The In-House Lawyer

Corporate fraud enforcement: 25 years in perspective

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In April 2008 Richard Alderman became the sixth director of the Serious Fraud Office (SFO). His appointment followed shortly after the release of the controversial report on the SFOs future by former US prosecutor Jessica de Grazia and from the outset it has been clear that Alderman has favoured a more American-style approach to enforcement issues. This was demonstrated most clearly in October 2008 by the groundbreaking settlement with Balfour Beatty, which saw the first use of civil recovery powers.

As the New Year began, Alderman reinforced this message by describing the SFOs investigation into potential criminality arising from the Madoff collapse as an example of the 'new, faster approach to tackling fraud. Hard on the heels of this announcement came the press release from the Financial Services Authority (FSA) indicating that it had fined Aon a record £5.2m (with an early settlement discount of 30%) for having failed to establish and maintain eff ective systems to counter the risk of bribery and corruption. The underlying complaint, which was referred by the US Securities and Exchange Commission (SEC), related to suspicious payments of some $7m made to overseas entities.

It seems clear that the future of corporate criminal enforcement, both from an SFO and FSA perspective, will now look to emulate the model deployed in the US by the Department of Justice (DoJ) and SEC. However, it is now 25 years since the enactment of the Police and Criminal Evidence (PACE) Act 1984 that in many ways set the scene for criminal enforcement in the ensuing quarter of a century.

It is therefore an opportune time to look at how the business crime landscape has changed over the past 25 years. Russell Jones & Walker has been undertaking fraud cases throughout this period and, with the benefit of such experience, this article refl ects on the developments that have turned an enforcement environment, which might have initially been termed supine, into one where international regulation and co-operation between law enforcement agencies now has a fundamental impact on the way in which business is transacted.

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PACE AND THE EARLY DAYS OF THE SFO

PACE was enacted amid concerns that followed several high-profile cases being overturned on appeal following the discovery that purported admissions or confessions had been tampered with. As a consequence, the Judge’s Rules governing the admissibility of confessions were replaced by a statutory regime that needed to be complied with before they could be admitted in evidence. PACE also underscored the right of suspects to remain silent in the face of questioning from investigating officers, so greater emphasis was placed on investigators to seek evidence from independent sources rather than relying on admissions or confessions.

‘Roskill Report’

It was into this new post-PACE era that the SFO was born. The genesis for creation of the SFO was the 1986 ‘Roskill Report’, which recommended the creation of a single, unifi ed organisation responsible for all the functions of detection, investigation and prosecution of serious fraud. In doing so, it noted that:

‘The public no longer believes that the legal system in England and Wales is capable of bringing perpetrators of serious fraud expeditiously and eff ectively to book.’

The Roskill Report made over 100 recommendations. In the context of the debate that has followed in recent years, it is interesting to note that the only recommendation not implemented is the proposal to remove juries from fraud trials.

Criminal Justice Act 1987

The broad thrust of the Roskill Report was, however, accepted and formed the basis of the Criminal Justice Act 1987 (the 1987 Act). Following this, the SFO fi rst opened its doors in April 1988. The 1987 Act empowered the SFO director to investigate any suspected off ence that appeared, on reasonable grounds, to involve serious or complex fraud. It is interesting that the SFO is currently committing signifi cant resources to combat corruption. Originally, however, the SFO was itself uncertain for a considerable period as to whether it was in fact empowered by the 1987 Act to investigate such offences.

Serious Farce Office

The multidisciplinary teamwork of the SFO was not unique. The Fraud Investigation Team set up between various police forces had a similar structure. What distinguished the SFO was its ability to interview, and obtain documents from, suspects and witnesses using compulsory powers carrying the threat of prosecution for non-compliance. Despite this advantage, the early years of the SFO were not a resounding success and it gained a reputation as the ‘Serious Farce Office’.

The SFO’s first real test came with the Blue Arrow investigation (unreported, 1992) that commenced in 1989. It involved a conspiracy to defraud based upon an allegation that Blue Arrow had rigged the share price of the American company Manpower Inc as part of a takeover process. Although four defendants were initially convicted, those convictions were reversed on appeal and two follow-on trials were also dropped in 1992. The estimated cost to the public purse was somewhere around £40m.

