by Anthony S. Barkow and David C. Lachman
The decision by British voters to exit the European Union (EU) has ushered in what is likely to be a prolonged period of uncertainty as the United Kingdom (UK) seeks to define its future relationship with the EU. Brexit’s effect on enforcement policy and the investigation and prosecution of white collar crime is one area that should be of great interest to international companies with operations in the UK, their general counsel, and cross-border practitioners. At first blush, it might appear that Brexit’s impact on enforcement will be minimal, because many of the relevant UK laws are independent of EU law. The uncertainty that Brexit portends for the UK generally, however, is equally applicable in the white collar arena. On the one hand, Brexit could result in a regulatory race to the bottom, affecting enforcement on both sides of the Atlantic. On the other hand, new Prime Minister Theresa May already has called for a tougher approach toward business, including in the areas of tax evasion and anti-competition policy. Although it is too early to predict Brexit’s consequences for enforcement activity, we delineate below a range of potential scenarios and how they may shape UK—and U.S.—efforts to investigate and prosecute corporate misconduct.
Economic and Political Models for UK’s Post-Brexit Engagement with Europe
The economic and political backdrop against which the UK enforcement agenda will be set is itself uncertain. As a consequence of Brexit, the UK could seek to join the European Economic Area (EEA), which would guarantee continued access to the single market. Alternatively, the UK might negotiate bilateral agreements with the EU, sector by sector, like Switzerland; participate in a customs union, along the lines of the EU’s relationship with Turkey; negotiate a separate free trade agreement, as has been drafted between the EU and Canada; or rely on World Trade Organization membership. Finally, although the new Prime Minister has explicitly foresworn this path, there still remains the possibility that the UK will not ultimately leave the EU, either as a consequence of a second, “regrexit” referendum or because the new government ultimately decides not to heed the advisory results of the Brexit vote.
This wide range of possible outcomes results, in part, from the failure of the “Leave” camp to articulate a clearly defined vision for the UK’s relationship with the EU. But the uncertainty of the UK’s position vis-à-vis the EU also depends, to a large degree, on the outcome of political negotiations with the remaining EU states and their willingness to reach an amicable divorce with the UK.
UK Regulatory Implications: A Spectrum of Possibility
However the UK decides to relate economically and politically with the rest of Europe, UK enforcement policy could be recalibrated along a range of possibilities. As an initial matter, some fundamentals will remain unchanged. Many of the existing laws governing serious fraud and economic crime, including the Bribery Act of 2010, are UK law and will remain in effect after Brexit, unless amended or repealed. Moreover, the Financial Conduct Authority (FCA) and the Serious Fraud Office (SFO) are national regulators, and their mandates are unchanged by Brexit. For these reasons, Brexit will not have a direct, immediate impact on the UK regulatory and enforcement regime. Moreover, Brexit’s effect on the UK’s enforcement of laws targeting financial crime and corruption depends largely on the nature of the relationship that the UK forges with the remaining EU states after Brexit. If the UK were to join the EEA, for example, Brexit may have a minimal impact on enforcement trends, because the UK would continue to be bound by EU law.
Discretionary enforcement and policy decisions, however, are less predictable. Freed from the constraints of Brussels, the UK might embrace a deregulatory strategy, either by design or in response to businesses threatening to relocate abroad. Such a deregulatory agenda could afford UK businesses a competitive advantage over their EU counterparts by reducing the costs and burdens of regulatory compliance. The UK financial center, for example, may attempt to take advantage of a race to the bottom by positioning itself as an offshore financial center for Europe. Moreover, to the extent that UK companies turn to emerging markets to replace lost business with the EU, they could encounter higher levels of bribery risk, which may in turn lead to a move to weaken the UK Bribery Act and other limitations on business conduct. Finally, if the uncertainty created by Brexit results in an economic downturn, as predicted by many analysts, budgetary pressure may diminish the ability of the FCA and SFO to initiate and maintain large-scale investigations, or may prompt Prime Minister May to revive her prior efforts to abolish the SFO and transfer the mandate of serious crime investigation to the National Crime Agency.
The pursuit of a deregulatory agenda, however, would likely have consequences for the UK’s access to the EU single market. Members of the EEA, for example, access the single market to the same degree as EU members but must comply with EU law, respect the “four freedoms” of movement of goods, persons, services, and capital, and make substantial financial contributions to the EU budget. Similarly, the EU is likely to condition the negotiation of bilateral agreements, a customs union, or a free trade agreement on the UK proving that it has adopted equivalent regulatory standards. As a result, the UK will likely have to choose between the ability to derogate from EU standards and open access to the single market. Being bound by EU law while surrendering the ability to influence its direction would seem to undermine one of the main pro-sovereignty motives for Brexit. However, it seems unlikely that the new UK government would want to remove the UK from the harmonized EU system of financial regulation, given the key role that access to the single market has played in the development of London’s financial center.
Alternatively—and accepting Prime Minister May’s first statements at face value—the UK could move in the direction of increased enforcement, whether in response to the undesirability of policy outcomes described above, for political reasons, or to position the UK competitively as a jurisdiction with a more rather than less stringent regulatory approach.
A U.S. Effect?
Whatever course the UK adopts has potential implications for U.S. enforcement policy. A decrease in UK enforcement activity might lead to a corresponding decline in U.S. enforcement. To some extent, as the recent Libor and Forex probes illustrate, the U.S. and UK enforcement agencies have been engaged in international competition. Moreover, the cross-border sharing of leads regarding potential violations, documents, and witness testimony often contributes to the enforcers’ abilities to bring such cases. If UK enforcement declines, the U.S. may have fewer leads to work with or fewer opportunities to piggyback on UK investigations—and less competitive incentive to initiate and bring such matters in the first instance.
The same developments might also lead to increased U.S. enforcement, however. If increased financial pressure on UK companies results in an uptick in fraud and business misconduct, and the UK regulators are less inclined to act, the DOJ or SEC may step into the void. In particular, the DOJ has demonstrated an intensified focus on FCPA enforcement, recently adding new prosecutors and FBI special agent squads dedicated to FCPA investigations.
And, if Prime Minister May’s statements foreshadow increased British regulatory enforcement activity, U.S. enforcement policy could respond competitively by increasing its own aggressiveness or, by contrast, scale down enforcement activity to seek some broader economic advantage.
In sum, the effect of Brexit on the UK and U.S. enforcement regimes is likely to play out in a dynamic and uncertain environment. The world will be watching the unpredictable political and economic developments—and companies and lawyers should be watching developments in the arena of enforcement policy and activity.
Anthony S. Barkow is co-chair of and a partner in, and David C. Lachman is an associate in, the white collar defense and investigations practice at Jenner & Block LLP. Both are based in the firm’s New York office.
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