environmental tweaks that largely make up the OECD report’s recommendations, while of great importance towards the protection against integrity breaches, will not suffce for this task. What is missing is the engagement of the individual, making each and every civil servant a proponent of a culture of public integrity. What is also missing is an account of a moral learning process. Moral learning is about the moral rightness of the decisions made by the individual civil servant, by the governmental organization. It does not speak to decency but to profciency: what can by the highest moral standards be expected of me as a professional? In other words, a

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moral learning process instils a practice of refection on good government into an organization.

Towards installing a moral learning process A reason for the OECD not to venture too extensively into the moral learning-side of the equation might stem from a sceptical disposition towards the effects of (rational) moral learning among behavioural ethicists. Ethics trainings have been around for many years by now and they have not proven to be very effective. Some of the main proponents of behavioural ethics have therefore expressed their cynicism regarding these types of trainings, not so much based on these empirics but because of the main faw to ethics trainings: they conceive of the decision-maker as a rational decision-maker. Bazerman and Tenbrunsel claim in ‘Blind Spots’ that ethics trainings based on traditional ethical thinking ‘lack an understanding of the unintentional yet predictable cognitive patterns that result in unethical behavior’ (Bazerman and Tenbrunsel, 2011: p. 5) and, ‘without an awareness of blind spots, traditional approaches to ethics won’t be particularly useful in improving behavior’ (idem: p. 37). Haidt (2013) furthermore states that: [n]obody is ever going to invent an ethics class that makes people behave ethically after they step out of the classroom. […] If you want to make people behave more ethically, there are two ways you can go. You can change the elephant,8 which takes a long time and is hard to do. Or [y]ou can make minor an inexpensive tweak to the environment, which can produce big increases in ethical behaviour. (2013: p. 106) Others have, more practically, tested whether those most active in moral reasoning, ethics professors, tend to behave more ethical, concluding that this seems not to be the case – at least when it comes to returning books to the library (Schwitzgebel, 2009). This chapter does not argue studies that show ethics trainings to be ineffective. Ethics trainings come in many forms, therefore it is diffcult to judge what is tested in these studies. Certainly, there are challenges – such as the one of Haidt, Bazerman and Tenbrunsel. The idea, however, that our real life judgments are largely defned by subconscious intuitive processes and not reason does not say anything about the role rational, critical refection could play in moral education (Sauer, 2012). It suffces to say for now that alongside this

8 Haidt’s Social Intuitionist Model (2007) states that most if not all our moral judgments are made based on rather indiscriminate frst intuitions. Reason, to which ethics classes would appeal, has only a very minimal role to play. The elephant stands for your intuitive dispositions.

Anti-corruption and integrity of government 279 critical literature a growing body of research emerges that shows moral learning to be effective (Railton, 2017; Walker and Lombrozo, 2017). The judges might still be out on the subject. On the other hand, I do not want to defend ethics trainings against the critiques from behavioural ethics. Instead, in agreement with much of the critical literature, any form of ethics training has to involve the heart and the mind so to speak, I will build on behavioural ethics. In the following I will describe a set of conditions for moral learning within organizations distilled from behavioural ethics and will use the methodology known as the seven-step procedure to moral judgment9 to show how these conditions can be translated into practice. I have been distinguishing between ethics trainings and moral learning. A simple reason for this is that an ethics training – often for its many faws – consist of a sporadically (once every couple of years) recurring training, sometimes online or for two hours with prefabricated cases. Moral learning by defnition describes a process. It is not a one-off; it requires repetition. One condition for success of any form of moral learning is repetition. Moral learning has to be an integral part of an organization’s practice and self-understanding. Based on the psychological and environmental ‘risks’ to moral judgments articulated above by way of some core concepts – moral balancing, bounded awareness, bounded ethicality, motivated blindness and ethical fading – fve necessary conditions for a successful moral learning process can be articulated: 1. Structured repetition. No training will suffce on its own to improve integrity. Constructing social norms and building professional identities takes time and effort – even within established democracies with a strong rule of law; 2. A carefully crafted procedure of investigation that enables civil servants to investigate the (morally) challenging questions they face within their work practice; 3. The requirement of a clear question that needs investigation that one of the participants has brought to the table – s/he is the case-owner. Made-up, run-of-the-mill, ethical dilemmas do not work since there is no owner of the question; 4. An invitation to take on an investigative disposition to suppress the innate need to justify intuitive judgments; 5. A measure by which to decide upon the morally right choice in the concrete case tabled.

9 This is a procedure that fnds its way into many governmental organizations in the Netherlands and has also been applied in the rather more challenging context of Ukrainian City government. Originally thought out by business ethicist Henk van Luijk (1993), the basic procedure for investigating a moral choice has been thought out by a range of Dutch philosophers, amongst others Frans Geraedts, Ruud Meij and Leonard de Jong (2006).

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Let me start with condition number 2, and end with repetition, since repetition only makes sense when there is something on the table that justifes it. Condition 2 is somewhat of a metacondition enveloping conditions 3 to 5. Challenging questions have the tendency to either trigger a form of (moral) perplexity or quick judgment, which in a group context is the frst step to debate instead of investigation. A carefully crafted procedure of investigation should provide a means to carefully dissect the question at hand and in a step-by-step manner bring it to a (conclusive) judgment. The methodology should be both intuitive and critical so that it can provide a shared and practicable language to all within an organization, while at the same time functioning as a critical test for that organization. What should the procedure offer? To answer this question, I refer to the seven-steps procedure originally developed by Van Luijk (1993), a Dutch business ethicist, further developed by De Jong, Geraedts and Meij (2006): 1. 2. 3. 4. 5. 6. 7.

What decision am I faced with? Who is affected by my decision? Who takes the decision? What information do I need to make my decision in a responsible manner? What arguments speak for both choice options? What is my fnal conclusion? How do I feel about the judgment I arrive at?

This seven-step procedure is relatively common with local civil servants and politicians in the Netherlands. In my work, I personally often train civil servants, municipal councils and local administration in the use of this procedure. In and of itself the procedure is already very helpful in structuring an investigation into a challenging decision. The singular steps within the procedure, at the same time, provide the needed interventions to trigger moral learning that the above conditions prescribe. Condition 3 – the need for a clear question put forward by a participant in the deliberation, the case owner – is highly practical at frst sight. To engage civil servants in moral learning, their own workpractice has to take centre stage. It is, after all, in that realm that we hope to make the intervention. Getting to a sharply delineated choice situation turns out to be rather diffcult in many cases. Either a decision has already been made or one has already a strong intuitive bias into choice. The case owner therefore, as well as the other participants, will subconsciously seek out a choice situation in which their favoured choice is shown to be the obvious choice. Getting the choice situation is thus of importance. A bad choice description at best colours the investigation or, at worst, downright undermines it. There is more to condition 3, however. Step 3 of the seven-steps procedure asks the question of whose decision it is that we are investigating. This question is a bit of a trick question as it is always the question tabled by the case owner. The question is meant as a test: is the question that I wrote down at step 1 actually the one that I have to answer? But step 3 is about something else as well. It explicitly places the ownership for the outcome of the question with the

Anti-corruption and integrity of government 281 participant that has tabled the question. The answer therefore is always ‘I,’ and thereby it is ‘I’ that is responsible and answerable for the decision that is mine to take. Step 3 thereby counteracts the temptations to dilute our responsibility – ‘if not me, someone else…’, ‘I was assigned…’, ‘I do not have the fnal say…’, ‘my action does not harm anyone…’. Condition 3 – translated into step 1 and 3 of the 7-step procedure – seeks to establish two things: (1) moral consciousnesses, i.e. that the questions a civil servant is faced with have a moral component to them. Engaging individual’s moral consciousness is an intervention against ethical fading and the dangers that come with framing – for instance in (fnancial) cost-beneft terms; and (2) moral ownership to counteract foating or diffused responsibility, thereby allowing for suffcient ‘wiggle room’ for justifcatory strategies (such as ‘distancing’ and ‘delegating’). Leading fgures in the study of moral behaviour such as Haidt, Bazerman and Tenbrunsel are highly doubtful of the value of ethics trainings since they overly depend on a rationalist model. What behavioural ethics shows according to these authors is that much of our judgment is intuitive and easily manipulated by certain psychological processes and environmental factors. Condition 4 is meant to take these limitations into account within moral learning: any procedure for moral judgment should invite an investigative disposition in the participants present. To use the seven-step procedure as an example once more, step 1 and step 5 are most explicitly meant to do just that. At step 1 of the procedure the participants are not only required to provide the choice situation but are also asked to give their intuitive choice. Followed by the most important argument against their preferred choice.10 This way, the frst intuition is made explicit, while at the same time the alternative is presented as at least reasonable (to the extent that there exists an argument in its favour. The aim here is to counteract Haidt’s important insight that reason is in general merely a means to legitimize our frst moral intuition.11 Step 5 furthers this intervention on one’s intuition by requiring the participants to list all possible argument in favour of both possible options on the table. While in practice it remains rather obvious that many will still seek out mostly arguments for their own intuitive choice, by undertaking this exercise within a group-setting much of this self-legitimization can be fltered out. Condition 4 thus requires that any form of moral learning is aware of and seeks to counteract the boundedness of our ethicality with its subsequent blindspots. Step 2 and 4 of the seven-step procedure can also best be described as an attempt to limit the impact, in this case, of our bounded awareness.

10 The effectiveness of this technique against ‘self-serving bias’ has been researched by Babcock, Loewenstein and Issacharoff (1997). They requested representatives in a dispute to start off negotiations by focusing on the weaknesses in their own argument. It turns out that such intervention has a considerable effect on fnding a settlement. 11 As Haidt states, ‘[D]on’t take people’s moral arguments at face value. They’re mostly post hoc constructions made up on the fy, crafted to advance one or more strategic objectives’ (Haidt, 2013: p. xv).

