Episode 3, Corporate Crime and Investigations: Investigations trends in 2023

26 May 2023

Ruby Hamid, co-lead in Ashurst's global corporate crime team is joined by Richard Bulmore, a partner in Ashurst's restructuring and insolvency practice based in London, Alexander Dmitrenko, Ashurst's corporate crime and investigations lead in Asia, Sophie Law, an investigations and litigation expert based in London and Olivier Dorgans, a partner in Ashurst's Dispute Resolution practice based in Paris.

In this episode Ruby, Richard, Alexander, Sophie and Olivier look forward and discuss the triggers they think they'll be seeing in 2023 and what macroeconomic trends will be involved.

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.



Hello and welcome to the Ashurst Corporate Crime and Investigations podcast series where we explore a range of aspects of investigations and bring to you some of the insights that we've gained from carrying out investigations for our clients across a wide range of areas. I'm Ruby Hamid, I co-lead Ashurst's Global Corporate Crime Team and we are looking today at investigations triggers for next year. What are we going to be talking about when we meet this time next year to look back on 2023? And we have a fantastic panel here today to have that discussion with you.

I've got with me today Richard Bulmore, who's a partner in our restructuring and insolvency practice. He's going to be talking to us about the economic downturn and the impact on investigations there. Alexander Dmitrenko, who's our Corporate Crime and Investigations lead in Asia. Alexander's a US qualified lawyer who specialises in sanctions amongst other areas. I've got Sophie Law with us who is an investigations and litigation specialist in London, and she's going to talk to us about the increasing rise of human rights and supply chain in investigations. And finally, Olivier Dorgans, who leads our practice in Paris and is going to talk to us about whistleblowing, which for those of you who are regular podcast listeners will know is a topic which comes up pretty frequently in the investigation space.

So some really interesting things to look forward to in this session. I'm going to kick off now by asking Richard, tell us a little bit about what the biggest macroeconomic trend that we are all facing at the moment, economic risk and recession, how's that finding its way into investigations?


Thanks, Ruby. Well, we're all being told to expect the UK's longest ever recession according to the Bank of England, and increased distress for companies. And we all know, I think, and are familiar with the range of economic headwinds that are causing that distress - interest rates, consumer confidence, changes in consumer behaviour, energy prices and labour shortages as well as many others. And there are very few industries or sectors that really are untouched by those headwinds. And with increased distress comes the prospect of corporate failure and really difficult decisions for directors.

And as to how that can play out leading to investigations. Well, the first angle is that following an insolvency, there are investigations carried out by an insolvency practitioner in the UK, an administrator or liquidator interrogating how directors complied with their duties, how they considered and satisfied those obligations to creditors and whether they were engaged in wrongful trading or other civil offences under the Insolvency Act. And we've also seen as well intense pressure on regulators, public bodies, even government to investigate failures and to scrutinise those involved. And thinking here of the large corporate failures in BHS, Carillion, and Thomas Cook.

Now the reality is that distressed situations are not always about failures by directors and boards, and sometimes there's not much that the board can have done differently, but there is increasing pressure on regulators and government to be interrogating them on why the company has failed and finding the reasons for that failure. As to the impact on the individuals involved, well investigation by an insolvency practitioner gives rise to the risk that actually becomes a prelude to litigation with possible personal liabilities for directors, and in extreme cases, disqualification or even criminal liability, although that tends to be limited to cases of fraud. But there is obviously, with the wider range of regulatory and government led investigation, the possibility and potential for significant reputational impact, those regulatory investigations may directly lead to sanction against the individuals.

But the kind of televised Treasury or BEIS Select Committees, even if they don't lead to actual direct sanction against individuals, can be incredibly stressful for those involved and they are televised and of the highest profile. One trend that we're seeing is a combination of one or more types of investigation, particularly in larger corporate failures and particularly in regulated businesses where there are competing or overlapping sources of duties, directors' duties and decision making can be much trickier to navigate and deciding what's in the best interests of stakeholders and creditors there will also need to take into account the attitude, prospect of action by a regulator. Is it possible, for example, that the regulator may impose a fine or in an extreme scenario actually impose a requirement on the firm? And is that clear or is it in fact ambiguous and therefore is a director faced with the really difficult task of working out whether he should follow his obvious duties to all creditors or actually look to the possibility that some creditors, or the interest of the regulator might have to take front stage in his decision making?