1990s: MORE SETBACKS BUT SIGNS OF CHANGE

While the SFO was successful in securing six convictions arising out of the collapse of Bank of Credit and Commerce International in 1993, the same year also saw further difficulties encountered in the second Guinness trial (unreported, 1993). Although the defendants in the first Guinness trial (unreported, 1990) – including Ernest Saunders and Gerald Ronson – were all convicted, Saunders then halved his sentence on appeal on the basis of medical evidence that was later questioned. To add further disquiet, all defendants charged in the second Guinness trial were acquitted, again at great public expense.

Further high-profile setbacks followed with the Brent Walker acquittal (unreported, 1994) that cost around £40m and the collapse of the Maxwell trials (unreported, 1995-96) that cost around £25m. George Walker was a former boxer accused of inflating business profits in an eff ort to lure investors. Walker was acquitted on a majority verdict following a trial of four and a half months, and although his former finance director was convicted of false accounting, he only received a suspended sentence and a fine of £25,000. The Maxwell trial, dubbed the fraud trial of the century, alleged that the Maxwell brothers, Kevin and Ian, had conspired with others to defraud the Maxwell company pension funds.

However, against this backdrop appeared the first green shoots of a legislative ‘rebalancing’ of the system in favour of the prosecution. While preserving the right to silence already referred to, the enactment of the Criminal Justice and Public Order Act 1994 qualified this right. An adverse inference could be drawn against defendants who chose not to answer questions in interviews and then advanced a defence at trial. A court could then rely on that inference in reaching a guilty verdict.

Criminal Investigations and Procedure Act 1996

Arguably, more seismic changes were brought about in the following year by the Criminal Investigations and Procedure Act 1996. This introduced a new disclosure regime that removed from the prosecution the need to provide the defence with all the information it had viewed, however tangential, while conducting the investigation. Instead, it would only be required to disclose material that the defence could demonstrate was relevant to the proceedings, in that it was either capable of undermining the prosecution case or assisting the defence to be advanced. Linked to that change, a defendant was, for the first time, required to set out the broad thrust of their defence in a written statement, often considerably in advance of the trial date. While the stated aim of these changes was to define core trial issues more clearly, and thus reduce costs, the changes also provided the prosecution with advance notice of the defence case. Accordingly, this allowed an opportunity to gather additional evidence with which to rebut it.

Confiscation regime

The 1990s also saw the development of the confiscation regime that it is now routinely deployed to great eff ect. Although provisions were initially included within the Criminal Justice Act 1988, it was realistically the Proceeds of Crime Act 1995 that saw the evolution of confiscation as a key component in the prosecutor’s toolbox. Such procedural loopholes as may have existed in the early days of confi scation have been firmly closed and the UK now operates arguably the most draconian confi scation and anti-money laundering regime anywhere in the world.

Events at the end of the decade

Undoubtedly, as a consequence of these changes, the SFO had its most successful period to date in the late 1990s under the stewardship of Rosalind Wright, its then director. While this trend was continued to some extent in the early years of the following decade (in part under Robert Wardle), the SFO’s conviction rate then declined. Many observers pointed to the correlation between this fact and the failure of the SFO to secure the resources that it needed to keep pace with the increasingly technological nature of modern business.

RECENT DEVELOPMENTS

In many ways, the key developments in the investigation and prosecution of fraud since the turn of the millennium have been shaped by events in the US, both following 9/11 in 2001 and the Enron collapse in 2002. Although many changes have been brought in, ostensibly under the auspices of fighting the war on terror, the effects of such changes have had a far wider eff ect and have dramatically changed the landscape of financial crime enforcement.

Financial Services and Markets Act 2000

Important changes in this decade began in the UK with the Financial Services and Markets Act 2000. This gave the FSA both a criminal and a new civil jurisdiction to tackle insider dealing. The civil market abuse regime, with its lower burden of proof, was intended to provide a more eff ective way to combat insider dealing. However, it has so far failed to live up to expectations. In particular, Paul Davidson, known more popularly as ‘the Plumber’, made something of a mockery of the system.1 Perhaps as a consequence, the FSA now appears to be more committed to once again seeking enforcement through the criminal courts.

Further enactments that pushed for change The Anti-Terrorism Crime and Security Act 2001 (the 2001 Act) brought overseas corruption committed by UK concerns into the jurisdiction of the UK courts for the first time (although a prosecution using the 2001 Act is still awaited). Similarly, the Enterprise Act 2002 introduced the criminalisation of anti-competitive behaviour, and in so doing introduced a system whereby immunity was offered to whistleblowers (to a certain extent, on a first-past-the-post basis). The Serious Organised Crime and Police Act 2005 then extended the creeping Americanisation of British law enforcement in that immunity from prosecution, or the potential to secure a reduced sentence, was given a statutory footing across a wide range of offences.

