There have been times in the last five years when the Serious Fraud Office’s (SFO) performance has left many with the impression that it is not fi t for the purpose for which it was designed almost 30 years ago. The SFO’s enforcement record, especially as regards corporate offending and when compared with the perceived success of the US authorities, has been fertile ground for critics. In addition, the SFO has been beset by a number of highly publicized failings, both in and out of the courtroom.
Some of the issues faced by the SFO seem likely to have been caused by individual or collective errors in case management and by poor systems and controls; others by a lack of resources from the Treasury and by legal constraints. Whatever the precise causes, these issues have created significant political and public pressure on the SFO.
The current Director of the SFO, David Green CB QC, when referring to the SFO in a recent speech said that “it is as if the oil tanker has completed its turn, and is now on the right course and making headway. The seas, of course, are always choppy if not rough for this particular tanker, and the rocks treacherous” (www.sfo.gov.uk/about-us/our-views/director’s-speeches/speeches-2014/david-green-cb-qcspeech-to-the-pinsent-masons-regulatoryconference.aspx).
The last five years have certainly shown the seas to be rough and the rocks to be treacherous for the SFO. However, it now has significantly improved legal tools, additional funding, new leadership and apparent impetus to fulfil its purpose. The obstacles in the SFO’s path appear to be fewer than they have been in its history.
This article considers if the SFO is indeed now on the right course and making headway, by reference to its recent performance and the latest changes to the environment in which it operates. It looks at whether the SFO has regained its so-called “mojo” as Mr Green often asserts, and whether it is now finally directed to the sort of work and function for which it was designed. Having an understanding of these issues is vital for those who advise clients on their potential exposure to an investigation or prosecution by the SFO.
The SFO was established in April 1988 in thewake of the Fraud Trials Committee Report by Lord Roskill, which recommended that a new organisation should be set up that would be responsible for the detection, investigation and prosecution of serious fraud cases, among growing dissatisfaction with the way in which serious and complex fraud was investigated and prosecuted in the UK.
Despite some initial success, the SFO has faced increasing, widespread and well publicized criticism for the way it has gone about its work. That criticism has come from a number of sources.
In the 2010 decision in R v Innospec Limited, Lord Justice Thomas criticized the SFO for agreeing to a $12.7 million penalty for Innospec, describing the amount as “wholly inadequate” ( EW Misc 7 (EWCC); see News brief “Self-reporting corporate corruption: where are we after Innospec?”, www.practicallaw.com/2-502-1218). In 2012, the same judge rebuked the SFO for “sheer incompetence” after it admitted that it had no clear record of the information used to obtain search warrants in the botched investigation into property tycoon Vincent Tchenguiz.
Lord Justice Thomas is not alone. In 2014, Judge Loraine-Smith criticized the approach that the SFO had taken in its investigation into Victor Dahdaleh, which ultimately resulted in the trial collapsing. He noted that the SFO’s approach gave the defense the opportunity to describe the prosecution as being partially motivated by the commercial interests of a party to civil litigation in the US. The trial against Mr Dahdaleh collapsed.
THE CROWN PROSECUTION SERVICE
The SFO’s methods have also come under fire from the Crown Prosecution Service (CPS) Inspectorate, which is the body tasked with inspecting the work of prosecuting agencies, including the SFO. In its November 2012 report to the Attorney General, the CPS Inspectorate found significant process failures and other weaknesses at the SFO, and that its quality of casework handling was significantly undermined by weaknesses in its systems and processes.
There has also been a number of well publicized out-of-court incidents in recent years, including:
- The loss by the SFO of highly sensitive data relating to the controversial investigation into BAE Systems plc (www.practicallaw.com/2-504-8661; www.practicallaw.com/0-501-7689).
- Legal challenges to the way in which the former director of the SFO delegated his authority to accept matters for investigation.
- Questions around redundancy payments to former senior staff, which resulted in criticism from the Public Accounts Committee.
- A fine by HM Revenue & Customs for underpayment of VAT.
The SFO has also faced criticism for the time it has taken to conduct investigations.
Critics of the SFO’s prosecution record regularly point out that in the four years since the enactment of the Bribery Act 2010 (2010 Act), the SFO has only managed to successfully prosecute two individuals for bribery offences under the 2010 Act: Gary Lloyd West and Stuart John Stone on 5 December 2014. There have been no prosecutions or charges in relation to the much-trumpeted corporate offence of failing to prevent bribery (see Briefing “Bribery Act 2010: still a sleeping giant”, www.practicallaw.com/8-584-9550).