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The three conditions discussed so far, merely articulate the necessity of a practice of careful investigation for a moral learning process to succeed. There is one more key condition inherent to the methodology applied to the individual’s moral judgment: a measure by which to decide whether a choice is the morally right choice. Here we move into complex philosophical territory with which this chapter cannot engage. It should, however, be clear that some sort of measure to decide whether option A or option B is right in the specifc choice situation. In other words, there is a need for a shared yardstick by which the participants to a moral deliberation can unambiguously decide what is the right course of action. Moreover, it should be clear from behavioural ethics (think of the auditors of Arthur Andersen in the Enron case) that this measure must be critical. It cannot simply re-iterate our own basic intuition, or organizational practice. In other words, one cannot refer to one’s own moral feelings nor to the current norms and values that you, your organization or your (sub-)group adheres to. These measures are simply subjective and self-affrming and lack the critical muster to enable learning. This for two reasons: (1) my personal feelings or values cannot be a reference point since it would lead to a fundamental relativist position that would hamper moral judgment on even the most infamous of killers, as long as they truly believed in their cause; (2) even while social norms are of great importance within an organization they are not in and of themselves valuable. It is that they are – in the ideal case – outcomes of moral deliberations on a range of comparable choices, attempts and generalizing these insights into guidelines for future action. For a critical engagement of the individual civil servant as a moral agent not the knowledge of what a social or legal norm is will help build the needed professional identity but the understanding why the social or legal norm exists (oftentimes the protection of someone’s right). A measure that does not fall into the above pitfalls is the following: the morally right choice is the one in which one ‘does right by the Other’. This rather abstract formulation can be operationalized as follows: suffciently take into account the rights, interests and wishes of all concerned (in this particular situation).12 Without delving into the philosophical credentials of this measure, this measure is not self-referential but critical in that it places the onus of the moral question with the Other. It asks what all concerned can rightfully expect of ‘me’ and provides the coinage in which to express this expectation. Step 6 of the seven-step procedure puts the measure into practice as it takes all the arguments summed up under step 5 and qualifes them as either an argument referring to a right or to an interest, or as a false argument (an excuse, i.e. an attempt at moral balancing). Rights in this context are of particular interest as they are the ‘trumps’ (Dworkin, 1977) in this measure. As moral rights are means to articulate moral minima, suffciently taking them into account implies fully living up to them (since they provide a minimum of expectation to the other). Arguments that refer to rights

12 Here too I build on the thinking of Van Luijk as well as De Jong, Geraedts and Meij.

Anti-corruption and integrity of government 283 generally place a duty upon the case owner to support that choice under which the so-called principle-based arguments have been articulated.13 Procedure and measure in hand, the tools for moral learning are in place. Conditions 2 to 5 provide, in their own way, interventions into the psychological processes and environmental factors that can colour our judgment. At the same time, the seven-step procedure shows how the individual participants become involved in a moral investigation to explicitly come to a shared understanding of the morally right choice. Without repetition, however, none of this matters to the greater goal of combating corruptive acts and improving public integrity. Repetition is an obvious condition that needs to be met yet it is barely put into practice. Ethics trainings generally take place once every so many years. Repetition is key when learning, socialization and identity-construction are to take place. An organization therefore should provide time and venue for civil servants – often with their own team – to investigate their challenging decisions. These ‘moral deliberation’ sessions allow individuals, in a shared co-productive effort, to refect on concrete issues at hand all the while at a metalevel the participants are engaging the normative ideals and identities at play in their feld of work. Whatever form of moral learning initiative is on the table, only by installing a process, that is, by structuring moral learning within the organization takes place, can an organization properly develop the social norms and identities proper for the civil service. It is the repetition of investigating challenging questions from your own workplace, in a group-setting, that triggers a critical refection not only on each and every single case, but on the moral nature of one’s everyday workpractice. In short, a successful moral learning process is exactly an intervention, albeit within a particular context, on the elephant, that is, our intuitive selves, as Haidt would have it. There is one last component to moral learning that needs to be added. Here the focus has been on the engagement of all individuals within strengthening the integrity of government. There is much to win for organizations as such in installing learning processes. The structured moral deliberations on concrete cases produce an enormous amount of moral knowledge as well as knowledge about the existing (or lack of existing) rules and procedures. Moral learning thereby becomes a tool that an organization can use to improve its internal structures as well as the way in which she fulfls her tasks: serving the public good.

Concluding remarks Combating corruption and good governance is a complex, multifaceted undertaking. This chapter focused on a specifc component in this undertaking: human behaviour within government organizations. In a recent report the OECD set out

13 This is a simplifed picture of the real-world of moral judgment. Rights can appear on both sides of the equation, people can ‘invent’ rights, or falsely place an argument under a certain choice and so on. While all important in the practice of moral judgments the account provided here suffces for describing the critical role of moral learning in integrity policy.

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to translate main insights from the feld of behavioural ethics into concrete integrity policy. The report remains underwhelming when it comes to moral learning. In line with the focus of behavioural ethics most attention is paid to containing transgressive, that is, unethical behaviour through environmental tweaks. This while the Report pays lip service to the importance of moral learning throughout. This chapter has done two things: it has shown that there is an evident need for moral learning that follows from the insights of behavioural ethics. At the same time, it has articulated a range of conditions that any approach to moral learning needs to fulfl based on insights from behavioural ethics. By way of the seven-step procedure to moral judgment a concrete instantiation of such a methodology to moral learning. This chapter leaves open a range of issues, including a practical programme to install moral learning into an organization. With an eye to further development of moral learning processes within organizations, the most interesting open end to this chapter is the scientifc testing of moral learning processes. As described here, moral learning of civil servants/service has never been executed. Besides the ex ante scientifc support for the moral learning process described here – by way of the distilled conditions – it would be highly interesting to see what can be learned from a long-term study on the effectiveness of moral learning. For now, we have to do with anecdotal evidence, albeit quite a large amount of it.

References Acquino, K. & Reed, A. (2002). The self-importance of moral identity. Journal of Personality and Social Psychology, 83(6), pp. 1423–1440. Arendt, H. (2006/1963). Eichmann in Jerusalem: A Report on the Banality of Evil. London: Penguin. Babcock, L., Loewenstein, G. & Issacharoff, S. (1997). Creating convergence: debiasing biased litigants. Law and Social Inquiry, 22(4), pp. 913–925. Barkan, R., Ayal, S. and Ariely, D. (2015) Ethical dissonance, justifcations and moral behavior. Current Opinion in Psychology, 6, pp. 157–161. Bazerman, M.H., Loewenstein, G. & Moore, D.A. (2002). Why good accountants do bad audits. Harvard Business Review, 80(11), pp. 96–102. Bazerman, M.H. & Tenbrunsel, A.E. (2011). Blindspots: Why We Fail to Do What’s Right and What to Do about it. Princeton and Oxford: Princeton University Press. Becker, G.S. (1968) Crime and punishment: an economic approach. Journal of Political Economy, 76(2), pp. 169–217. Dana, J., Weber, R. & Kuang, J. (2007). Exploiting moral wiggle room: experiments demonstrating an illusory preference for fairness. Economic Theory, 33(1), pp. 67–80. De Jong, L., Geraedts, F. & Meij, R. (2006). Over het morele oordeel. In: H. De Koningh & F. Van de Wouw, eds., Handboek Integriteit: Ervaringen uit de Praktijk en Achtergronden. Assen: Van Gorcum. Dworkin, R.M. (1977). Taking Rights Seriously. Cambridge, MA: Harvard University Press. Haidt, J. (2007). The new synthesis in moral psychology. Science, 316, pp. 998–1002.

Anti-corruption and integrity of government 285 Haidt, J. (2013). The Righteous Mind. Why Good People are Divided by Politics and Religion. London: Penguin. Lessig, L. (2013). Foreword: ‘Institutional corruption’ defned. The Journal of Law, Medicine and Ethics, 41(3), pp. 553–555. Loewenstein, G., Issacharoff, S., Camerer, C. & Babcock, L. (1993). Self-serving assessments of fairness and pretrial bargaining. Journal of Legal Studies, 22(1), pp. 135–159. Lozovsky, I. (2015). The Spirit of Lviv: how Ukraine’s most European city forged a popular movement against corruption and bad governance. Foreign Policy. Available from: https://foreignpolicy.com/2015/09/16/the-spirit-of-lviv-ukra ine-corruption/ [Accessed 12th May 2019]. Mazar, N., Amir, O. & Ariely, D. (2008). The dishonesty of honest people: a theory of self-concept maintenance. Journal of Marketing Research, 45(6), pp. 633–644. OECD. (2018). Behavioural Insights for Public Integrity: Harnessing the Human Factor to Counter Corruption. OECD Public Governance Reviews. Paris: OECD Publishing. Available from: https://doi.org/10.1787/9789264297067-en [Accessed 27th November 2019]. Railton, P. (2017). Moral learning: conceptual foundations and normative relevance. Cognition, 167, pp. 172–190. Sauer, H. (2012). Educated intuitions: automaticity and rationality in moral judgment. Philosophical Explorations, 15(3), pp. 255–275. Schulze, G. & Frank, B. (2003). Deterrence versus intrinsic motivation: experimental evidence on the determinants of corruptibility. Economics of Governance, 4, pp. 143–160. Schwitzgebel, E. (2009). Do ethicist steal more books? Philosophical Psychology, 22, pp. 711–725. Shlavi, S., Dana, J., Handgraaf, M.J.J. & Der Dreu, C.K.W. (2011). Justifed ethicality: observing desired counterfactuals modifes ethical perceptions and behaviour. Organizational Behavior and Human Decision Processes, 115(2), pp. 181–190. Tenbrunsel, A.E. & Messick, D.M. (2004). Ethical fading: the role of self deception in unethical behavior. Social Justice Research, 17, pp. 223–236. Van Luijk, H. (1993). Om Redelijk Gewin: Oefeningen in Bedrijfsethiek. Amsterdam: Boom. Walker, C. & Lombrozo, T. (2017). Explaining the moral of the story. Cognition, 167, pp. 266–281. Wenar, L. (2017). Blood Oil: Tyrants, Violence, and the Rules that Rule the World. Oxford: Oxford University Press.

