Enforcing white-collar crime in the UK
September 2013 | EXPERT BRIEFING | FRAUD & CORRUPTION
Responsibility for the investigation and prosecution of white-collar crime in England and Wales is shared between three specialist agencies: the Serious Fraud Office (SFO), the Financial Conduct Authority (FCA) and the Office of Fair Trading (OFT).
In addition, serious frauds investigated by the police and tax frauds investigated by Her Majesty’s Revenue & Customs are prosecuted by the Crown Prosecution Service Central Fraud Division.
This article looks at the remit of the three specialist agencies, examines their recent history and discerns what each aspires to.
Serious Fraud Office
Since its inception in 1988, the SFO’s role has been to investigate and prosecute only the most serious and complex allegations of fraud and corruption. Its criteria for accepting cases have remained largely consistent, limited to those which are factually or legally complex, involve substantial financial loss to victims or reputational loss to the UK, and which sufficiently engage the wider UK public interest.
Recent years have seen a shift in the way the SFO goes about its work, albeit one which is in the process of being at least partially reversed. Under the directorship of Richard Alderman (2008 to 2012), the SFO, with an envious eye on the enforcement model of the US Department of Justice, tried to remodel its own practices and procedures, albeit within a very different jurisprudential framework.
The UK had embarked on what became a successful and much publicised modernisation of its anti-corruption laws in 2007. This culminated in the Bribery Act 2010 which came into force on 1 July 2011. Concurrently with the legislative reform, the SFO’s investigative resources were being directed towards dealing with allegations of historic potentially corrupt conduct, looked at through the eyes of the rather less modern pre-existing legislation. The number of what might be described as ‘heavyweight’ fraud prosecutions appeared to correspondingly diminish.
Legislation from the turn of the last century was not the only difficulty the SFO faced. The history of prosecuting companies in England for criminal offences has hardly been littered with success. Save for offences of strict liability, English law has traditionally predicated corporate criminal liability on the ability to identify a single guilty individual, sufficiently senior within the organisation to be regarded as its directing mind and will: a task far more readily accomplished in a small company than a modern multinational corporation. It is only recently, with the Corporate Manslaughter and Homicide Act 2007 and the Bribery Act 2010, that other models of corporate criminal liability have been adopted.
Perhaps acknowledging these difficulties and others, not least a vastly reduced budget, the SFO sought to encourage corporate self-reporting, offering what proved to be the uncertain incentive of civil settlement rather than criminal prosecution. Civil settlement was to be achieved by means of a Civil Recovery Order under the Proceeds of Crime Act 2002 (POCA), either alone or in conjunction with relatively minor ‘books and records’ offences. POCA permitted the SFO and the subject of corporate investigation to agree a sum to represent the proceeds of criminal misconduct (the misconduct not necessarily being that of the company entering the settlement). Subject to court approval of the order, those monies would be paid to the Treasury and shared by the SFO.
This novel approach attracted criticism, both from the Judiciary and the wider public. Lord Justice Thomas in Innospec made clear that rarely would it be appropriate for corporate offending of such a serious type to be dealt with by way of a Civil Recovery Order.
The appointment of David Green CB QC as director in 2012 led the SFO to change direction, reiterating its primary role as a prosecutor of the most serious economic crimes. Since his appointment a number of high profile investigations have been commenced (LIBOR, Barclays / Qatar Holdings) and, in one case, recommenced (Weavering Capital). This is in addition to the SFO’s ongoing workload of bribery and fraud investigations and prosecutions. It has been reported that two of those bribery investigations relate to conduct covered by the 2010 Act.
Within a matter of months the SFO will be able to enter into a Deferred Prosecution Agreement (DPA) with corporate offenders. The Code of Practice for such agreements is currently subject to public consultation. Once in force, the SFO will have a statutory mechanism to address corporate offending without passing a death sentence on the company concerned. Whether the Code of Practice provides any or sufficient certainty of outcome for those considering self-reporting, essential if DPAs are to become a useful alternative to prosecution, remains to be seen.
Although the SFO appears to have fought off calls to be subsumed within a wider prosecution agency it remains an organisation facing difficulties. It is noteworthy that the SFO had to seek special funding from the Treasury to undertake the LIBOR investigation, over and above its allocated budget. The indications are that such requests might have to be made in other ‘blockbuster’ cases. This has led to concerns that this effectively gives the Treasury a veto over which investigations the SFO will be permitted to carry out.