In addition, and despite there now being a specialist proceeds of crime division within the SFO, criticism has been levelled at the SFO regarding its record for confiscating and recovering the proceeds of crime. In its 2014 to 2015 annual report and accounts, the SFO announced that it had obtained confiscation orders for £26 million from criminals in the preceding year, but had only recovered £13 million.
Criticism of the SFO has been intensified by the perceived success of other authorities, particularly in the US, in extracting significant fines from multinational companies for bribery and corruption related offences. In January 2014, Alcoa World Alumina LLC pleaded guilty to bribery offences and was fi ned $209 million and ordered to forfeit $14 million to settle charges by the US Department of Justice (DoJ). Alcoa Inc, the corporate parent, also agreed to resolve civil charges brought by the US Securities and Exchange Commission (SEC) by disgorging $161 million. In December 2014, Alstom SA, a French power and transport company, agreed to pay the DoJ $772 million to resolve charges related to bribes in various countries around the world. The SFO’s fines pale into insignificance compared to these sums. In addition to “mega-fi ne” resolutions, the DoJ and the SEC have continued to vigorously pursue a number of smaller, although still significant, resolutions.
In addition, and perhaps most worryingly for those within the SFO, it has repeatedly come under scrutiny by the current Home Secretary, Teresa May, who has been widely reported as wanting to shut down the SFO and transfer its operations to the National Crime Agency (NCA) (see News brief “The new NCA: what does it mean for the SFO?”,www.practicallaw.com/3-546-0919).
Concerns regarding the future of the SFO have also been heightened by the fact that it was barely mentioned in the UK’s anti-corruption plan, which was published in December 2014, and the announcement in August 2015 that a new International Corruption Unit is being established to investigate cases of international corruption affecting developing countries. This new multi-agency team will bring together existing investigation and intelligence units funded by the Department for International Development and will be operated by the NCA. It is not immediately clear how the work of the SFO will tie into the work of this new unit.
CAUSES OF THE PROBLEMS
The problems faced by the SFO are multifaceted and complex, as are the causes of those problems.
SYSTEMS AND PROCESSES
To a certain extent, the issues outlined above appear to have been caused by mistakes in the handling and progression of cases, and weaknesses in systems and processes. The conduct of the Tchenguiz investigation, the BAE Systems data loss issue and the Dahdaleh prosecution provide examples of this point.
It is generally accepted that the SFO has been substantially underfunded by the Treasury for the role that it is mandated to perform. The current annual budget is £32 million, although this has been heavily supplemented with blockbuster funding (see “Budget and resourcing” below).
In July 2012, Mr Justice Silber, the then President of the Queen’s Bench Division, made his feelings on the subject known in his judgment in Rawlinson and Hunter v Tchenguiz, which arose out of the failed investigation into the Tchenguiz brothers ( EWHC 2254). Mr Justice Silber said that it was clear that the SFO did not have the human and financial resources available to it in the case that were necessary for the investigation and prosecution of serious fraud in the financial markets.
It is impossible to know if many, or any, of the issues highlighted above would have occurred if the SFO was adequately funded. However, it seems possible that they may not have done. Lack of proper funding almost certainly holds the SFO back from properly staffing, training and supervising case teams and from giving those case teams the support needed to effectively undertake their work. In short, lack of funding makes mistakes more likely to occur.
Lack of funding also increases the inequality of resources between the SFO and many of its opponents. Companies and wealthy individuals embroiled in SFO investigations often spend as much as, if not more than, the SFO’s entire annual budget on investigating and preparing to defend an SFO prosecution; a fact that makes its job all the more difficult. The DoJ and SEC face similar difficulties.
APPROACH TO CORPORATE PROSECUTIONS
The SFO’s prosecution record has also undoubtedly been affected by the approach to corporate self-reporting taken by the former Director, Richard Alderman, who held office between 2008 and 2012. In 2009, Mr Alderman published guidelines stating that companies that self-reported incidents of wrongdoing would generally be dealt with using the SFO’s civil recovery powers as opposed to a prosecution. During Mr Alderman’s tenure, several companies took advantage of the change of approach to avoid a prosecution (see box “Examples of companies that have ‘self-reported’ to the SFO”).