16 Ethical integration in EU law The prevailing normative theories in EGE opinions Matthias Pirs and Markus Frischhut1

Introduction Recently, the European Commission’s (EC) key ethics advisory body, the European Group on Ethics in Science and New Technologies (EGE), emphasized that it ‘will continue to strive to offer the guidance to support the European Union to shape its ethical identity and vision’ (EGE, 2018a: p. 18, d); hence, to integrate ethics in the European legal and policy framework, in particular with regard to the future of the European Union (EU) pertaining to science and new technologies. However, the diversity in views and the lack of both a constitutional ideal as well as a common European identity could seem to stand in contrast of having primarily experts in charge with the task of substantively shaping ethical content in the EU at their discretion (De Witte, 2013; Tallacchini, 2009; Williams, 2009). By possibly obscuring the line between the legal and the moral, the promotion of certain philosophical schools of thought carrying normative force at the heart of European policymaking and legislation, the EC, raises the odds for public debate. In the EU where fundamentally different philosophical views – ‘united in diversity’ – persist, the question remains whose philosophical schools of thought are taken into account from a normative point of view (Plomer, 2008; Williams, 2009). This is not least due to the leading role the EGE pursues with its expertise in a wider ethical lattice at an international level (e.g. relations with organisations such as the OECD, UN or the Council of Europe), inter-institutional level of the EU (legislation as well as policymaking),

1 This chapter is based on the fndings from a joint research project conducted by both Matthias Pirs and Markus Frischhut and thus parts can overlap with the underlying thesis by Pirs (2017) or the parallel book on The Ethical Spirit of EU Law by Frischhut (2019), which also covers other elements in addition to the EGE. The authors would like to thank the editors for the invitation to contribute to this book, as well as Lorenzo Pasculli for the co-supervision of Matthias Pirs’ Master’s thesis. The authors of this chapter would like to express their gratitude to former EGE president/chairperson Göran Hermerén, as well as to the current EGE Members Barbara Prainsack (University of Vienna, Austria) and Nils-Eric Sahlin (Lund University, Sweden) for providing valuable exchange of views on this topic. This chapter also beneftted from the friendly feedback of several colleagues to the above-mentioned book (see Frischhut, 2019). The usual disclaimer applies. This chapter was fnished in December 2018.

Ethical integration in EU law 287 the Commission itself, and in acting as a central reference point for national ethics committees even beyond the EU (Dratwa, 2014; Mohr et al., 2012; EGE, 2018a, d). Against this backdrop, this chapter elaborates on the role of the EGE in integrating specifc normative theories in various contexts of EU policymaking and legislation by means of its latest published opinions, retrievable from its offcial website (EGE, 2018d). That is to say, philosophical schools of thought are categorised according to the main theories in the feld of normative ethics, henceforth called normative theories: deontology, consequentialism and virtue ethics (Copp, 2006; Frischhut, 2019). For this purpose, the argumentation of this chapter draws on the main results of a research project conducted by both authors of this chapter. Matthias Pirs performed the research which investigated all existing EGE opinions in the course of his Master’s thesis Ethical Integration in EU Law by the European Group on Ethics in Science and New Technologies (Pirs, 2017). To that end, the underlying research design has been developed by both Markus Frischhut as well as Matthias Pirs, with the latter specifying the design in more detail as part of his thesis. Moreover, the thesis has been supervised within the Integrity Research Group2 by Lorenzo Pasculli (previously at Kingston University London) together with Markus Frischhut. Regarding the underlying research methodology, all 30 publicly available opinions3 of the EGE (English versions) were investigated as part of the qualitative content analysis (QCA),4 thereby pursuing an inductive research approach for deriving ‘rules of prediction’5 in an explorative way through latent (interpretative) reading of the text. Furthermore, the research was augmented by using a widely recognised computer-assisted qualitative data analysis software, namely MAXQDA.6 This was not only to cope with the increase in size and scope of the EGE opinions over time, but also to systematically categorise, evidence and narrow down the EGE’s in-text references concerning philosophers (Mayring, 2014; Pirs, 2017: pp. 40–45). With the help of the inductive approach – that is, inductive category formation (coding) – using the software, it was possible to gradually examine the opinions (amounting to more than 1,200 pages)7 and hence

2 Now replaced by the Global Integrity Research Network (GIRN): www.girnweb.com/. 3 All opinions of the EGE can be accessed via the group’s website (EGE, 2014b). The EGE’s opinion No. 30 on the ‘future of work’ was published in December 2018; therefore, it could only be taken into account to a limited extent. 4 The QCA can be seen as a mixed research approach, that is, both qualitative (assigning code categories in the relevant material) and quantitative (analysing and interpreting category frequencies). 5 The authors would like to thank Nils-Eric Sahlin for emphasizing the fact that an inductive method cannot lead to a theory. 6 Software used for this research (opinions No. 1–29): www.maxqda.com/products/new-in -maxqda-12. 7 This number refers to the opinions as such, not to ‘accompanying documents’ etc.

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to reliably identify relevant references on philosophical schools of thought (i.e. philosophers) advocated by the EGE. The references were categorized according to the underlying theoretical background in a reiterative process, consisting of in-depth reading, category coding, lexical search and category adjustment (Mayring, 2014; Schreier, 2012; Pirs, 2017). As for the lexical search across all EGE opinions, this functionality was mainly used to execute a database search for keywords related to philosophical schools of thought (e.g. ‘*Rawls*’, ‘*deont*’), thereby eliminating redundancies and determining an exhaustive list of category codes (Pirs, 2017). After all, the QCA research on EGE opinions faced some limitations. The QCA mainly took those philosophical schools of thought (i.e. philosophers) into account that were referred to in the main line of reasoning by the EGE (in-text citation). Standalone footnote references with respect to philosophers were only considered if being brought in connection to the EGE’s main in-text reasoning. The research only took references of recognised philosophers related to normative theories into consideration. For the sake of feasibility, this research intentionally categorized the major fndings along the traditional three strands of normative theories,8 thus neglecting other potential streams that might also be legitimate in the academic feld of moral philosophy. Solely the English versions of EGE opinions were included in the research, although some publications of opinions (No. 11–20) are also available in full in French and German (Pirs, 2017). Taking a closer look at the results from Pirs (2017) and the role of the EGE in the EU at large, the underlying argumentation in this chapter tries to answer the following question:

What are the prevailing normative theories advocated in the opinions of EGE? Moreover, where appropriate, this chapter further expands on the following subquestion if they can be related to a philosopher referred to by the EGE’s line of reasoning: • • •

In which context are ethical principles referred to by the EGE? What kind of legal documents are mentioned in that regard? Is there a specifc defnitional approach towards human dignity purported by the EGE?

Given the above, the following sections give an overview about the evolving nature of ethics in the EU (II), and in particular, the EGE’s role as an expert group on ethics having signifcant weight in the EU’s legal and policy framework via its opinions (III). Then, section IV of this chapter goes further into detail by discussing the main results of the EGE’s advocated normative theories amply

8 That is, deontology, consequentialism, virtue ethics.

Ethical integration in EU law 289 refected in its opinions. Finally, section V will conclude by outlining the future perspective of the EGE.

Ethics in EU law While values have been offcially enshrined in the EU treaties with the Lisbon Treaty, they have already played a role even before this milestone (Frischhut, 2019). Ethics, on the other hand, has not been part of EU integration right from the beginning, but has increasingly entered the feld of EU law from the 1990s onwards, where nowadays we can fnd more and more references of EU law to ethics and morality (Frischhut, 2015, 2019). Some called this an ‘ethicalization’ of EU law, where this term can refer to opening clauses (references to non-legal concepts), ethics codices, as well as ethics committees,9 thus including standards, procedures and institutions in law, which themselves are not part of the legal system (Gruschke, 2013; Wilms, 2013). Often these concepts are described as soft law, which, although not legally binding, can have a signifcant impact also on hard law (Müller, 2014). These references from one discipline (EU law) to another (ethics as a branch of practical philosophy) reveal similar challenges as in case of references of (EU) law to natural sciences (Jasanoff, 2005; Frischhut, 2017, 2019). This mainly concerns the question of whether these concepts of another discipline should be imported in an absolute (i.e. unchanged) or relative (i.e. adapted to the legal framework) manner. It has been argued elsewhere that this import should take place in a relative way, hence also taking into account the legal requirements of EU values, human rights and the cornerstone of human dignity10 (Frischhut, 2015, 2019). This is especially important, as often these references to ethics and morality are not suffciently determined with regard to their content, hence posing a problem with regard to the requirement of legal certainty, one formal element of the rule of law. We can observe some differences in the approaches of different layers and areas of EU law (e.g. EU primary law, EU secondary law, agreements with third countries and so forth, as well as in case law) with regard to ethics (Frischhut, 2019). To make a long story short, the precision in providing suffcient determination of what these references to ethics and morality should mean in the end vary. In addition, we can identify different normative theories (deontology, consequentialism and virtue ethics) refected in different ways, while deontology clearly played a key role (Manners, 2008; Frischhut, 2019). However, often the EU’s approach can be described by referring to its motto, ‘united in diversity’. While to some extent the approach is still diverse (especially

9 For an intriguing overview on ethics committees, see Hermerén (2009). 10 The ‘Explanations relating to the Charter of Fundamental Rights’ emphasize that the ‘dignity of the human person is not only a fundamental right in itself but constitutes the real basis of fundamental rights’ (EU, 2007).

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different attitudes in Member States towards morality), it is becoming more and more united (Herrmann and Rowlandson, 2008; Euchner & Engeli, 2018; Mondo, 2018; Frischhut, 2019). This is also refected in the preambles of the TEU, the TFEU and the CFR, where we can fnd statements in either direction (EU, 2016a, b, c; Frischhut, 2019).

