The Fraud Board

The Fraud Board

Commentary on current cases, news stories and legal developments in international business crime and regulation

McGuireWoods’ London Government, Regulatory and Criminal Investigations Group
Compliance programmes, Corporate sentencing, Corruption, Deferred prosecution, FCPA, Fraud, Plea bargaining, Self-reporting, Serious Fraud Office, Uncategorized

Cooperation, Leniency, Internal Investigations, Self-Incrimination, Privilege and All That Jazz

I recently attended a Fraud Conference in Miami where I heard a French lawyer insisting that since he was a defence advocate, his job was to defend his clients against fraud allegations, not to prosecute them.  Instead of cosying up to the authorities, and self-reporting, he regarded it as his duty to challenge the prosecutor and make his or her life as difficult as possible.  France does not have a system of deferred or non-prosecution agreements, so if the magistrate decides to run a case, there will be a trial. The reminder that there is still such a thing as a duty to defend your client, and that this will lead in the end to a trial, came as a pleasant surprise.

If you are a legal conference junkie, with a penchant for economic crime, you will, like me, have spent a good deal of time recently listening to ‘key-note speeches’ by law enforcement authorities about ‘enforcement trends’, and in particular the virtues, and the many and various ways, of assisting them with their enquiries.   In what clearly appears to my French friend to be a reversal of roles, the Serious Fraud Office, the Department of Justice and others seem to expect corporate offenders to fall on their swords, investigate their own wrong-doing, produce a mea culpa report, and negotiate an outcome.

Equally vociferous have been the white collar crime lawyers, like me, selling their investigatory and negotiating wares, and discussing the finer points of LPP in the context of internal investigations, the real meaning of the ‘Yates Memorandum’, the advantages of a negotiated settlement, including the newly introduced UK version of the Deferred Prosecution Agreement, and what to do when faced with a section 7 Bribery Act 2010 rap.

The US has, of course, been running a DPA practice for the last decade, prompted at least in part by the Enron/Arthur Andersen debacle, and there have been numerous DPA outcomes.  The UK only caught up with this idea early last year, and we are still awaiting the first concluded DPA, although we have been assured that there will be a couple by the year end.  Much speculation surrounds which corporate will be first past the post – and even more about how a UK DPA will work out in practice.

The US version has come under criticism from various quarters recently, the complaint generally being that the approach adopted by prosecutors has been far too casual, and the outcomes of too many cases have meant that law enforcement has been able to chalk up a ‘victory’, and a big fine, while the corporate has escaped with little real damage to either purse or reputation.  Recent reports suggest that the authorities have lost the files recording the agreements, and cannot even remember some of the actions that have been taken.

It is claimed that the UK DPA process will have more teeth, because it will be overseen by a senior judge, who will importantly have to declare at the outset that the agreement is in the public interest; as well as ultimately approving the terms of the settlement.

UK fraud lawyers eagerly await the first fruits of the laborious process of reaching this point.  Of course they will want to study the legal implications, and to pore over the terms of the agreement, and the extent of judicial interference.  But a major benefit for conference organisers, speakers and attendees alike will be that it will give much needed new talking points to fill the programmes of fraud and corruption conferences.  What level of co-operation is needed to secure a DPA?  How will LPP be dealt with?  What impact will a failure to waive privilege have on the question of co-operation?  Will expensive ‘Monitors’ be appointed to check up on compliance procedures?  Will senior executives, and others, be ‘thrown under the bus’ in the wake of the DPA, and end up facing trial?  Importantly, what will be the reaction of the Great British Public to the fact that a corrupt or dishonest company has paid a form of fine, and been told to mend its ways, but has not been criminally convicted of any offence?  Will it be seen as a cost of doing business, or a slap on the wrist?  What reputational damage will a DPA cause?  How will it impact on the share price?  In short, will it create any kind of a stir, save amongst those who are desperate for something new to say at the next fraud conference?

Another Big Issue is how section 7 of the Bribery Act 2010 will work in practice?  Section 7, as is well known to anyone likely to read this blog, introduced a strict liability offence of failing to prevent bribery: if an associate of the company bribes a third party, the company is guilty of an offence under the section, unless it can show that it had adequate procedures in place to prevent bribery.  Under section 9 of the Act the Secretary of State was required to publish guidance ‘about procedures that relevant corporations can put in place’ to prevent bribery.  The Guidance that was published by the Ministry of Justice in March 2011 runs to 30 pages.