The SFO has also found itself under the microscope for matters both case related and internal. Legal action by the Tchenguiz brothers following their arrests in 2011 during the investigation into the collapse of Icelandic bank Kaupthing revealed significant problems in the quality of the SFO’s case work. Civil proceedings have been commenced seeking damages amounting to several times the SFO’s annual budget. Further, concerns about the remuneration of senior staff recruited during Mr Alderman’s tenure have led to enquiry in the House of Commons and subsequent public censure.
In short, the future looks better today than it has for a number of years. The SFO now has the means properly to deal with what have always been very difficult cases. Ultimately, like all prosecutors, the SFO will be judged by its results.
Financial Conduct Authority
As of 1 April 2013 the FCA adopted the regulatory and enforcement powers of the Financial Services Authority. Responsibility for the prudential regulation and supervision of banks, insurers and similar institutions was subsumed within the Bank of England’s Prudential Regulation Authority.
The FCA’s remit is to protect consumers of financial services and ensure that the financial markets function well. Its powers derive from the same statue which created the FSA in 2000. It can deal with misconduct using its civil, regulatory or criminal powers.
Leaving aside the power to seek relief in the civil courts, the FCA can use its regulatory powers to extract fines and impose conditions on the activities of those it regulates, both for breaches of its rules and, for more serious misconduct, using the ‘market abuse’ regime. The record fine imposed by the FSA on an institution was £160m, to UBS, for manipulating LIBOR. The record fine imposed on an individual was £6m.
In appropriate cases the FCA can prosecute certain criminal offences through the criminal courts, bringing with it the possibility of imprisonment in the event of conviction. Although the concept of ‘credible deterrence’ was central to the FSA’s enforcement policy for many years, it was not until 2009 that the FSA achieved its first criminal conviction for insider dealing. Since then progress has been steady. Since 2009 the FSA secured more than 20 criminal convictions against individuals and continued to utilise its regulatory powers where time consuming and resource intensive criminal prosecution was not appropriate.
The FCA continues in the same furrow. It adopted a number of criminal investigations from the FSA and has since commenced its own. It continues to impose sanctions on institutions which do not meet the required regulatory standards, most recently a Swiss bank and a Nigerian bank, both of whom fell short in anti-money laundering compliance.
Office of Fair Trading
As of April 2014 a new body, the Competition and Markets Authority (CMA), will consolidate the OFT’s functions and powers of competition law compliance and cartel enforcement with those of the Competition Commission, the body responsible for investigating mergers, and identifying and remedying the restriction or distortion of competition.
Insofar as criminal enforcement is concerned, the OFT’s problems go somewhat deeper. The Enterprise Act 2002 gave the OFT the power to prosecute individuals for participating in cartels. Essentially, those who dishonestly colluded with competitors to fix prices, limit supply, share markets or rig bids faced the prospect of imprisonment if prosecuted and convicted.
However in the 10 years that the OFT had the power to prosecute it brought only two cases: the Marine Hose cartel, an investigation which owed much to the defendants being caught ‘red handed’ in the US by the FBI in conjunction with the US Department of Defense; and the British Airways / Virgin fuel surcharge case, which collapsed a few weeks into trial as a result of substantial disclosure issues.
The OFT attributed the failure to bring more prosecutions to the difficulty in proving dishonesty, notwithstanding the fact that no contested case came before the courts. Things may be about to change. April 2014 will also herald a change to the cartel offence, removing the requirement to prove dishonesty. Instead the cartel offence may be committed by individuals who agree with competitors to indulge in anti-competitive behaviour unless appropriate steps were taken to publicise those agreements. Defences are available to those able to demonstrate an intention not to conceal or to take legal advice.
This undoubtedly casts the criminal net far wider than before. Those ignorant of the law, and without access to sophisticated compliance regimes and legal advice, may find themselves criminally liable for agreements with competitors when they were not acting dishonestly.
The new agency will no doubt hope that this change leads to greater successes than its predecessor had.
However much it might be desired by some, the UK’s enforcement of white-collar crime cannot match that of the corresponding agencies in the US. However, there are clearly signs that, if sufficiently resourced, the relevant agencies mean to prosecute more aggressively in order to maintain the UK’s reputation as a safe and secure place to invest and do business. Quite frankly, they have to.
Neil Swift is a partner at Peters & Peters Solicitors LLP. He can be contacted on +44 (0)20 7822 7763 or by email: email@example.com.
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