EGE as a paramount protagonist within the European Commission: History, institutional structure and opinions The strong need for ethical advice regarding the regulatory framework in biotechnology and genetic engineering motivated the EC for the frst time, to integrate ethics in its institutional setting with the inception on 20 November 1991 of the Group of Advisor on Ethical Implication of Biotechnology (GAEIB), the predecessor of the EGE (Tallacchini, 2009; EC, 2016a; Frischhut, 2019). The main driving force behind creating an advisory group on ethics was not only to facilitate coordinated public debate, but also to account for public concerns arising on ethical issues (Plomer, 2008: p. 840). This is, for example, with regard to the ferce debate in the European Parliament (EP) to adopt the Biotechnology Directive (98/44/EC), whereto the group contributed much to its content. The fnally adopted Directive states that the group ‘evaluates all [sic!] ethical aspects of biotechnology’ (Busby, Hervey & Mohr, 2008; EU, 1998, art. 7) Following and replacing the GAEIB, the EC offcially proclaimed the EGE as an expert group in December 1997, thereby ‘extending the Group’s mandate to cover all areas of the application of science and new technology’ (EC, 2016a, Recital 3; EC, 1997; Plomer, 2008). From 2000 onwards, the ‘Bureau of European Policy Advisers (BEPA)’, which directly reported to the EC president, represented the directorate general (DG) in charge of the EGE (Mohr et al., 2012: p. 107; Plomer, 2008: p. 841). As of 2005, the EC began to express the EGE’s legal mandate by adopting formal decisions (EC, 2005). Today, the DG Research and Innovation has been entrusted to coordinate the EGE’s work – in liaison with the group’s chairperson – as well as to provide its secretariat (EC, 2016a, art. 5). With its most recent mandate, the EGE was shifted to DG Research and Innovation with no direct and regular link to the EC President (Juncker). While this portfolio seems to ft the EGE’s activities, its internal role and infuence within the EC could be seen to have declined to some extent.11 Over time, the EC, and hence the group, broadened the EGE’s task, which is currently charged with providing advice – in the form of written opinions that are perceived as a signifcant soft law body – primarily to the Commission on all ethical questions with ‘wider societal implications’ originating from science and new technologies (Plomer, 2008; Tallacchini, 2009; EC, 2016a, art. 2). The

11 In terms of advising the EC, the EGE’s activities (ethics in science and new technologies) can overlap with those of the EC’s Scientifc Advice Mechanism (SAM), also comprising the Group of Chief Scientifc Advisors (EC, 2015).

Ethical integration in EU law 291 group defnes itself as an ‘independent, multi-disciplinary body’ that provides ‘advice on all aspects of Commission policies and legislation’ raising ethical, societal and fundamental rights questions in the developments from science and new technologies (EGE, 2018d). The group aims at promoting ethical EU policymaking with due regard to the Charter of Fundamental Rights of the EU (CFR), the Treaties and in particular the values enshrined in art. 2 of the Treaty of the European Union (TEU) (EU, 2016a, Recital 1, art. 2; EU, 2016c). In other words, the group perceives ‘the values laid down in the Treaties’ as the ‘normative pillars’, whereon the ethical framework for European policies is built (EGE, 2018a: p. 15). Due to the increasing weight of ‘good governance’, horizontal rules pertaining to the creation and operation of offcial expert groups to the EC are also applicable for the EGE.12 In light of this, the EU aims at promoting ‘the highest level of integrity of experts’ via a balanced group composition and providing rules on confict of interest (EC, 2001a, 2016b). Because of the EGE’s registered status as an offcial expert group to the EC, the core principle of ‘quality, openness and effectiveness’ must also be adhered to by the EGE (EC, 2018). Acknowledging the just mentioned horizontal rules on expert groups and recent criticism towards the appointment of EGE members, the 2005 mandate made adaptations to its procedure for appointing EGE experts (Plomer, 2008: p. 844). Even though the president of the Commission has still the fnal power to appoint EGE members upon a proposal by the Commissioner of DG Research and Innovation, the recent mandate stipulates to have an ‘Identifcation Committee’13 select members based on an open call for EGE membership (EC, 2016a: art. 4, 2017). All members of the group are appointed for 2.5 years serving in their personal capacity.14 The group’s composition shall account for a balance in geographic origin, knowledge bases and areas of interest in addition to a high level of expertise and pluralism – an aspect that previous mandates of the EGE lacked, as scholar remarked (Mohr et al., 2012; EC, 2016a: art. 4 [1], [2] and [4]) Pursuant to the current mandate, the group is comprised out of 15 members, who are professionals from various felds (EC, 2016a: art. 4). The current group mandate stipulates to include experienced ethicists in the group, which is why EGE members are vertically connected to established ethics bodies in member states (MS), that is to say, also having membership in National Ethics Councils (NEC) (EC, 2016a: art. 4[6]). Scholars have argued that professional

12 The same is true for the Group of Chief Scientifc Advisors (EC, 2015: art. 3). 13 There is also an ‘Identifcation Committee’ for the Group of Chief Scientifc Advisors (EC, 2015: art. 3). 14 This reminds us of the position of the president of the European Council, as introduced by the Lisbon Treaty, where we also have an appointment for two times 2.5 years. This clearly facilitates more control compared to an appointment for fve years. In case of the members of the Group of Chief Scientifc Advisors, the 2015 mandate has foreseen an appointment for 2.5 years, which recently in 2018 has been extended (EC, 2015: art. 3, para 10).

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ethicist might be more capable of producing authoritative opinions, considering their experience and recognition in the feld (Mohr et al., 2012). The key requirement for qualifying as a member of the EGE reads as follows according to art. 4 (6)(c) of the current mandate: The Members shall refect the broad cross-disciplinary scope of the group’s mandate, embracing philosophy and ethics; natural and social sciences; and the law. However, they shall not [!] perceive themselves as representatives of a particular discipline, worldview, or line of research; they shall have a broad vision which collectively refects an understanding of important ongoing and emerging developments, including inter-, trans and multi-disciplinary perspectives, and the need for ethical advice at the European level. (EC, 2016a: art. 4[6][c]) It is revealing to see that the EC with the current EGE mandate clearly dismisses the possibility for EGE members to be affliated with or represent any specifc political or ideological interest. This is a new characteristic of the mandate which has to be perceived in light of the previous criticism raised in 2008, where the majority of EGE members were allegedly linked to the Catholic Church (Plomer, 2008: p. 844). As regards the EGE’s inter-institutional role, its main task is to provide advice primarily for the EC (EC, 2016a: art. 2). In spite of the persisting tensions regarding the general place of morality in the EU’s institutional set up through which substantive European moral norms are shaped, the Council of the EU and especially the EP, representing European citizens, fall short in the institutional process of guiding substantive ethical content via the EGE (Plomer, 2008: p. 842). In fact, ‘the Commission may [only] draw the Group’s attention to issues considered by the Parliament and the Council to be of major ethical importance’, thus leaving the major sphere of infuence to advance ethical legislation and policymaking by the EC.15 Following the adoption and general publication of EGE opinions, the opinions are merely forwarded to the Council and the EP (EC, 2016a: art. 5[8]). With respect to the group’s intra-institutional role, ‘the EGE shall establish close links with Commission department concerned by issues the Group is working on’ (EC, 2016a: art. 5 [7]). In that regard, it can be argued that EC envisages a rather prescriptive wording (‘shall’) in the current mandate, especially when compared to previous ones (Plomer, 2008: p. 846). Furthermore, connections with external representatives (e.g. open roundtables with various interest groups) have to be agreed with the

15 However, in the past the EGE was also willing to accept request by other institutions, followed by an offcial request of the EC. For example, in case of a political deadlock, such as the EGE opinion No. 27 on energy.

Ethical integration in EU law 293 Commission’s representative,16 which was solely to decide by the EGE itself in previous mandates (Plomer, 2008: p. 846; EC, 2016a: art. 5 [7]). Lastly, it is also interesting to note that the EGE does not have a ‘president’, but a ‘chairperson’ only (EC, 2016a: art. 5(2); Plomer, 2008: p. 846). From a legal perspective this might not carry a lot of weight; however, the symbolic nature of such wording cannot be left aside. For an overview on the EGE’s historical development, see Table 16.1. Referring to the EGE’s working procedure, it is worth to note that as part of the confdential discussions the group generally aims at seeking consensus among its members to develop their opinions and standpoints in a collaborative manner, whilst at the same time also allowing for dissenting opinions (EC, 2016a: art. 5[6] and [8]; EGE, 2002: p. 19). Until now, the EGE has adopted 30 opinions as well as statements and general reports on their activities and the CFR (EU, 2016c). The EGE’s opinions have been deemed to be a central soft law body in the EU and hence, have been referred to by various EU legal documents (Busby, Hervey and Mohr, 2008). Generally, the opinions ought to provide a set of recommendations, which are based on an overview of the state of the art of sciences and technologies dealt with and a profound analysis of the relevant ethical implications (EC, 2016a: art. 5[5]). The opinions are organised in three major parts (EGE, 2005: p. 10):17 The frst part by means of recitals refers to all relevant texts that were taken into consideration in the opinion (e.g. both EU and international legal provisions, preceding reports or opinions, scientifc works or roundtable hearings). The second part comprises three sub-sections containing the scientifc, legal as well as an ethical framework to the opinions. The third part concludes with a major recommendation to be considered by major actors in the EU legal and policy framework. The group’s lines of argumentation offer reason to believe that, not very suprisingly, lawyers draft the legal parts, philosophers the ethical one and scientist the scientifc ones. Overall, EGE opinions have expanded both in scope (covering broader ethical issues in science and new technologies beyond bioethics) and in size, reaching from 6 pages in early opinions to around 100 pages in its latest opinions (see Figure 16.1).

Major fndings Based on the EGE’s unequivocal endeavour to shape the EU’s ‘ethical identity and vision’, the following lines shed some light as to whose philosophical school of thought prevail in the EGE’s ethical reasoning of its opinions (EGE, 2018a: p. 18). More precisely, considering the major fndings from the previously mentioned research project, the next section elaborates on the main normative

16 Nevertheless, it appears that this does not represent an obstacle for the EGE to establish these connections, when needed. 17 N.B. EGE opinion No. 30 differs slightly in structure.

1991–1997

1998–2000 2000–2005 2005–2010

2010–2015 2016–2021

1st mandate 2nd mandate 3rd mandate

4th mandate 5th mandate

GAEIB

EGE

Source: Frischhut (2019).

Timeframe

Term

Table 16.1 Overview of EGE.

15 pers. | 5 years 15 pers. | 2.5 years

EC (1997) EC (2001b) EC (2005) EC (2010) EC (2016a)

Number of members | term of years 6 pers.; 9 pers. as of 1994; | 2 years 12 pers. | 3 years 12 pers. | 4 years 15 pers. | 4 years

EC

Established by

26–29 (4) 30 (1)

11–15 (5) 16–20 (5) 21–25 (5)

1–10 (10)

Opinions (total number)

Marcelino Oreja; followed by Noëlle Lenoir | Noëlle Lenoir Göran Hermerén | New: part of BEPA Göran Hermerén | New: appointed by EC president Julian Kinderlerer Christiane Woopen | New: proposal from Commissioner for research etc., ‘Identification Committee’; part of DG Research and Innovation

Chairperson; additional information

56 116 123

36 23 17 16 19 20 17 12 11 8

No. 09 cloning techniques

6

No. 05 food labelling of modern biotechnology

No. 04 gene therapy

4

11

No. 06 prenatal diagnosis

4

No. 08 patenting human origin inventions No. 07 genetic modification of animals

3

5

4

No. 11 human tissue banking

7

12

No. 14 doping in sport No. 13 healthcare in the information society No. 12 human embryo FP5 research No. 10 5th research framework programme

6

Scope of EGE Opinions (1993-2018) in No. Pages

No. 21 nanomedicine No. 20 ICT implants in the human body No. 19 umbilical cord blood banking No. 18 genetic testing in the workplace No. 17 clinical research in developing countries No. 16 patenting human stem cells inventions No. 15 human stem cell research and use

No. 03 biotechnology directive No. 02 human blood or human plasma products No. 01 performance enhancers in agriculture

Figure 16.1 Scope and size of EGE opinions (1993–2015) in No. pages. Source: updated from Pirs (2017: p. 27, A7–8).