This has given rise to a bonanza for lawyers and accountants, providing advice and compliance packages to corporations to seek to prevent bribery taking place, and to assist them to claim that they have adequate procedures.  This could present an interesting crux: on the one hand, if any act of bribery has taken place, in spite of whatever procedures are in place, it might be said that, ipso facto, the procedures were not adequate.  On the other hand, a corporation might well argue that, having spent large sums on advice from top lawyers and accountants, they were entitled to believe that their procedures were adequate.

Much of the advice given, and the procedures put in place, will be risk driven.  Will there be room for argument that the problem that gave rise to bribery was not a recognised, or foreseeable, risk?  That the corporation had adequate procedures, judged by common standards, but nevertheless committed an offence by failing to cater for an unusual risk?

No charges under section 7 have yet been preferred, in spite of the fact that the provision has been in force since April 2011, so once again the world of fraud and bribery conferencing is eagerly awaiting an outcome, so that programmes can be refreshed.  At that point the SFO will be able to explain how it considers the adequacy of procedures.  Defending lawyers will be able to put a spin on that explanation.  But it may be anticipated that most corporations facing a section 7 charge will seek a DPA.  If this is the case, it may be some time before a section 7 case is fought out in front of a jury, and, if the prosecution succeeds, appealed, and therefore real answers to the question of what adequate procedures look like will have to wait.  In this context, it may be noted that there is a similar offence, albeit applying to individuals rather than corporates, now in regulation 45 of the Money Laundering Regulations 2007, but originally introduced in 1993.  This offence has never, in more than 20 years, been prosecuted.  Given that the focus on money laundering has, over the years, been every bit as ferocious as that on bribery, it may be worth considering why the offence has not been deployed.

There is a curious coda to the section 7 debate: for the last two or three years there has been pressure from prosecutors, and supported in the UK Anti-Corruption Plan published in 2014, to introduce a new offence, modelled on section 7: failing to prevent economic crime. The genesis of this proposal may well have been the perceived need to be able to punish, in future, those banks whose employees are alleged to have behaved unethically, as in the Libor and Forex cases. However, the Ministry of Justice has now rejected the proposal, stating on 28 September 2015: ‘there is little evidence of corporate wrongdoing going unpunished in the UK’.

There will, inevitably, be some unexpected complications and unintended consequences of both DPAs and section 7.  Take privilege: the right to assert privilege is a cornerstone of UK European and US law.  A realistic concern for a corporate defendant is that any privilege waiver will open the gates to assertions in later civil claims that privilege has been waived for all purposes.  But how far can a prosecutor go towards insisting that privilege should be waived if a corporation is to get the full benefit of the co-operation discount?  The messages on this have been subtly conflicting: of course an accused is entitled to maintain a claim of litigation and/or legal advice privilege, and will not be judged uncooperative if he does so. However, if the claim of privilege is based on spurious grounds, any assertion that the corporate has fully co-operated will be seriously undermined.  Even if privilege is rightly asserted, there will be some residual sense that co-operation has not been full and frank.  It might weigh in the balance, however many arguments and precedents are paraded in support of the position.

This leads on to a second unintended consequence: the ground will be trampled by the internal investigation, and this will make the task of law enforcement much more difficult when it comes to their turn to examine the evidence.  David Green QC has expressed concerns about this, for understandable reasons.  A witness who changes his evidence between his first account in the internal investigation and the evidence he gives in court is a hostage to fortune.  If a prosecutor does not know about the change of account, he is at a serious disadvantage.  Therefore, the investigator is not significantly assisted by the enquiries carried out by, or on behalf of, the corporate, which he must treat with a good deal of circumspection, and he must almost always carry out a full investigation in any event, which will have to include a review of the internal investigation.  While the corporate must, of course, carry out work to satisfy itself that there is a problem that needs to be shared with law enforcement, it needs to consider carefully the point at which to down tools and hand over to the police.  Arguably, this should be sooner rather than later.

