SFO v. NCA – will the SFO win the battle for survival this time?

July 2017  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2017 Issue


Theresa May has, within the latest Conservative Party manifesto, pledged to finally absorb the Serious Fraud Office (SFO) within the National Crime Agency (NCA), the UK’s self styled answer to the FBI.

This has sent shudders down the spines of a number of white-collar and dispute resolution lawyers, but it can hardly have been a surprise. In 2011 and 2014, when she was home secretary, Ms May tried to bring the SFO under the NCA’s control, but failed. In 2016, the Director General, Lynne Owens CBE, appointed by Ms May, was reportedly given statutory power of direction over the SFO and has an NCA representative on the SFO board; this has been denied, but even the suggestion of this means that the writing was most certainly on the wall last year.

The reasoning behind this move is not immediately clear. Is it because Ms May wants to bring the SFO under ministerial control? Presently, the NCA reports to the Home Secretary; the SFO reports to the attorney general. Perhaps it is a pet project of hers, which was seen off by Dominic Grieve QC and Ken Clarke when she raised the issue previously, and which she is now determined to implement as prime minister.

So far, all we have had are some rather glib comments from the government claiming rationalisation as the explanation, which has, so far, been rather short on detail.

What are the differences between the SFO and the NCA?

Let us begin with the SFO, which was set up nearly 30 years ago as the UK’s flagship and wholly independent criminal prosecution agency whose remit was serious, complex fraud and business crime. It has very specialist, often draconian powers, which lie, fundamentally, within the Criminal Justice Act 1987, though more recently the Bribery Act 2010 would appear to also be its sole preserve.

Much has been made of the SFO’s chequered history, and it has been easy to chart its developments from those early days.

It was created as a result of the Roskill report, as a response to the multiple scandals that hit the City in the 1970s and 1980s, launched with great fanfare and bestowed an enormous budget. Originally it was staffed with primarily young City trained civil or commercial lawyers, many of them on temporary secondment from a City firm. The majority of the SFO’s respective directors were also civil or commercial lawyers from major City firms, and there was a definite City firm culture.

There were a number of retired experienced former fraud squad officers and forensic accountants employed, but they were very much in the background.

It was obvious even then, when dealing with the SFO, that there were frictions between police officers and lawyers, and that it could take years before a decision to charge was made.

The problem was that serious fraud offences are criminal offences committed by experienced, ‘dyed in the wool’ fraudsters, who were not the stereotypical City gent. These cases were not commercial litigation actions but prosecuted in the rough and tumble of the criminal courts.

So, while most certainly the SFO went after some of the more notorious fraud cases, it suffered a long string of high profile failures. Primarily, it seemed to be unable to deal with the complexities of criminal disclosure. It would use a small cartel of prosecution barristers from the independent bar, and trials rambled on for many months leaving juries bored, unsure and ready to acquit.

The lack of assertive case management allowed aggressive, experienced criminal defence lawyers to make strong legal submissions which often led to the collapse of these high profile cases.

This came to the attention of an increasingly hostile press, which, overlooking the successful prosecutions, led an aggressive campaign criticising some directors of the SFO.

The most notable case disasters have been rehashed countless times but things began to change when David Green QC was appointed as director of the SFO in 2012. Mr Green was a tough career prosecutor when practising at the independent bar, and was of the view that the SFO was a wholly independent criminal investigation and prosecution agency, and that it should go back to its basic remit.

He had to deal with some very nasty problems left over from the previous SFO administration and he had a rocky start. Not only that, but the government’s austerity programme began to bite and he faced huge funding deficits, low staff morale and high staff turnover.

His stance was to rapidly distance the organisation from the cosy City culture and relationships, adopting a much tougher prosecution approach. He gradually rebuilt bridges with the US Department of Justice (DOJ) which at one stage had little faith that the SFO could get the job done.

He expanded the organisation’s panel of outside barristers to assist and conduct the prosecutions, including many of the best criminal barristers in the country, and so moved away from the previous small cartel of prosecuting counsel.

The SFO faced dealing with enormous multijurisdictional investigations of globalised corporate crime investigations without having the resources to do so adequately. Additionally, the government, looking across the Atlantic, was keen to pursue the highly lucrative deferred prosecution agreements (DPAs) with criminally offending corporations. The initial reaction of the British judiciary to these DPAs was not positive, and it is hard to imagine that Mr Green would have been enthusiastic either, considering his background, however the judiciary in the form of LJ Leveson has gradually warmed to the subject.

The SFO came under enormous pressure to agree its first DPA, after their implementation in February 2014, and Mr Green has delivered on that point, having now secured a number of successful DPAs, stressing that apart from recovering the proceeds of the criminal activity from the companies, there also has to be elements of punishment and deterrence within those agreements.

Companies facing bribery and corruption or serious fraud investigations employed corporate litigators or dispute resolution lawyers to defend them, and that is when problems began. These lawyers had no experience of dealing with a specialist criminal investigator or prosecution organisation like the SFO, so serious and fundamental issues concerning transparency, legal representation and legal professional privilege arose early on.

Mr Green has made it abundantly clear that he expects genuine, honest, transparent cooperation from the corporates and their legal teams. He has pushed for a corporate offence of failing to prevent fraud, along the lines of Section 7 of the Bribery Act 2010 and the new failure to prevent tax evasion offence (Criminal Finances Act 2017), which would allow the SFO to criminally prosecute fraudulently offending corporates, but that has met with great resistance from the CBI, among others.