No. 25 synthetic biology No. 24 modern agricultural technologies No. 23 animal cloning for food supply No. 22 hESC FP7 research projects

1993 1993 1993 1994 1995 1996 1996 1996 1997 1997 1997 1998 1999 1999 2000 2002 2003 2003 2004 2005 2007 2007 2008 2008 2009 2012 2013 2014 2015 2018

112 108

97

152

112

88

86

No. 30 Future of Work, Future of Society No. 29 NHT and citizen participation No. 28 security and surveillance technologies No. 27 research, production and use of energy No. 26 information and communication technologies

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theories which can be evidenced in the group’s ethical reasoning touching on different contexts of its opinions. Table 16.2 offers an overview of the major fndings. To begin with, the research disclosed that during its frst formal legal mandate – the third from 2005 to 2010 – the EGE began to draw on normative theories for substantiating its ethical reasoning; more precisely as of opinion No. 23 (issue date: 16.01.2008) until the most recent opinion No. 30 (issue date: 19.12.2018).18 Against this background, one might argue that the EGE’s formally strengthened third mandate goes hand in hand with the group’s shift to also embark on broader ethical issues beyond the sole feld of bioethics/biotechnology, thereby refecting on technological developments in agriculture, energy, information and communication technologies (ICT), security and surveillance, and citizen participation in new health technologies (NHT) (Pirs, 2017: p. 49). In the following, we will analyse the references to (A) deontology, (B) consequentialism and (C) virtue ethics frst briefy from a quantitative and then from a qualitative perspective. From a quantitative perspective,19 the total hints on deontology prevail (42), followed by virtue ethics and relatd (25) and consequentialism (10). Opinion No. 25 on ‘synthetic biology’, No. 28 on ‘security and surveillance technologies’ and No. 30 ‘future of work, future of society’ demonstrate the highest numbers of hints towards normative theories, 18, 16 and 18 respectively. As regards philosophers, John Rawls amounts to most of the hints (15), followed by Hugo Grotius (7), Martha Nussbaum (6), Thomas Hobbes, Hans Jonas and Amartya Sen with fve each, Hannah Arendt and Michael Foucault with four each, John Stuart Mill, Jeremy Bentham, Peter Singer, Jeremy Waldron and Aristotle with three each, John Locke and Jürgen Habermas with two, and lastly Immanuel Kant and JeanJacques Rousseau having one each (Pirs, 2017: p. 50). As can be seen in Table 16.2, the qualitative content analysis (QCA) exhibited that the EGE puts great emphasis on (A) deontology in the above-referred opinions. Starting with opinion No. 24 on ‘ethics of modern developments in agriculture technologies’, the EGE elaborated on the notion of justice by pointing out the ‘institutional dimension of ethics’ (EGE, 2008b: p. 48). Expounding upon the arguments of global as well as intergenerational justice, the EGE refers to Harvard philosopher John Rawls (1921–2002) and his understanding of the ‘original position’ in which people base their rational decisions on the question of justice by imagining to be covered behind a ‘veil of ignorance’, which shall allow

18 Normative theories were also mentioned in opinion No. 12 (EGE, 1998) 19 Of course, one has to acknowledge that as regards quantitative hints it could be the case that, for example, three references are evidenced on the same page of the same opinion, whereas in other cases, three references were found in different parts of the same opinion, or the total references are shared among three different opinions. Hence, the mere quantitative weight of hints should not be exaggerated.

6

7

18

17 0 1 4

0 0 4

No. 25 No. 26 synthetic biology ICT 11/2009 2/2012

3

3 0 0

No. 27 energy 1/2013

16

12 2 2

No. 28 security and surveillance technologies 5/2014

5

0 0 5

18

5 0 13

77

42 10 25

No. 29 No. 30 future In total health technologies and of work citizen participation 12/2018 10/2015

Source: updated from Pirs, 2017:p.48. Sources for EGE opinions No. 23-30: (EGE, 2008a, b, 2009, 2012, 2013, 2014a, 2015, 2018e). N.B. This table provides an overview of the main fndings does not include references that cannot be assigned to one of the three main normative theories. a While their classifcation to a normative theory is debated in literature and clearly challenging, Arendt, Foucault, Habermas, Nussbaum and Sen are covered here in ‘virtue ethics, and related’.

5 1 0

0 7 0

Deontology Consequentialism Virtue ethics, and relateda In total

No. 24 agricultural technologies 12/2008

No. 23 animal cloning for food supply 1/2008

EGE opinions/ normative theories

Table 16.2 EGE opinions normative theories (quantitative analysis).

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for un-biased decision-making. In other words; people would – because of selfinterest – accept ‘a “maximin” strategy also maximising the position of the least well-off’ (EGE, 2008b: pp. 51–52). As for the global justice discourse, the EGE underlines the question of distributive justice in which deliberations are made on how and which goods a society or a collective group shall distribute among themselves, that is, the individual members. In the same vein, the EGE also addresses the temporal dimension on the question of justice. In this connection, the group uses the concept of ‘justice between generations’, emphasizing that ‘future or past generations can be viewed as holding legitimate claims or rights against present generations, who in turn bear correlative duties to future or past generation’ (EGE, 2008b: p. 52). The discussion on justice does not only include the perspectives of rights, but also of duties, comparable to the debate on human rights and obligations thereof (Assmann, 2018; Weß, 2010: pp. 258–259). In light of this, the group even underlines the following as regards the issues of contrasting views in ethics: If there is an intergenerational confict of interests, considerations of justice could place an obligation on present generations not to pursue policies that create benefts for themselves but at the expense of those who will live in the future. (EGE, 2008b: p. 52) Concerning ‘synthetic biology’, the EGE in its opinion in 2009 has used the same ideas of Rawls on justice (EGE, 2009: p. 45). As regards the debate of an ethical framework on energy, the EGE took up arguments from philosopher Hans Jonas (1903–1993). Jonas was a philosopher that shed light on the relationship of man to nature and his handling of technology by stressing the responsibility towards future generations. Drawing on Kant’s ‘categorical imperative’ (Kant, 2014: pp. 71, 87, 97, 105), Jonas in his 1979 book Das Prinzip der Verantwortung outlined an ‘ecological imperative’ that reads: Handle so, daß die Wirkungen deiner Handlung verträglich sind mit der Permanenz echten menschlichen Lebens auf Erden [translation: Act so that the effects of your action are compatible with the permanence of real human life on earth]. (Jonas, 1979: p. 36) The emergence of this deontological concept has to be put into the historical context of Jonas. He perceived a strong necessity to create a new concept of ethics that takes into account the effects of technology in both spatial and temporal dimensions, which, according to him, had not been the case before. Against this backdrop, the EGE in opinion No. 27 emphasised that Jonas’s concept ‘is echoed in part in the implementation of the ‘precautionary principle’ in the legal EU framework, which reverses the burden of proof – the argument for the greater

Ethical integration in EU law 299 overall beneft of an action – in cases of expected harms or risk of envisioned technologies’ (EGE, 2013: p. 49). Furthermore, the EGE relates Jonas’ ideas of obligations towards future generations to the ‘principle of sustainability’ regarding the impact of current actions on future generation (EGE, 2013: p. 49). In this connection, the EGE points out the values of human dignity (including human rights), justice (i.e. distributive, social, political and intergenerational justice) as well as solidarity (i.e. the shared responsibility and concern for EU and global welfare). Taken together, these rights and values shall ‘guide the development of an ethics framework oriented at a responsible design of the EU energy policy’ (EGE, 2013: p. 50). It is revealing to realize that the EGE’s arguments on justice, especially with regard to obligations towards future generations, further manifest in a clear institutional recommendation for installing an ‘“ombudsperson” structure to protect the interests of future generations’, taking into account the ‘long-term effects of all political, socioeconomic and technological decisions’ in the EU (EGE, 2013: p. 66, 2018a: p. 75). The above-mentioned value of human dignity, which is generally accepted to be a deontological concept, is also picked up by the EGE in its opinion on ‘synthetic biology’. As for the EGE, human dignity represents ‘the core of the ethics framework for synthetic biology’ (EGE, 2009: p. 39). Even though the EGE only refers to it as ‘[o]ne such attempt’ for defning human dignity, the group relies further on the following defnition of the medical expert William P. Cheshire in its opinion (EGE, 2009: p. 39): The exalted moral status which every being of human origin uniquely possesses. Human dignity is a given reality, intrinsic to human substances, and not contingent upon any functional capacities which vary in degree. […] The possession of human dignity carries certain immutable moral obligations. These include, concerning the treatment of all other human beings, the duty to preserve life, liberty, and the security of persons, and concerning animals and nature, responsibilities of stewardship. (Cheshire, 2002: p. 10) This ‘intrinsic value’ – a deontological concept inspired by the ‘Kantian understanding of human dignity [that] emphasises moral responsibility’ – does not allow for ‘treating human beings as mere ‘objects’ of the interests of others’ (EGE, 2009: p. 39). For the EGE, this is in particular important when it comes to vulnerable human beings. For this purpose, the EGE refers to an idea addressed by Beyleveld and Brownsword in their seminal work Human Dignity in Bioethics and Biolaw. Resting upon the ‘notion of dignity as a virtue’, the concept of responsible behaviour, in line with them, ought to be taken seriously;20 that is to say, the responsibility on which the notion of dignity is built, is a ‘responsibility that goes to questions of character as much as to the appearance’ (Beyleveld and