As to how we can reduce the risk and what companies and directors ought to be thinking about, well it's all the usual best practice principles for complying with directors' duties generally. So we would encourage directors to really engage and inform themselves as fully as possible of all the relevant facts, ask the right questions, whether there is a reasonable prospect of avoiding an insolvency, pay close attention to cash flow and the signs of distress, including arming themselves with the information necessary to do that, holding frequent board minutes, having detailed minutes and records as soon as really there's the earliest indication of distress. And also, to obtain the right legal and financial advice, which in itself, just taking that is a critical mitigant and really to do that sooner rather than later. Really that's key in how companies and directors approach these sorts of situations.


Richard, that's fascinating. Thank you. And a really interesting theme you're picking up there, which we've talked about in other podcasts, this increasing focus on the role of the individual and individual conduct here in the insolvency space, it's directors who are in the spotlight. Thank you very much.

Alexander, I'm going to move on to talk to you about one of the other big macroeconomic trends that we are dealing with at the moment, which is itself giving rise to investigations and that's financial sanctions. Energy prices and the war in Russia are being talked about as key triggers for that global financial uncertainty Richard's been discussing. How is this playing out for our clients in the investigation space?


Thank you, Ruby. Indeed, financial sanctions have seen phenomenal expansion in the last year in response to Russia's war in Ukraine. We are now probably at a place where law and regulations have largely settled and licenses have been issued to allow winding down have also expired. So it's what you may call the enforcement time. And enforcement time means there will be investigations and we know that now OFAC has been able to recoup a lot of staffing needs that appeared after and during the Trump administration when people have left OFAC, now I understand those spots have been filled and people are keen to start enforcing.

And enforcement in sanctions sphere, Ruby, would be also important to address the criticism that has been raised in this area because a lot of people have been saying, well, sanctions have been issued, but are they taking any effect? Vis-à-vis Russia's ability to launch the war in Ukraine. So the enforcement will need to come in and it's on the way. We know it's a priority for the US particularly authorities to show sanctions will and do bite.

To think about that in a sense, enforcement in the sanctions sphere probably is not dissimilar to other areas where regulatory investigations do take time. In one of my last cases, it was almost three years before it became public and settled. So we may not hear about them, but we do know that there are sanctions ongoing and investigations that are ongoing and enforcement that's being pending.

Ruby, to your question, I think from clients' perspective, it's particularly what OFAC would call low-hanging fruit. It's the financial industry and the logistics industry that may be particularly exposed. So to them, I think we will always say, and we see them being as both the enforcers and then foreseers of sanctions, and I think we'll see that continuously as a trend going forward.


A great deal of risk here, Alexander, one of those risks being the ever-changing nature of the sanctions and the risk that companies are caught between sanctions as financial measures and counter measures by other jurisdictions. Do you want to say something about how that might impact our clients?


Yes, Ruby, you definitely raising a critical point and critical concern that clients have been facing, particularly in jurisdictions like Russia, like China, where there are now counter measures and counter sanction regimes that basically make compliance with international foreign sanctions domestically a very difficult proposition.

For Russia, what clients are seeing now, it's difficult exiting Russia or selling the assets and moving the money out of Russia if they want to. For China, obviously it's continuously this compliance with foreign sanctions that may lead to negative consequences and there are a myriad of them, one of them may be losing licenses in China and Hong Kong. And I think, but that's where clients have asked us to help them with some guidebooks and rule books as to what to do in situations where you do face a clear conflict of sanctions within two different jurisdictions.

But clients don't come to us just because they have concerns. They want to mitigate those concerns, right Ruby? That's a key area. They don't want to be necessarily facing investigations. So when we think about mitigation, we want to start with risk assessment. We want to ensure that clients have robust compliance programmes, policies, procedures in place, that those compliance procedures are ongoing, and not just that at a time when clients are onboarding their third parties. And ultimately, and particularly for financial industry, we do see that contractual protections and requirements of having reps and warranties focusing on sanctions are put in place and they're given by the counterparties ensuring that the counterparty isn't sanctioned and none of their owners, affiliates are, that they're not doing business with sanctioned companies or countries, that transactions and proceeds are not going to end up in any benefit for sanction parties. And also ultimately, dealing with someone who's on the sanctions instigation.