Again, it is not possible to be certain, but it seems at least possible that, in the absence of Mr Alderman’s guidance, some (perhaps many) of these companies would have been prosecuted. If successful, these prosecutions would have made the SFO’s enforcement record against companies look very different today.
In October 2012, Mr Alderman’s guidelines were unceremoniously scrapped by Mr Green, the current Director, whose view on self-reporting differs quite markedly from his predecessor (see News brief “Selfreporting fi nancial crime: moving the goal posts”, www.practicallaw.com/1-522-6197). On 9 October 2012, the SFO issued several major policy statements, including guidance on self-reporting (www.sfo.gov.uk/bribery–corruption/corporate-self-reporting.aspx). This guidance provides that a self-report may be taken into consideration as a public interest factor tending against prosecution if it forms part of a genuinely proactive approach that was adopted by the company’s management when the offending was brought to its notice. Mr Green has made it clear that self-reporting is no guarantee that a prosecution will not follow, and each case will turn on its own facts.
It is also necessary to bear in mind the fundamental legal restraints under which, until recently, the SFO had to operate when it sought to prosecute companies. Broadly speaking, as a matter of English law, a company can be prosecuted for a criminal offence using the identification principle. This attributes to the company the acts and the state of mind of those who represent the directing mind and will of the company.
The application of the identification principle is typically restricted to the actions of the board of directors, the managing director and other senior personnel who carry out functions of management and speak and act as the company. Therefore, where the criminal act and criminal state of mind in question can be attributed to these individuals, the company can be prosecuted for the offence as a principal offender.
In practice, the identification principle has represented a significant hurdle for the SFO to overcome when seeking to convict a company for a criminal offence. This is especially true for large, multinational companies which, by virtue of the SFO’s stated purpose, are often the target of SFO investigations. In these companies, the individuals who are the directing mind and will of the company as a matter of English law, such as the board of directors, may be far removed from areas of the business in which criminal activity may take place. Mr Green has spoken of his frustration at how often the email trail in an SFO investigation runs cold above a certain level within an organization.
The position in the UK can be contrasted sharply with the position in the US, where corporate criminal liability is far more expansive, allowing prosecutors to impose liability on a company for the acts of its agents and employees that “benefit” the company; this requirement being interpreted broadly. This lower bar has traditionally made it far easier for US authorities to prosecute, or at least threaten to prosecute, companies under US law for bribery and corruption-related offences.
As regards the 2010 Act, the SFO’s enforcement activity has been further restrained by the fact that it is not retrospective. Therefore, for conduct to be criminal under the 2010 Act it has to have taken place after 1 July 2011. Often, conduct of the type investigated by the SFO takes time to surface; and, once it does, it takes time to investigate. This is especially true in international bribery and corruption cases.
In the last four years, there has been a number of changes to the internal and external environment in which the SFO operates that have been put in place to deal with some of the issues that it has faced.
The introduction of the 2010 Act has had a major part to play. The 2010 Act came into force in July 2011 and is among the strictest legislation in the world for prosecuting public and private bribery, whether it occurs in the UK or overseas (for background, see feature articles “The Bribery Act 2010: a landscape transformed”,www.practicallaw.com/5-503-8482; “Bribery Act 2010: what does it mean for your company?”,www.practicallaw.com/8-505-9543).
The 2010 Act includes a corporate offence that enables a company to be prosecuted for failing to prevent bribery. A company can be convicted on strict liability principles for failing to prevent bribes being paid on its behalf by certain associated persons; for example, an employee, agent, subsidiary or other third party that is performing services for the company or on its behalf. As a strict-liability offence, the demonstration of the company’s knowledge (actual, constructive or implied) of the bribe by the associated person is not required for the offence to be established. There is no longer a need for the SFO to prove that those individuals who represent the controlling mind and will of the company were aware of, and complicit in, the criminality.
DEFERRED PROSECUTION AGREEMENTS
Since February 2014, the SFO has had the power to offer corporate defendants deferred prosecution agreements (DPAs) as an alternative to a prosecution (see feature article “Deferred prosecution agreements: moving into the unknown”, www.practicallaw.com/6-525-6101). A DPA involves a company reaching an agreement with the SFO so that the company is charged with a criminal offence but proceedings are automatically suspended. The company also agrees to a number of conditions, which may include paying a financial penalty, paying compensation, and co-operating with future prosecutions of individuals. If the conditions are not honored, the prosecution may resume.