The SFO fought back, with the aggressive use of its s2 CJA 1987 powers thwarting judicial review applications by well resourced companies (for example, Unaoil and Soma) concerning their investigations, in an attempt to force the hand of the SFO; preventing the same firm of lawyers representing potential witnesses in interview while acting for their employing company, which was the primary subject of the SFO investigation, Lord & ors v. SFO; legal professional privilege, on application of McKenzie v. SFO and more recently ENRC, in Barclays Qatar investigation, the SFO claimed litigation privilege over its interviews with witness and suspects to prevent third parties from accessing those transcripts. It found consistent allies in the judiciary who have backed its position.

The SFO has not been afraid to take on difficult situations, such as Libor, fraudulent accounting practices, fraudulent commercial arrangements, biofuel industries, property developments or SIPP investment frauds. Neither has it been afraid to take on some of the biggest names in business. These cases have not always been successful, though the SFO conviction rate has improved for a number of reasons, and not just related to its performance. All in all, it has done well and Mr Green has had his term as director extended to 2018 as a result.

The NCA is a completely different organisation, set up in 2013 as primarily a police organisation, initially led by the highly respected senior police officer and its first director general, Keith Bristow. It was the flagship crime fighting agency with a very wide remit.

It replaced SOCA (Serious Organised Crime Agency) which was set up in 2006 by the Labour government to replace the NCA and the NCIS, which, in turn, had recruited heavily from the disgraced South East Serious Crime and Customs & Excise.

SOCA was primarily an intelligence agency and was quite successful at dealing with drugs and organised crime. At the time, nobody really understood why SOCA had to be replaced.

There were enormous problems when the NCA was first established; tales of poor and outdated computer equipment, demoralised staff, clashes of various cultures within the organisation and rumours of direct interference from the Home Office abounded.

There was certainly a long hiatus before the NCA began to bring existing SOCA operations to court, and there were problems from the very beginning. Two high profile money laundering prosecutions were thrown out by experienced judges over issues arising from the execution of illegal search warrants and a £40m fraud prosecution was also discontinued by a judge who described the behaviour of the NCA officers as beyond negligent. It then had to pay out compensation to a business tycoon in the sum of £3m, in a misguided attempt to seize his assets.

High staff turnover and a reportedly top heavy and bureaucratic management set up led to comparisons with a government department rather than a leading national police force at the top of its game.

Within two years, director general Bristow and seven of his management team resigned or took early retirement – this, despite a budget of nearly £500m per annum and more than 4000 staff. But there were complaints and resentment about the level of direct control exerted by Ms May and, in particular, her direct order that child abuse should be the organisation’s absolute priority.

The remit and power of the NCA is huge. It is responsible for the analysis of money laundering suspicious activity reports (SAR) investigations into organised crime, people trafficking, money laundering asset seizure, POCA, modern slavery, drugs trafficking, child pornography, cyber crime and fraud, bribery and corruption. In fact, the only area currently not within its remit would appear to be terrorism which is presently with the Metropolitan police and security services.

The director general of the NCA has arguably one of the most important roles in policing: she has the power to direct senior officers from other forces and their budgets and can even adopt the extensive powers of HMRC and investigate in their stead.

The NCA has begun one particularly high profile bribery and corruption investigation in Northern Ireland, concerning the sale of a distressed property portfolio there. The portfolio belongs to NAMA (the so-called ‘bad bank’ of the Irish Republic) and is worth £1.2bn. Two senior NAMA officials were arrested and bailed in 2016, and that investigation is continuing. As such, they are gaining some of the experience necessary to fulfil the SFO brief. An earlier foray was not quite as successful. It was suggested that that the bribery and corruption units of the Met and the City of London police merge and work with the NCA. However, the City of London police refused to participate and the Met officers left that joint unit gradually, so it was a complete disaster.

It would seem that the NCA still has a long way to go. It has adopted a rather old fashioned aggressive approach. As such, important material, notably, covert bugging of emails and mobile phone evidence, is always served late. It seems to have little understanding or regard for the rules of criminal disclosure. Frankly, its approach is the polar opposite of the SFO.

It is pretty clear that the SFO will be merged within the NCA. Ms May is unlikely to pay much heed to the worries of dispute resolution or white-collar crime lawyers, but it is a real shame that just when the SFO has restored its battered reputation that this should happen now. It will be even less likely to attract the very best criminal or fraud lawyers and investigators, who will not want to work with CPS, because it just does not have the same cachet.

More importantly, it will also deter companies from self reporting instances of money laundering, bribery and corruption, a key component of any successful DPA agreement. Companies like certainty, and their City dispute resolution lawyers are just beginning to understand how the revitalised SFO works, what it wants and expects of a company and its internal investigations. It is impossible to assume that serious fraud will be given the priority that it requires on the NCA agenda going forward. As it is, the number of serious or complex fraud prosecutions has dropped off to the lowest level yet across the country because of government cuts.

The important point that Ms May should consider is the effect the merger of the SFO and the NCA would have on the country’s reputation for dealing with globalised corporate crime. Every major jurisdiction has an independent specialist serious fraud prosecution office and we are about to lose ours.

One suspects that the real bone of contention between the SFO and the prime minister is David Green’s absolute insistence that the SFO should be independent and free of ministerial or government influence. That may prove to be the final nail in its coffin.

 

Siobhain Egan is a director at Lewis Nedas Law. She can be contacted on +44 (0)207 387 2032 or by email: segan@lewisnedas.co.uk.

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