No deal Brexit and financial crime: proposed regulations published
‘Waste crime’ takes many forms and is nothing new. However, it is on the increase and is now one of the main targets for serious and organised crime networks. The criminality includes large-scale fraud, bribery and corruption, intimidation of legitimate competitors, breaches of environmental law, tax evasion, and in some cases modern day slavery.
This has now attracted significant government attention and an Independent Review into Serious and Organised Crime in the Waste Sector was commissioned in June 2018 with a report published November 2018.
One area that is being looked into is abuse of the regulatory system for package recycling following a scathing report published by the National Audit Office (NAO) last year which has resulted in the Environment Agency opening a fraud investigation. The Environment Agency has set up a team of investigators to respond to concerns raised in the report and elsewhere that firms and organised criminals are abusing the packaging waste system. As such, it is clear that there is a significant will to punish anyone involved.
In a nutshell, the NAO report highlighted that the self-reporting nature of the regulatory system governing packaging recycling, combined with reduced oversight from the Environment Agency, has left the industry open to fraud. This is backed up by increasing complaints to the Environment Agency about fraudulent behaviour of exporters of recyclable waste.
Marie Fallon, director of regulated industry at the Environment Agency, has stated that “waste crime is in the nature of the industry” and has earmarked additional resources to be used to combat it. The Environmental Agency has accordingly moved to step up compliance and enforcement efforts and a number of criminal investigations are in hand into potential fraudulent and organised criminal activities.
By way of background, the Government has introduced a system whereby companies of a certain size (handling more than 50 tonnes of packaging in a year and having a turnover higher than £2 million), which are involved in the sale or production of packaged goods must demonstrate that an amount of packaging (proportionate to the packaged products they sell or produce) has been recycled. The way this is done is by the purchase of Packaging Waste Recovery Notes (PRN’s) or Packaging Waste Export Recovery Notes (PERN’s) from accredited reprocessors or exporters for the equivalent amount the company must recycle. PRN’s/PERN’s act as documented proof that packaging material has been recycled by the accredited recycle company. These Notes relate to specific types and amount of material.
These Notes are also supposed to give financial incentives to the recycling industry to collect and reprocess or export for reprocessing (and thus meet EU recycling targets). In addition, their value fluctuates depending on demand and supply and as such are traded on the open market between obligated companies and reproducers/exporters.
Recycling packaging waste is an area in which the UK’s environmental obligations are growing. The UK has managed to meet its EU targets for packaging recycling, currently recycling 64% of all waste, significantly above the 55% target proposed by the EU. This target has been met almost exclusively through the practice of exporting waste to other countries rather than reprocessing the waste domestically. However, the packaging recycling target in 2030 is anticipated to be 70%, and the practice of exporting waste is becoming more complicated as countries begin to refuse to accept UK waste. In light of this, pressures on recyclers to process more waste with fewer options to recycle engenders the possibility of fraudulent means being employed either to deal with waste illegally or to increase profit margins.
Whilst the value of PRN’s varies in response to market forces, the NAO states that, with respect to plastic, “[t]he financial incentive for companies to fraudulently claim they have recycled plastic packaging is higher than for any other material, with recovery notes [PRN’s] representing around 60% of the price of waste plastic bottles over the first six months of 2018.”
Further, the regulation of the industry offers significant scope for undetected frauds to take place. Under the current system, reprocessors and exporters self-report the extent of the material they recycle (and thus the number of PRN’s/PERN’s generated and sold). The NAO identified a number of ways which they could over-claim: beyond inventing waste entirely, there are more canny ways that a recycler could over-report recycled material so as to increase their revenue from PRN’s, for example, claiming for contaminated material, or for non-UK or non-packaging material, or for material that is not recycled under adequate environmental and health and safety standards
Risks are particularly acute in respect of exporters, since there is less oversight of waste processing once the destination country is reached. Allegations are understood to have been made to the Environment Agency that packaging waste is being illegally shipped via The Netherlands to the Far East and concerns have been raised that companies that serially export overly-contaminated waste are permitted to continue operating. The effects of which are impossible to ignore.
Producers have also been accused of misrepresenting the amount of packaging they produce in order to reduce the number of PRN’s/PREN’s they are obliged to purchase.
For less serious breaches of packaging waste regulations, the Environment Agency can bring an enforcement action for breach of regulations under the Producer Responsibility Obligations (Packaging Waste) Regulations 2007, section 40.
However, for cases of alleged criminality, the Environment Agency can look behind the corporate veil and bring criminal prosecutions against directors and employees under the Fraud Act 2006.
The most generic charge that could be brought under the Fraud Act is fraud by false representation, contrary to section 2 of the Fraud Act. Where, for example, a recycling company dishonestly claims to have recycled more packaging waste than it has in fact recycled, fraud by false representation might be the appropriate charge to bring.
Alternatively, a charge of fraud by failing to disclose information, contrary to section 3 of the Fraud Act, could be brought against recyclers and any other party involved. This would be appropriate where for example, an exporter dishonestly failed to disclose that exported waste was too contaminated to be suitable for export or included material which would not be recycled.
Recently, the Environmental Agency in Wales successfully prosecuted directors and employees for conspiracy to commit packaging waste fraud. The advantage in prosecuting on this basis is that the prosecution need only prove that there has been an agreement between individuals to commit a fraud. Whether or not the fraud has actually taken place is immaterial.
Whilst a regulatory breach can lead to a substantial fine for a company and severe reputational damage, a criminal charge can lead to a custodial sentence for the individuals involved in the fraud. Where company directors were recently prosecuted for conspiracy to commit fraud by false representation, they were sentenced to four years custody apiece. In addition, they received substantial confiscation orders to remove any benefit they had derived from their crime. For serious or serial allegations in the area of waste management, then, there is a real possibility that custodial sentences combined with confiscation orders could be sought by prosecutors.
So whilst criminal prosecutions have been a rarity in the area of packaging waste management, the Environment Agency has indicated a new appetite to pursue investigations against organisations suspected of fraudulent activity. The stated intention is to prosecute serious regulatory breaches, and it is well equipped to do so, given the wide-ranging statutory powers of investigation it is afforded under the Environment Act. Pressure on the Environment Agency and, more broadly, the Department for Environment, Food and Rural Affairs [DEFRA] concerning systemic failings in the regulations may well see prosecutions being brought to compensate for shortcomings in compliance oversight. Hence all companies including producers of waste need to ensure that they have robust processes in place to counter any inadvertent involvement in this growing area of fraudulent activity, the penalties otherwise are far reaching for all involved.
Nicola Finnerty is a partner in the criminal litigation team. She has experience of fraud, corruption (including the Bribery Act) and cartel matters, financial compliance, money laundering, asset seizure and confiscation cases, through to sexual offence cases, drugs, murder and offensive weapon crimes.
This blog was co-authored with Dorian Robinson in the Criminal Litigation team.
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