20 On virtue ethics, see infra.

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Brownsword, 2001: p. 2). They carry forward with the part (partially) quoted by the EGE (EGE, 2009: p. 39): Specifcally, it is the idea of dignity as a particular practical attitude to be cultivated in the face of human fnitude and vulnerability (and, concomitantly, the natural and social adversity that characterizes the human condition). (Beyleveld and Brownsword, 2001: p. 2) Given this, for the EGE, dignity ‘is the basis for more specifc principles, rights and obligations, and is closely connected to the principle of justice and solidarity’ (EGE, 2009: p. 39). This concurs with human dignity as enshrined in art. 1 CFR and art. 2 TEU (i.e. EU’s common values) as well as the previously stated emphasis not only on rights, but also on obligations (EU, 2016a, c). With respect to patentability of biotechnological inventions, the EGE discusses the risk of commercial exploitation (‘commodifcation’; Sandel, 2012) – a potential for violating human dignity – and thus suggests three types of categories of inventions. First, that ‘which is common to all humankind, and should not be patentable or directly exploited for commercial gain’, second, that ‘which, for a variety of reasons, should be placed in the public domain for all to use and exploit (the “commons”)’, and third, inventions that can be protected ‘at the inventor’s discretion’ (EGE, 2009: pp. 45–46; Pirs, 2017: pp. 56–59). It can be argued that considering the EGE’s priority on human dignity, deontology represents a guiding theory in the feld of bioethics for the group (Pirs, 2017:p.56; Frischhut, 2019). With regard to ‘security and surveillance technologies’, the EGE stresses that human dignity ‘is at the heart of ethics and is also of crucial importance regarding the debate’ in this feld (EGE, 2014a: p. 71). Given the ongoing debates on security versus limiting freedom, the EGE provides an unequivocal comment: Human dignity is the core principle of the European moral framework, and as such it cannot be ‘traded off’. (EGE, 2014a: p. 77) However, as the EGE puts it openly, ‘dignity is intimately associated with freedom and responsibility’, whereto a balance has to be reached in between the two concepts (EGE, 2014a: p. 77). For this purpose, the EGE relies on the arguments of Jeremy Waldron (1953–), a New Zealand professor of law and philosophy. Waldron sees the respect for dignity of citizens as an argument for a moral entitlement to ‘transparency or the reasons why [the citizens] should apply certain laws’ (EGE, 2014a: p. 78). This relationship between citizens and the state (rulers and the ruled) is largely dealt with using ‘social contract theories’21 (EGE, 2014a: pp. 61–68).

21 In opinion No. 30, the EGE advocates for ‘a new social contract, in which the normative employment relationship is reconfgured so it does not have to shoulder so much of the social justice burden’ (EGE, 2018e: p. 73).

Ethical integration in EU law 301 By referring to well-known philosophers such as Thomas Hobbes (1588– 1679) and others (i.e. John Locke [1632–1704] with two references and JeanJacques Rousseau [1712–1778] with one reference), the EGE deliberates on the notion of security and ‘the moral justifcation of the absolute power of the state and of the citizens’ limitation of freedom’, mainly based on Hobbes’ 1651 book Leviathan (EGE, 2014a: pp. 61, 64; Hobbes, 2008). Whilst in theory the elected representatives are tied to the ‘people’s will’ – that is, being accountable –, ‘this has turned out to be a challenge under the new security policies’ (EGE, 2014a: p. 66). Pirs argues that in the area of ‘security and surveillance technologies’, the EGE uses ‘a more subtle approach towards a deontological understanding of human dignity’, where rights are brought in balance according to the principles of proportionality22 and effectiveness (Pirs, 2017: p. 60). Turning to (B) consequentialism, according to the major fndings of the research there were notably fewer references in EGE opinions from a quantitative perspective (see Table 16.2). When it comes to assessing the consequences arising from developments in science and new technologies, the normative theory of consequentialism plays a central role for the EGE. Against the backdrop of risk assessment, these consequences pertain to the possible beneft versus risks. Regarding anthropocentric approaches, putting humans in the centre of the universe, the EGE puts the focus ‘on consequential considerations and issues related to potential consequences from the use of synthetic biology for human beings (risk assessment and management and hazard considerations […])’ (EGE, 2009: p. 42). As for the analysis of risk, there are three elements, that is to say, risk assessment, risk management and risk communication. The already mentioned ‘precautionary principle’ is especially decisive for risk management (Dratwa, 2011; EGE, 2013: p. 49; EC, 2000: p. 2; EU, 2016b: art. 191). To that end, the EGE addresses risk assessment with a view to protecting ‘human dignity and the autonomy of persons’ on an equal level with the importance of the ‘precautionary principle’ (EGE, 2009: p. 42). Elsewhere, the EGE has referred to the precautionary principle as ‘the expression of prudence as a genuine ethical virtue’ (EGE, 2010a: p. 10). As a result, one can argue that the EGE also applies the normative theory of consequentialism in connection with human dignity, similarly as in the aforementioned context of deontology. Additionally, the EGE uses theories of consequentialism in the opinion on ‘animal cloning for food supply’. In this regard, the EGE applies a more biocentric approach that includes ethical concerns for cloned animals, for humans, for the environment and also for the society (EGE, 2008a: p. 32). One of the leading founders of modern utilitarianism (the most prominent form of consequentialism) is said to be Jeremy Bentham (1748–1832). Utilitarianism is egalitarian

22 The authors would like to thank Göran Hermerén (chairperson during the second and the third mandate) for addressing the fact that, where a consequentialist approach was (also) called for, the EGE often discussed proportionality; on the latter, see Hermerén (2012).

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in the sense that the well-being of each person is of equal value, and even the feelings of animals might be perceived in this way (Eggleston, 2012; Habibi, 2002). Therefore, Bentham is often considered as one of the earliest proponents of animal rights. Bentham together with John Stuart Mill (1806–1876) and Peter Singer (1946-) among others are referred to by the EGE with a view to conferring animals a moral status as ‘actions causing pain in sentient animals are morally unacceptable, since animals are considered moral subjects’ (EGE, 2008a: p. 33). Simultaneously, the EGE draws on a deontological line of argumentation that relates to the ‘intrinsic value argument’, thereby referring to literature addressing animals’ intrinsic value and integrity. Eventually, the EGE concludes that there are ‘doubts as to whether cloning for food supply is justifed’ and hence ‘does not see convincing arguments to justify the production of food from clones and their offspring’ (EGE, 2008a: p. 45). With respect to (C) virtue ethics (and related) in Table 16.2, the research of Pirs (2017), as updated concerning opinion No. 30, revealed 25 references. Virtue ethics is defned as ‘an approach to both understanding and living the good life that is based on virtue’ (Chara, 2002: p. 915). The EGE mainly addressed this concept of ‘human fourishing’ in light of the implications arising from the potential dangers of corroding of privacy due to the dissemination of new Information and Communication Tools (ICT). This ‘good life’ is touched upon in the EGE opinion on ethics of ICT by means of ‘giving up privacy would determine the fourishing of a personal and social virtue […] based on people’s freedom to introduce and share whatever data on their own lives they desire’ (EGE, 2012: p. 45, 2014a: p. 73). For this purpose, the EGE eventually calls for promoting ‘a stronger and more coherent data protection framework’ (EGE, 2012: p. 45, 2014a: p. 73). Additionally, the EGE refers to Hannah Arendt (1906–1975), who was one of the most important philosophers in the twentieth century. Since Arendt was among the frst scholars to address the ‘political importance of privacy’, the EGE relies on her ‘defence of the importance of the private sphere warns about dangers arising from the erosion of the private, a situation which some consider deriving from the use of IT as communicational tools’ (Arendth, Allen, and Canovan, 2018; EGE, 2012: p. 45, 2014a: p. 73). In the same vein, the EGE refers to Arendt concerning the opinion on new health technologies and citizen participation, thereby pointing out the danger of ‘downgrading of individual rights in pursuit of the collective good (EGE, 2015: p. 41). Moreover, the EGE mentions Artistotle (384–322 BCE), a well-known proponent of virtue ethics, in relation to the ethics in ICT. Here, the EGE refects on Aristotle’s notion of ‘friendship as mutual care between equals’ pertaining to the ‘ethically important change’ in the sense that social networks shape the concept of friendship and community23 (EGE, 2012: p. 42). Against this backdrop, one

23 Likewise, Aristotle has been referred to in ‘synthetic biology’ EGE (2009: p. 11) and ‘security and surveillance technologies’ EGE (2014a: p. 64).

Ethical integration in EU law 303 can see that even old concepts from moral philosophy are used for both current and future challenges. Nevertheless, despite these fndings, it is important to note that the EGE ‘does not clearly stipulate any normative ethical guidance on the basis of virtue ethics in this regards’ (Pirs, 2017: p. 63). Only one exception can be evidenced in the EGE’s opinion on ‘security and surveillance technologies’. In this context, the EGE prescribes a ‘virtuous behaviour’ as regards the tension between privacy and new technologies, thereby emphasising four instruments: technology, education, self-regulation and the law. As for self-regulation, the EGE states ‘[s]elf-regulatory governance works to promote (virtuous) behaviours by involving stakeholders and establishing bottom-up soft regulations’ (EGE, 2014a: p. 59). In light of its frst formal mandate (in 2005), one can say that as of 2008 with opinion No. 23 the EGE’s argumentation has begun to avail itself of normative theories. During that time the EGE was offcially integrated into BEPA. Adding to that, it is revealing to observe a similar progression from a legal perspective. Starting with opinion No. 16 on ‘patenting of human stem cells inventions’ (May 2002) under its second mandate, the EGE began to increasingly put emphasis on EU and international documents – primarily in the feld of human rights – as shown in the following Figure 16.2. With opinion No. 17 on ‘clinical research in developing countries’ (2003), the number of references became double-digit (14 hits), 54 hits in opinion No. 25 on ‘synthetic biology’ (2009) and reaching the maximum of 80 hits in opinion No. 28 on ‘security and surveillance technologies’ (2014). Above all, among those documents referred to, the CFR took the lead with 142 hits, followed by the European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) amounting to 79 hits, the Oviedo convention with 61 hits, the Universal Declaration on the Human Genome and Human Rights with 41 hits, the International Covenant on Economic Social and Cultural Rights (ICESC) with 28 hits and the Helsinki declaration amounting to 21 hits. This development coincides with the increase of opinions in size, as the number of pages went up from 20 pages in opinion No. 19 (2004) to around 100, commencing with opinion No. 21 (2007) (Pirs, 2017: A7). Generally, it can be noted that the development of EGE opinions witnessed a palpable extension. This is not only in the number of pages, in references to normative theories as well as the just mentioned documents, but also in scope moving topics solely in the feld of bioethics to broader issues dealing with human rights and the rise in the number of group members. Alongside the normative theories dealt with in this chapter as well as its terminological delimitation, the EGE referred to values (human dignity, justice, freedom, solidarity, etc.), to human rights and to principles, such as privacy, informed consent, non-discrimination, equity, precaution, sustainability (EGE, 2005: p. 12, 2010b).