DPAs may be used for fraud, bribery and other economic crime. They apply to organizations, not individuals. From the SFO’s perspective, DPAs offer it the ability to deal with companies in a far more flexible way than had been the case previously. For example, the company can be sanctioned without the collateral consequences that might flow from a formal criminal prosecution (see box “New sentencing guidelines”).
BUDGET AND RESOURCING
The Director of the SFO has recently requested and been granted so-called “blockbuster funding” from the Treasury to cover the costs of significant investigations and prosecutions that are expected to cost more than a certain percentage of the SFO’s annual budget. In early 2014, it was reported that the SFO requested and received blockbuster funding of £19 million. Nine months later, it was reported that the SFO requested £26.5 million to cover significant investigations and to settle other liabilities. It is understood that at least the investigations into the manipulation of the London Interbank Offered Rate (LIBOR) and into Rolls-Royce are benefitting from blockbuster funding. Only time will tell whether those investigations and prosecutions will be handled in a more effective manner as a result. In addition, the SFO’s workforce has grown from roughly 300 to over 400 people during Mr Green’s tenure (see box “Experience and expertise in the SFO”).
ROLE OF THE SFO
There has also been a definite recalibration of the role of the SFO by Mr Green. He has issued revised policy statements on corporate hospitality, facilitation payments and self reporting and has made it clear in several speeches that he is keen to distance the SFO from the approach taken to companies and self-reporting under the former regime, when Mr Alderman was the Director. Mr Green has been particularly keen to emphasize:
- The SFO’s primary role as an investigator and prosecutor of complex fraud and corruption, rather than as a regulator or adviser to companies.
- That a decision whether to prosecute a company will be made only using the test set out in the Code for Crown Prosecutors and any relevant guidance.
- That the SFO is investing in its intelligence function, especially its relations with prosecutors in other jurisdictions and the UK’s intelligence services.
The last 12 months have seen a number of successes for the SFO.
The SFO has secured a number of high-profile convictions, many of which broke new ground for the SFO (see box “Other successful prosecutions”).
First 2010 Act conviction. On 5 December 2014, the SFO successfully prosecuted three men for their roles in a fraud valued at approximately £23 million: Gary Lloyd West, James Brunel Whale and Stuart John Stone (see “Getting results” above). This followed an investigation by the SFO that centered on the selling and promotion of biofuel to UK investors between April 2011 and February 2012. The men were sentenced on 8 December 2014, receiving custodial sentences of 13, nine and six years respectively, as well as being disqualified from acting as directors. Among other offences, Mr Stone and Mr West were convicted of offences under the 2010 Act. The case is the first conviction that the SFO secured under the 2010 Act and the sentences are the first to be decided under the new sentencing guidelines (see box “New sentencing guidelines”).
First corporate bribery conviction. On 22 December 2014, Smith and Ouzman Ltd, a printing firm based in Eastbourne, was convicted alongside two of its former employees at Southwark Crown Court following a three-year investigation by the SFO. The company was found guilty of corruptly agreeing to make payments to public officials for business contracts in Kenya and Mauritania, contrary to section 1(1) of the Prevention of Corruption Act 1906 (the offences occurred before the 2010 Act was in force). The case was a notable victory for the SFO because it was its first conviction, after trial, of a company for offences involving the bribery of foreign public officials.
First LIBOR conviction. On 3 August 2015, Tom Hayes was convicted of eight counts of conspiring to rig LIBOR and sentenced to a total of 14 years in prison (see News brief “LIBOR conviction: a watershed in the saga?”,www.practicallaw.com/4-618-3119). The conviction is the first arising from the global scandal over the manipulation of benchmark interest rates and represents a significant, high-profile and much-needed victory for the SFO. Several more trials of individuals allegedly involved in the rigging of benchmark rates are expected to follow.
2014 CPS REPORT
A follow-up report published by the CPS Inspectorate in November 2014 described the SFO as having made significant efforts to deal with the deep-rooted issues that the CPS Inspectorate had identified in its November 2012 report (see “The Crown Prosecution Service” above).