Confiscation and anti-money laundering provisions were further strengthened by the Proceeds of Crime Act 2002 and the Money Laundering Regulations, which were most recently updated in 2007. The risk now faced by businesses of committing one of the principal money-laundering offences (carrying a 14-year maximum sentence) in the event that it receives funds tainted by any crime, committed anywhere in the world, cannot be overstated.

More bad press

Despite the presence of this new weaponry, results still remain mixed. Convictions were secured in the Independent Insurance (unreported, 2007) and Marine Hose ( R v Whittle & ors [2008]) prosecutions. The latter, although one of the first demonstrations of a price-fixing-related prosecution, emanated from a US investigation that ensured guilty pleas in return for custodial sentences to be served in the UK. On the other side of the balance sheet, there were yet further high-profi le, and costly, collapses in the Jubilee Line Extension (unreported, 2005) and Wickes (unreported, 2002) cases. The decision to drop the BAE-Al Yamamah corruption investigation, and the ultimately unsuccessful challenge to that decision in 2008, have already generated countless column inches. However, in the final analysis it did little to enhance the SFO’s reputation.

Immunity deals, of the type envisaged in the enforcement world of the future, were off ered to several witnesses who would otherwise have been prosecuted in the recent pharmaceuticals price-fixing case ( Operation Holbein ). This prosecution also collapsed when the House of Lords ruled that cartel activity alone could not form the basis of a criminal off ence at the time the activity was undertaken ( R v Goldshield Group plc & ors [2008]).

If this domestic picture had encouraged a more relaxed approach to corporate criminal compliance, the increasing willingness of the US to exercise extra-territorial jurisdiction in relation to companies doing business with, or in, the US and to seek the extradition of businessmen (such as the NatWest Three) has more than removed the room for any such complacency.

LOOKING FORWARD

Nevertheless, it is against a broadly unsatisfactory history that the SFO is presently rearranging itself for the post-de Grazia period under Alderman. The message being retailed is one of the SFO becoming a far more proactive agency seeking co-operation from the business community in what the SFO sees as a new era of corporate responsibility. In particular, the SFO has made clear its commitment to tackle corrupt business practices both in the UK and overseas. The continued criticism of the UK’s record on anti-corruption by the Organisation for Economic Co-operation and Development will undoubtedly see that commitment translated into positive action.

There can be no doubt that Alderman envisages self-reporting by companies of the type routinely seen in the US. While there is currently no legislation that mirrors the US Foreign Corrupt Practices Act, which is regularly enforced by the by the DoJ and SEC through the use of deferred prosecution agreements, it seems clear that both Alderman and Margaret Cole (the FSA’s head of enforcement) would greatly welcome such a tool. Further, as the Balfour Beatty settlement showed, Alderman is willing to follow the US model notwithstanding the present absence of bespoke legislation. In summary, the message is: report, reform and secure leniency. Conversely, companies found to have committed irregularities that have not been disclosed are likely to face severe sanction.

The effectiveness of this message remains to be seen. However, the globalisation of commerce is now increasingly mirrored in the flow of information between international enforcement agencies, so the risk of detection is greater than at any time previously. For example, The Aon fi ne stemmed from a report to the FSA that had its genesis in an investigation by the SEC, which in turn resulted from a report by the Indonesian regulator.

The business sector is under the microscope of the enforcement community to an unprecedented degree and the Madoff collapse is only likely to increase that scrutiny. The way in which corporate misfeasance is now viewed by the public may well mean that the consequences of prosecution are commercially catastrophic, even if the ultimate outcome secures an acquittal. Ensuring that company criminal compliance systems are fi t for purpose in this new world should be a key priority for 2009. It will be a brave corporate counsel that accepts their systems as adequate without very careful thought.

By Jeremy Summers, partner, business and regulatory investigations department, Russell Jones & Walker. E-mail: j.summers@rjw.co.uk.

NOTES

1) In 2006 Mr Davidson successfully overturned a £750,000 fi ne imposed by the FSA for market abuse relating to a spread bet involving his company Cyprotex.

 

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