So a lot of the reps and warranties now are in a way to protect yourself against potential exposure. But ultimately, Ruby, I'll finish with this, is that for many sanctions regimes, it's a strict liability regime. So you may not necessarily be able to defend yourself with all these mitigation risks, but you may really be able to mitigate risks and bring down the measures that may otherwise be quite drastic. Thank you.


Okay. Really good advice, Alexander. Thank you. Sophie, I'm going to bring you in to ask you about human rights as one of the trends that we see taking hold in 2023. But do you want to mention the sanctions tracker that you've been so instrumental in putting together? I think that might pick up on one of the useful mitigation steps that Alexander's mentioned.


Yeah, absolutely. So as Alexander was saying, it's been a historic year in terms of sanction and it was hard even for sanctions practitioners to keep track of the ever-changing new requirements that were being placed on companies, in particular at the beginning of the invasion back in February, March, April time. So we have a tracker of Russian sanctions and it covers four major jurisdictions, so the UK, the EU, Australia, and Japan that we keep updated very regularly with help from colleagues across the globe and gives a very high level summary of the developments. And that can just be found on the Ashurst website.


That's great. Thanks, Sophie. Tell us a little bit about human rights as a theme. Again, clearly one of those big macroeconomic trends we're hearing so much about. How's it finding its way into the investigations agenda?


Yeah, absolutely. So I think human rights and modern slavery, in particular in the context of corporate supply chains, is something that's been under increasing scrutiny recently, and that's only going to increase I think over the course of the next year.

I think one of the main sources of that scrutiny is changes in legislation. So modern slavery is nothing new. The UK's had a Modern Slavery Act since 2015, but it does only require businesses to publish statements on the steps that they're taking to prevent modern slavery in their operations, and it doesn't really have any powers or any teeth in terms of regulators to come after companies if they are not taking adequate steps. The UK is committed to a new modern slavery act, which does increase some of the obligations on companies in this area, for example, increasing civil penalties for non-compliance. But it's interesting when you look at some other jurisdictions, and particularly in Europe, there's a number of new pieces of legislation that are going a lot further than that.

So for example, France, Germany, the Netherlands, and the EU as well are all introducing or have introduced legislation that requires companies to do a lot more to minimise human rights related and environmental risks along their supply chains. So in particular, the European Commission has published a draft of its corporate due diligence directive and that imposes mandatory human rights and environmental due diligence requirements across member states, not only to say what they are doing to reduce those risks in their supply chain, but also to prevent and remedy those adverse human rights and environmental risks.

And I think the second reason as to why human rights, in particular modern slavery, is coming under increased scrutiny is simply that it's being talked about more. It's very much on politicians' and policymakers' agendas. ESG is a buzzword that we've been talking about for a number of years, but the focus has been mainly on the E, the environmental, in particular climate change. And I think the increased prominence of human rights and modern slavery is showing that people pay much more attention now to the S of ESG, and businesses are facing pressures, not just from regulators and governments, but also from investors and shareholders and even from employees and civil society to be seen to be doing the right thing in this area.


That's a really fascinating trend and absolutely tapping into the zeitgeist at the moment. What sort of thing can our clients do to prevent or to mitigate the risk of investigations arising from human rights and from their supply chains?


I think the first thing that's really key is to make sure you understand what legislative requirements you have, where are you operating? What of these pieces of legislation do you need to comply with? And coming back to the themes that Alexander and Richard have mentioned already, companies may well be operating in a number of jurisdictions where the obligations in this area are not harmonised. So that may well be complex in itself, but get a good handle on what your obligations are.

And I think the second most important thing is to really due diligence your supply chain, carry out robust risk assessments. Are you operating in an industry or a jurisdiction which is high risk? Know your suppliers, due diligence, research, visit them and understand where your risks are so you can identify ways to mitigate those risks. And I think the final thing, again, Alexander's touched on this, is to have some really robust policies and procedures in place to make sure that everyone across your business understands their obligations and complies with them in this area.


Absolutely. Great advice, Sophie. Olivier, I'm going to ask you a bit about whistleblowing, which is a theme that regular listeners to this podcast will have heard us touch on in a range of different ways. An uptick in whistleblowing, I think we'll all agree, but some really crucial changes happening to legislation in Europe. Do you want to pick up on those for us?