0 3 5 2 1

Opinion no. 14 doping in sport

Opinion no. 15 human stem cell research and use

Opinion no. 16 patenng human stem cells invenons

Opinion no. 17 clinical research in developing countries

Opinion no. 18 genec tesng in the workplace

28 5 20 162

Opinion no. 28 security and surveillance technologies

Opinion no. 29 NHT and cizen parcipaon

Opinion no. 30 future of work, future of society

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Ethical integration in EU law 305

Concluding remarks and outlook In this chapter, it was amply illustrated that the EGE explicitly refers to normative theories – deontology, consequentialism and virtue ethics – in its opinions, that is, using philosophical proponents depending on the specifc context of the opinions at hand. With regard to the central question of this chapter, it can be clearly stated that the normative theory of deontology prevails in the sense of proponents being referred to by EGE in its opinions.24 While the normative theories of consequentialism and deontology seem to play a dominant role across various opinions of the EGE, virtue ethics was found to be of lesser importance to the EGE’s lines of reasoning. The strong role of deontology can be seen to lead into a similar direction as human dignity and human rights, which can both be seen as a bridge between ethics and law (Frischhut, 2019). The fact that in terms of structure, the frst part of EGE opinions lists all the relevant EU legal documents, can be seen as a small, still important brick of this bridge. And yet, considering the vast amount of information available, it is still diffcult to provide an exact answer as to why and when a specifc normative theory has been used by the EGE. With that being said, it is worth to note that the EGE very often refers to one normative theory, by emphasizing the implications for policymakers to opt for this theory, whilst at the same time illustrating another theory, thereby also stressing the implications of this theory. Therefore, in view of the dominant advocacy of deontology by the EGE, this disclaimer has to be kept in mind. Looking back, it can clearly be stated that the EC has successfully reacted to criticism, such as the too close link of some representatives to the church, and has ensured the independence of EGE members. The EC has also made clear that EGE members ‘shall not [!] perceive themselves as representatives of a particular discipline’. The only development that can be subject to criticism is the fact that a mandate of two times 2.5 years can potentially make members less independent compared to a straightforward mandate of 5 years. The ‘inspiration’ for this approach, which allows for more control, might have been drawn from the same concept used for the job of the president of the European Council; newly created by the Lisbon Treaty, Member States did not know how powerful this position might develop. Another advisory body besides the EGE, the Group of Scientifc Advisers has been subject of a slight increase of its term of mandate (from 2.5 years in 2015 to ‘up to three years’ in 2018) (EC, 2015). After this retrospective, let us now turn to possible developments in the future. Being part of the Scientifc Advice Mechanism (SAM), it will be interesting to see how those two advisory bodies, the EGE for ethics in science and new

24 A related book goes into a similar direction, according to which deontology plays a role in order to refer to general principles of morality, consequentialism to address the potential implications of technology in terms of ethical challenges, and virtue ethics in terms of how technology affects the goal of ‘pursuing a good life’ (Lucivero, 2016: p. 15).

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technology, and the Group of Scientifc Advisers for scientifc advise at large, will cooperate, or whether there will be divergent positions on future challenges.25 It will be equally interesting to see how much impact as such they will have on decision-making in the EU.26 At the beginning of its term, the Juncker administration was criticized for ‘scrapping scientifc advice’, by not prolonging the job of Scottish scientist Anne Glover as ‘Chief Scientifc Adviser’ (CSA) (Keating, 2014; Panichi, 2015). Transferring both the ‘ethics in science and new technologies’ as well as the ‘general scientifc’ input from the president of the Commission to DG ‘Research and Innovation’ can be seen in an ambivalent way. On the one hand, it can be welcomed, as these advisory bodies are located in the one DG that has the closest relationship content-wise, on the other hand, it can also be seen as a downgrading, as the direct contact to the president in this form is no longer ensured. Both access to the president as well as to other DGs will be important in terms of safeguarding the implementation of this advice in EU law and policy. This is especially true for ethical input, as nowadays the effects of technology in both spatial and temporal dimensions have way more impact than decades ago (Jonas, 1979).

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Ethical integration in EU law 307 Dratwa, J. (2011). Representing Europe with the precautionary principle. In: S. Jasanoff, ed., Reframing Rights: Bioconstitutionalism in the Genetic Age, Basic bioethics. Cambridge, MA: MIT Press, pp. 263–285. Dratwa, J. (2014). How values come to matter at the European Commission. Ethical Experimentations of Europe. Politique européenne, 45(3), pp. 86–121. doi: 10.3917/poeu.045.0086. EC. (1997). Création d’un Groupe Européen d’éthique des Sciences et des Nouvelles Technologies. SEC(97)2404 fnal 12.12.1997. EC. (2000). Communication on the Precautionary Principle. COM(2000) 1 fnal 2.2.2000. EC. (2001a). European Governance: A White Paper. COM(2001) 428 fnal OJ 2001C 287/1. EC. (2001b). Groupe Européen d'éthique des Sciences et des Nouvelles Technologies (GEE): Modifcation Du Mandat. C(2001) 691 fnal 26.3.2001. EC. (2005). Decision 2005/383/EC on the Renewal of the Mandate of the European Group on Ethics in Science and New Technologies. OJ 2005 L 127/17. EC. (2010). Decision 2010/1/EU on the Renewal of the Mandate of the European Group on Ethics in Science and New Technologies. OJ 2010 L 1/8. EC. (2015). Decision on the Setting Up of the High Level Group of Scientifc Advisors. C(2015) 6946 fnal 16.10.2015, as amended by Decision amending Decision C(2015)6946 on the setting up of the High Level Group of Scientifc Advisers. C(2018) 1919 fnal 5.4.2018. EC. (2016a). Decision 2016/835 on the Renewal of the Mandate of the European Group on Ethics in Science and New Technologies. OJ 2016 L 140/21. EC. (2016b). Decision Establishing Horizontal Rules on the Creation and Operation of Commission Expert Groups. C(2016) 3301 fnal 30.5.2016. EC. (2017). Terms of Reference: EGE-Identifcation Committee. Available from: http: //ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDe tailDoc&id=24166&no=1 [Accessed 8th October 2019]. EC. (2018). Register of Commission Expert Groups and Other Similar Entities: European Group on Ethics in Science and New Technologies. Available from: http: //ec.europa.eu/transparency/regexpert/index.cfm?do=groupDetail.groupDe tail&groupID=1566&NewSearch=1&NewSearch=1 [Accessed 8th October 2019]. EGE. (1998). Ethical Aspects of Research Involving the Use of Human Embryo in the Context of the 5th Framework Programme. Opinion No. 12. Available from: http: //ec.europa.eu/archives/bepa/european-group-ethics/docs/avis12_en.pdf [Accessed 8th October 2019]. EGE. (2002). Ethical Aspects of Patenting Inventions Involving Human Stem Cells. Opinion No. 16. Available from: http://ec.europa.eu/archives/bepa/europe an-group-ethics/docs/avis16_en.pdf [Accessed 8th October 2019]. EGE. (2005). On the Activities of the European Group on Ethics in Science and New Technologies 2000–2005. Available from: http://ec.europa.eu/archives/bepa/e uropean-group-ethics/docs/publications/genactrep05txt_en.pdf [Accessed 8th October 2019]. EGE. (2008a). Ethical Aspects of Animal Cloning for Food Supply. Opinion No. 23. Available from: http://ec.europa.eu/archives/bepa/european-group-ethics/ docs/publications/opinion23_en.pdf [Accessed 8th October 2019].

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EGE. (2008b). Ethics of Modern Developments in Agricultural Technologies. Opinion No. 24. Available from: http://ec.europa.eu/archives/bepa/european-group-e thics/docs/publications/opinion24_en.pdf [Accessed 8th October 2019]. EGE. (2009). Ethics of Synthetic Biology. Opinion No. 25. Available from: http:// ec.europa.eu/archives/bepa/european-group-ethics/docs/opinion25_en.pdf [Accessed 8th October 2019]. EGE. (2010a). Citizens Rights and New Technologies: A European Challenge. Report of the European Group on Ethics in Science and New Technologies on the Charter on Fundamental Rights Related to Technological Innovation. CFR Report. Available from: http://ec.europa.eu/archives/european_group_ethics/docs/prodi_en.pdf [Accessed 8th October 2019]. EGE. (2010b). General Report on the Activities of the European Group on Ethics in Science and New Technologies to the European Commission 2005–2010. Available from: http://ec.europa.eu/archives/bepa/european-group-ethics/docs/gar_ ege_2005-2010_web.pdf [Accessed 8th October 2019]. EGE. (2012). Ethics of Information and Communication Technologies. Opinion No. 26. Available from: https://publications.europa.eu/en/publication-detail/-/publi cation/c35a8ab5-a21d-41ff-b654-8cd6d41f6794 [Accessed 8th October 2019]. EGE. (2013). An Ethical Framework for Assessing Research, Production and Use of Energy. Opinion No. 27. Available from: https://publications.europa.eu/en/ publication-detail/-/publication/44f7f1fa-eb0c-44e7-9a75-45377d5abd73 [Accessed 8th October 2019]. EGE. (2014a). Ethics of Security and Surveillance Technologies. Opinion No. 28. Available from: https://publications.europa.eu/en/publication-detail/-/publi cation/6f1b3ce0-2810-4926-b185-54fc3225c969 [Accessed 8th October 2019]. EGE. (2014b). Welcome to the Web Site of the European Group on Ethics in Science and New Technologies. Available from: http://ec.europa.eu/archives/bepa/e uropean-group-ethics/publications/proceedings-ege-roundtables/index_en.htm [Accessed 8th October 2019]. EGE. (2015). The Ethical Implications of New Health Technologies and Citizen Participation. Opinion No. 29. Available from: https://ec.europa.eu/research/ ege/pdf/opinion-29_ege.pdf#view=ft&pagemode=none [Accessed 8th October 2019]. EGE. (2018a). General Activity Report 2011–2016. Available from: https://ec.euro pa.eu/research/ege/pdf/ege_genral-acivity-report_2018.pdf [Accessed 8th October 2019]. EGE. (2018b). Statement on Artifcial Intelligence, Robotic and Autonomous Systems. Available from: https://publications.europa.eu/en/publication-detail/-/publi cation/dfebe62e-4ce9-11e8-be1d-01aa75ed71a1/language-en/format-PDF/ source-74172308 [Accessed 8th October 2019]. EGE. (2018c). Open Round Table Future of Work. Available from: https://ec.euro pa.eu/info/sites/info/files/research_and_innovation/ege/ege_b5_proceed ings_roundtable-future-of-work.pdf [Accessed 8th October 2019]. EGE. (2018d). The European Group on Ethics in Science and New Technologies (EGE). Available from: https://ec.europa.eu/research/ege/index.cfm?pg=hom e [Accessed 8th October 2019]. EGE. (2018e). Future of Work, Future of Society. Opinion No. 30. Available from: https://ec.europa.eu/info/sites/info/fles/research_and_innovation/ege/ege_ future-of-work_opinion_122018.pdf [Accessed 8th October 2019].

