Whilst Chapter One of the Criminal Finances Bill (CFB) has been attracting the lion’s share of attention, one of the most interesting changes for those who interact with the FCA’s Enforcement and Market Oversight Division has been largely overlooked.
Clause 17 of the CFB will provide the FCA with a new weapon in its enforcement tool kit; an ability to seek a civil recovery order, or CRO.
A CRO enables certain named enforcement authorities to recover property in civil proceedings that is, or represents, property obtained through unlawful conduct, whether or not any criminal proceedings have been brought for an offence in connection with the property. Presently the only enforcement authorities who may conduct this type of proceedings are the National Crime Agency, the Director of Public Prosecutions and the Director of the SFO. The CFB proposes to extend that category to include both the FCA and HMRC.
Under a CRO, property is still recoverable even if it has been converted into a different sort of property, for example profits made from insider dealing being used to buy a car. In these circumstances the car becomes the recoverable property. Where recoverable property generates further profits, those profits too are also recoverable.
CRO’s are an extremely valuable tool for those enforcement agencies who are able to utilise the power, for example in matters when it is not feasible to secure a conviction in a case or if the public interest is better served using civil powers of recovery rather than a criminal disposal. For the FCA, an ability to seek a CRO as an alternative to launching a prosecution of an individual should be particularly helpful in respect of both its unauthorised businesses and its criminal insider dealing prosecutions.
A knotty problem that has confronted the FCA in both of these types of cases is how to deal with potential defendants who have made profits from their criminal activities. In the case of insider dealing, rings often consist of two categories of traders – key participants who are repeatedly trading on confidential price sensitive information and make regular and sizeable profits, and bit players who have had only peripheral involvement in the criminality and thus have made, relatively speaking, small profits from their related trading.
Large scale prosecution cases are extremely expensive to pursue through the courts. For the FCA, it is not feasible, nor necessarily desirable, for it to prosecute all of those who are complicit. For example, if an insider dealing ring were to consist of 14 people, making profits ranging in size from the small to the large, then the FCA would be faced with having to hold a number of separate, and undoubtedly lengthy, trials if they were to prosecute all individuals involved. Clearly, in these circumstances, a targeted and strategic approach focussed on the key individuals would allow for the delivery of a more manageable, and ultimately more successful prosecution.
Similar considerations also apply to boiler room frauds, where traditionally prosecutions have been targeted at those individuals who set up and run the fraud, rather than at the individual salesmen who often make large sums of money from miss-selling to victims.
Hitherto, the options open to the FCA are restricted. In respect of insider dealing, the only option is to either scythe off the bit players and take no further action against them, or alternatively deal with them through the market abuse route. The option in respect of the unauthorised business cases is starker, as it is not open to the FCA to follow any regulatory route. The only option is to prosecute or not to prosecute those lower down the scheme such as the actual salesmen.
The FCA faced a highly unpalatable problem in these circumstances. In the event of no prosecution the individuals were still able to keep their ill gained profits. Although small when considered alongside the sums made by key players, we are not merely talking about change found down the back of the sofa.
Section 17 will however offer the FCA a new alternative. CRO’s should provide them with a way of allowing for a targeted approach to prosecutions whilst ensuring that individuals who are not prosecuted, due to strategic or resource implications, can be stripped of their profits. The FCA will undoubtedly also be hoping that the imposition of a CRO will look more attractive to peripheral members of insider rings who may prefer to agree to a CRO rather than risk a large fine for market abuse, which will impose a fine in excess of just the profits made.