Of course. Thanks Ruby. As you may recall, the European Union adopted in 2019 a directive to harmonise the protections of whistleblowers throughout Europe. Because it was adopted in 2019, it was due to be fully implemented by all member states by 2021, but because of COVID notably there's been some significant delays in the implementation by member states.

France was at the forefront of whistleblowers' protection as early as 2016. It adopted as part of its anti-corruption legislation, fairly strong whistleblowers' protection regime and it was one of the architects of the European directive. So not surprisingly, France was one of the first European country to fully transpose the European directive and the transposition is still undergoing some progress in various European countries. So we hopefully going to see a full implementation of the directive by 2023.

In terms of the novelty that have been brought by this new whistleblowers' protection regime at the European level, there are two areas which are noteworthy I believe. The first relates to the levelling of the various alert channels. The European Union noticed that some of the internal alert systems that companies were implementing were not as efficient as they should be. So they've levelled the internal and the external channels. So accordingly now, a whistleblower can decide to either opt for the internal channel or go directly to a regulator and benefit from the protection of the whistleblower status.

So this is something that you can understand from a policy standpoint, but it's causing a lot of headaches to companies, most notably because some companies have spent significant time, efforts, and invested a lot in their internal channels over the last few years and it's been a great deal of effort and it's now difficult because they are facing direct competition from the external channel. And as we all know, it's so much easier for a company to manage a potential alert when it's been handled first internally before having the authorities kicking in.

And now that there's a perfect levelling of the two channels, then it's going to be very difficult for companies, even though there are ways to do so, to keep the internal channel attractive. And before I forget, the other area which is in the directive, is the fact that there's a creation of a whistleblower facilitator status as well, which is a novelty, and it's been created to give protection to unions, for instance, internally or to all sorts of individuals that may want to help the whistleblower as part of the process. The reason behind that change is the fact that the commission also noticed that whistleblowers can sometimes be very isolated. So by extending the protection status of whistleblowers to unions or individuals that have assisted the whistleblower as part of the whistleblowing, then the commission is also hoping that there will be more alerts being raised and as a result that there will be more investigations being conducted.


So a lot on the horizon in Europe. Olivier, can I ask what the impact of that is on companies who, for example, are not headquartered in Europe, but which have offices or operations or staff there? Are they also impacted?


They are. It's company above, irrespective of the legal form, company that are operating through, for instance, subsidiaries in Europe. To the extent that the subsidiary has 50 employees or more, it has to set up its own internal system that meets the requirement of the European directive, and there's been some interesting discussions for groups which are headquartered in one member state, but have affiliates or subsidiaries throughout Europe. Above which thresholds do these subsidiaries or affiliates need to have their own internal systems, or can they benefit from the group whistleblowing system? The Commission has a very strict point of view, which is to the extent you are above 50 employees, but below 250, you have the ability to benefit from the group system. If your subsidiary or affiliate has more than 250 employees, then you need to have your own internal whistleblowing system.


Okay. So really broad application to many of those who will be listening to this podcast. Alexander?


Yeah. Well yeah, Ruby, actually, and Olivier, this is a great question because for companies that are sitting in Asia, many companies have operations in Europe and France and I've helped companies to set up those whistleblowing hotlines globally. And it does impact how those companies will create the kind of global structure because if we see in different regulatory requirements expectations from those companies, that may apply domestically in France or Europe, vis-à-vis the global operations, that may create a disconnect because companies may not be ready to follow French law globally. And I think that's a trend we will see and that experience that maybe European law will lead us, will be interesting to see whether that will resonate for global companies elsewhere or that will remain to be European only.


Yeah, I think there's much to watch in the whistleblowing space, and I'm sure we'll come back to it in future podcasts. I'm going to draw this conversation to a close. Thank you very much to Alexander, to Olivier, to Sophie, and to Richard for joining today. If any of our listeners want to get in touch with us, then you'll find our details on the Ashurst website. And if you'd like to learn more, then look out for the next podcast in this series. If you don't want to miss future episodes, do subscribe now on your favourite podcast platform. And if you'd like to keep the conversation going, leave us a review or a rating and let us know if there are any topics you'd like us to cover. Until then, thank you for listening.

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.