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Index

actuarial justice 75 bank secrecy 163–176, 185–201, 209, 211, 217 behavioural ethics see ethics bribery 7, 18n4, 20n6, 23, 161, 164, 243–246, 270; and corporate social responsibility 221, 223, 237–238; prosecution, prevention and deferred prosecution agreements 71–84, 91, 94–98, 100, 105, 107–108; and restorative justice 113, 117; in Swiss frms 246–249, 251, 253, 257, 260, 263–264 Bribery Act 2010 (UK) 71–84, 91, 95, 98–99, 105, 109, 243 causes of corruption see corruption community: business 19, 264; international 32, 168; and restorative justice 114, 118–121, 123; social 17, 26, 99, 227, 230–231 Companies Act 2006 (UK) 224, 230, 233, 238 Competition Act 1998 (UK) 39–41, 43–45, 48–49 competition law 36–50 cooperation (international) see harmonisation and cooperation corporate compliance 7–8, 27 corporate criminal liability 5–6, 17–32, 72–74, 76–85, 88–108, 113–124 corporate governance see governance corporate social responsibility (CSR) 4–5, 219–220, 223, 234–237 corruption 243–246; causes (proximate and remote) 8–10; grand 7, 20, 127–141; perception of 18n4, 64, 145, 247–259, 262; transnationality 4, 17–19; transversality 4

Council of Europe Civil Law Convention on Corruption 1999 4n1, 164 Council of Europe Criminal Law Convention on Corruption 1999 4n1, 54, 60, 164 Court of Justice of the European Union 11, 154, 173 Crime and Courts Act 2013 (UK) 115, 118, 121 criminal law 5–6, 10, 17–32, 54–65; escape from punishment and criminal law 5–7; see also corporate criminal liability; deferred prosecution agreements; restorative justice criminal procedure 17–32 deferred prosecution agreements (DPAs) 6, 75–85, 89–108, 113–124, 161 Department of Justice (US) 38, 53, 82, 89–90, 121 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 on the disclosure of non-fnancial and diversity information by certain large undertakings and groups 4, 219–238 discretion: expert 286; judicial 26, 115–118, 124, 135, 231; managerial 234, 272n6; national 11, 137, 188; prosecutorial 10, 116–118, 124 Egypt 130–131, 133 embezzlement 115, 131, 151, 171, 270 Enterprise Act 2002 (UK) 39–40 Enterprise and Regulatory Reform Act 2013 (UK) 45–46, 49 ethics 3, 10, 173, 176, 245, 286–306; behavioural ethics 268–284

312

Index

European Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR) 1950 117, 133– 134, 138–139, 162n2, 173, 303–304 European Court of Human Rights 62, 138–139, 173, 175 European Court of Justice see Court of Justice of the European Union European Group on Ethics in Science and New Technologies (EGE) 286–306 evidence: in the designation for sanctions 133, 138; in the prosecution of fnancial crimes 6–7, 30, 46, 61, 73, 82, 92–95, 102–108, 161–162, 210; provided by whistle-blowers 153–154, 157, 163, 167–169, 171 false accounting 20, 82, 100–101, 103–104, 106, 149–150, 275; see also fraud Financial Conduct Authority (FCA) (UK) 36, 38, 42–49, 89, 97, 101–104 fnancial crime 3, 6–7, 10, 25; prosecution of 36–50, 75, 89; and restorative justice 113, 121; and whistleblowing 150, 153, 156, 161–176; see also white collar crime Financial Services Authority (FSA) (UK) 38, 43, 47, 51–52, 75 Foucault, M. 71, 74, 296, 297 fraud 23, 26, 40, 74, 90–92, 117, 123, 244–245, 270; accounting and reporting 101, 149–150, 235; tax 161, 169; see also false accounting; tax avoidance; tax evasion global governance see governance globalisation 18, 27, 186–188, 192, 195, 200; of anti-corruption law 3–11, 17–32; of corruption 3, 8–9; judicial 9; see also governance global justice 296, 298 governance 3, 154, 164, 264; corporate 26, 42, 102, 123, 145–146, 149, 158, 222, 227–233; crime 74–76; global 18, 76, 215; good 268, 270–271, 283, 291, 303; of tax havens 209–210 governmentality 71 Greece 169 Groupe d’Etats contre la corruption (GRECO) 57, 66

harmonisation and cooperation (international) 4–9, 20–22, 28–32 integrity 3, 5, 7–8, 10–11, 62–63, 287, 291, 302; corporate 219, 234, 237–238; fnancial 18, 27, 95, 104, 195; public 62, 245, 249, 269–284; social 62; of the systems of restorative justice and deferred prosecution agreements 117 Italy 22–27, 54–65, 224–225, 228–229, 235–237 Luxembourg 3, 161–163, 172–176, 193, 195, 197, 216 Luxleaks 172–175 misappropriation 127–141, 148, 151; see also embezzlement money laundering 20, 61, 130, 140, 151, 161–162, 169, 185; laws and regulations 97–98, 132, 137, 162, 167, 197, 214; prosecution 73, 82; sentencing 117; and tax avoidance and evasion 209, 211–215; see also Sanctions and Anti-Money Laundering Act 2018 (UK) moral learning 268–284 mutual legal assistance in criminal and civil matters 128, 130, 139–140; see also harmonisation and cooperation Nigeria 145–158 OECD Convention on Combating Bribery of Foreign Public Offcials 1997 20n6, 22, 77–78, 243–244 OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters 8, 174, 208–209, 212–213 OECD Standard for Automatic Exchange of Financial Information in Tax Matters 2018 8 offshore fnancial centres (OFCs) see tax havens Panama Papers 162, 185–186, 188 perception of corruption see corruption power: political 11, 128, 188, 190, 193, 199–200, 206–217, 269–270, 301; corporate 72, 74–76, 84–85, 155, 227, 229; individual 169, 273

Index

313

Powers of Criminal Courts (Sentencing) Act 2000 (UK) 114 prevention of corruption: administrative measures 55–56; failure to prevent model 76–82; negative measures 6–7; positive measures 7–8; preventive partnerships 71; regulatory action 75–76; in the UK law 76–78 prosecution 36–50, 71–85, 161–162 punishment see criminal law

tax havens 176, 185–201, 206–217 transnationality and transversality of corruption see corruption Treaty on European Union (TEU) 20n6, 128, 132, 289, 291 Treaty on the Functioning of the European Union (TFEU) 39–40, 128, 132, 140, 289, 291n14, 305 Trump, D. 6, 74 Tunisia 129–130, 133, 139, 168

rational choice 210, 271, 272n7, 277 responsibilisation 7–8, 71–72, 75–76, 78, 84–85 restorative justice 113–124 risk: assessment and management 55, 75–77, 146, 210, 214, 220–222, 226–228, 234, 238, 256–257, 276– 277, 301; of corruption 7, 244, 247, 250–251, 253, 260–264, 270–272, 274, 276, 279; of crime 6, 32, 55, 62, 95–96; fnancial 41, 46, 74, 185, 192, 200; of human rights violations 137–138; of insolvency 81, 99; of whistle-blowing 154, 157, 161–176

Ukraine 131, 133, 138, 168, 271n3, 279n9 UN Charter 128 UN Convention against Corruption (UNCAC) 2003 4–9, 20n6, 54, 130–131, 164, 243–244 United Kingdom 3, 6; corruption 243, 246; prosecution of fnancial crimes 36–50, 71–85, 89–108, 122–123; reporting of non-fnancial information 224, 230–234; sanctions 134–135, 137, 139; taxation and tax havens 186, 190–194, 198–200, 206, 214–216; whistleblowing 45–46, 49–50, 92, 104, 146–149, 154, 155, 164, 168–169, 175 United States of America 3; anticorruption 62, 243; prosecution of fnancial crimes 28, 36, 73–74, 80, 82–83, 89–91, 119, 121, 161; taxation and tax havens 188, 209; whistleblowing 149, 166–169, 256 UN Security Council 128

sanctions 7, 11, 127–141 Sanctions and Anti-Money Laundering Act 2018 (UK) 137, 214–215; see also sanctions Security and Exchange Commission (SEC) (US) 89–90, 111 Serious Fraud Offce (SFO) (UK) 38–40, 52, 72–74, 78–83, 88, 91–108, 111–112 sovereignty 9, 11, 71, 74, 193, 198, 200, 208, 214–215 SwissLeaks 162–172 Switzerland 3, 5, 38, 161–176, 186–197, 200, 243–264 tax avoidance 8, 20, 172, 185–201, 206–217 tax evasion 8, 20, 113, 150–151, 155, 161–163, 165–176, 185–201, 206–217; see also fraud

victims: of corruption offences in Italy 57, 59, 237n19; and restorative justice 114, 117–118, 120, 122–123 whistle-blowing 6, 8, 143–158, 161–176; in Italy 55, 61–65; in Switzerland 245, 253, 256, 261; in the UK 45–46, 49–50, 92, 104 white collar crime 42, 56, 90–91, 113, 115, 257, 259; see also fnancial crime