The November 2014 report acknowledged that the SFO had not attempted to “plaster over the cracks” and that it was taking the proper approach of laying down sound foundations to ensure success for future years. The CPS Inspectorate found that the SFO had made substantial progress on three out of the eight recommendations issued in the November 2012 report and that it was generally moving in a positive direction. However, as of the end of 2013, the SFO had made only limited progress on four out of the eight recommendations.
NEW HIGH-PROFILE INVESTIGATIONS
Although there have, to date, been no corporate prosecutions under the 2010 Act, Mr Green has recently started high-profi le investigations into activities at a number of blue chip companies including: Tesco plc, G4S and Serco, Rolls-Royce, GlaxoSmithKlein plc, the Sweett Group and the banks alleged to be involved in the manipulation of financial benchmarks, including LIBOR, and in the foreign exchange market. In the last year, 16 new investigations were opened, an increase on the previous year.
RECENT ANNUAL REPORT
The SFO’s annual report and accounts for the year ended 31 March 2015 reports a 78% conviction rate for the year. It achieved successful prosecutions of 18 defendants in nine cases. In addition, 30 defendants in seven cases have been charged and are awaiting trial.
THE FUTURE OF THE SFO
In the last 12 months, there are signs that the so-called tanker has completed its turn and is now on the right course. The convictions secured in the Innospec, Weavering, JJB Sports and Tom Hayes trials suggest that the SFO has rediscovered the ability to secure prosecutions and lengthy prison terms for complex fraud, and bribery and corruption cases. Given the time lag and duration of most SFO cases, it is diffi cult to conclude that these successes are as a direct result of the recent developments, but it is not inconceivable that new impetus, new leadership and blockbuster funding have played a part.
Likewise, the new investigations that have been started by Mr Green in the last 12 to 24 months are high-profile, multi-jurisdictional, high-value and complex; precisely the types of top-tier cases for which the SFO was designed.
Just as importantly, the SFO has avoided any recent embarrassing slip-ups. The civil claim brought by the Tchenguiz brothers was settled before trial in July 2014 for a fraction of the amount claimed, undoubtedly avoiding significant negative publicity for the SFO during trial and freeing up valuable (and much needed) management, financial and case team resources for other cases.
So there is reason to be cautiously optimistic that the SFO has started to turn around its fortunes. However, the very nature of the SFO’s role and the types of cases it takes on means that, in Mr Green’s words, treacherous rocks and choppy seas will never be far away. There also remains a number of residual issues that need to be resolved. Even with blockbuster funding, the SFO remains underfunded and its investigations still take a significant amount of time, leaving corporate and individual suspects waiting for years, often in the glare of negative publicity, while the SFO investigates possible wrongdoing.
Criticism from the judiciary is also never far away. In February 2015, the SFO was ordered to pay the multi-million pound costs of the defendants in the collapsed prosecution relating to the sale of mines in South Wales. In his judgment on the issue of costs, which was heavily critical of the SFO, Mr Justice Hickinbottom said that the SFO did not approach the case with the requisite degree of legal analytical care or precision, and that the SFO’s legal analysis throughout the case was inadequate ( EWHC 263 (QB)).
Continued availability of funding will be a crucial factor in determining the future of the SFO. Much may also turn on whether the SFO can start to make use of the potentially very significant and powerful offence of failure to prevent economic crime, which appears to be gaining real traction in Westminster and Whitehall (see News brief “Failure to prevent economic crime: a new corporate offence”, www.practicallaw.com/7-581-8568). More ominously, the SFO also needs to survive any further efforts by the government to subsume it into the NCA.
Ultimately, the SFO and Mr Green will only be judged on results, and the results achieved in the next 12 to 18 months will have a significant impact on that judgment. If, during that period, the SFO can successfully prosecute more of the LIBOR cases on its books, make the DPA programme start to work by agreeing one or more effective DPAs, bring a prosecution for the corporate offence under the 2010 Act and, where appropriate, turn the high-profile current investigations of large UK public companies into high-profile prosecutions, the SFO will start to be seen in a very different light both in the UK and overseas. If not, then the recent successes will be judged as anomalies.
This article was first published in the October 2015 issue of PLC Magazine (http://uk.practicallaw.com/resources/uk-publications/plc-magazine).