One final point: what will criminal courts make of allegations of bribery made against individuals based on an internal report that has as its predominant purpose the obtaining of leniency for the corporate offender, but where law enforcement has demanded the provision of evidence against individuals as a pre-requisite for obtaining such leniency?  How will judges and juries deal with questions of fairness and integrity when faced with the proposition that such defendants have been sacrificed by the company in order to buy leniency for itself? One answer to this is that it is no different from the position where a participating informant buys his liberty by giving evidence against his co-accused under the provisions in section 71 of the Serious Organised Crime and Police Act.  That evidence will be attacked as being self-serving, and sometimes it will not work for the prosecution, but the process is seen by law enforcement as a proper means of securing convictions where other means have failed. The leniency provisions in the Enterprise Act 2002 may also be compared, although I am only aware of them being used in the British Airways/Virgin case in 2010.  The case against four BA executives was humiliatingly dismissed when Virgin, which had received immunity by reporting its participation with BA in price fixing agreements, failed to disclose relevant evidence.

Therefore, is it just possible that my French colleague is right: the introduction of alternative dispute resolution to criminal fraud cases risks leading to an artificial process where the established norms of the adversarial trial of criminal allegations, with all its checks and balances, will disappear, to be replaced by a mess that will satisfy no one.  Put another way, would it not be simpler just to cut out the middle man, and for law enforcement to investigate and bring to trial those cases where criminal offences are made out?  Sure, in some cases corporates might bring to their attention matters which otherwise would not come to light, and the emphasis on better compliance has arguably reduced levels of bribery, but only time will tell whether this has really shown the kind of dividends that justify a significant subversion of due process.

Civil fraud jurisdiction, Compliance programmes, Due diligence, Enforcement, FCA enforcement, Fraud, Senior Executives

Making Bankers Accountable

The Financial Conduct Authority and the Prudential Regulatory Authority have recently been showing signs of gearing up for the new regime which is intended to have the effect of making senior bankers and other financial services managers accountable for failings within their institutions. The intention, of course, is to avoid the kind of meltdown we all (apart perhaps from the bankers who had caused it) endured for some time after October 2008.

The Parliamentary Commission on Banking Standards (PCBS) reported in June 2013. It made some trenchant criticisms of banking standards and culture, and came up with a raft of measures designed to ensure that trust is restored in banking and that standards improve: “Reform across several fronts is badly needed”, they said, adding that this had to be achieved “in ways that will endure when memories of recent crises and scandals fade”.

The proposals the Commission put forward had five themes, of which the first was: “Making individual responsibility in banking a reality, especially at the most senior levels.” Under the heading: “Making Individual Responsibility a Reality”, they described the problem in the following terms:

Too many bankers, especially at the most senior levels, have operated in an

environment with insufficient personal responsibility. Top bankers dodged

accountability for failings on their watch by claiming ignorance or hiding behind

collective decision-making. They then faced little realistic prospect of financial

penalties or more serious sanctions commensurate with the severity of the failures

with which they were associated. Individual incentives have not been consistent with

high collective standards, often the opposite.”

Few, save perhaps those in the banking sector, would disagree with the sentiments expressed in that pithy paragraph. The British public has been baying for blood, and wanting to see bankers banged up in prison for long sentences. No senior banker has, however, been prosecuted. For those who believe that they do things better in the US, the cold truth is that neither the SEC nor the DoJ took action against senior banking management for offences arising out of the global financial crisis either.

The Financial Services (Banking Reform) Act 2013, Part 4, outlined a series of reforms designed to put this right under the heading: ‘Conduct of persons working in the financial services sector’. This included the section 20 provision concerning ‘statements of responsibility’, which is intended to identify the straight line accountability of named board members for specific aspects of the bank’s activities. Section 36 creates a criminal offence ‘relating to a decision causing a financial institution to fail.’ While one might applaud the sentiments behind this section, it is surely unlikely that it will ever be capable of being deployed.

The full detail of Parliament’s response to the PCBS Report is now becoming apparent, with legislation due in the autumn, and with implementation of the ‘Senior Managers Regime’ planned to come into effect on 7 March 2016. The impact will be felt not only by UK banks, but also by the managers of all banks operating in the UK, and by insurance companies, as set out in a press release issued by the FCA and the PRA last week.

So how will all this work out in practice?

The most obvious effects will be that (a) a good deal more paperwork will be generated, and (b) being a senior banker will be much less attractive than it once was.

The amount of paperwork will keep regulators and line managers busy, but it should lead to some useful consequences. For example, the fact that a senior manager has signed up to oversee, say, the bank’s money laundering polices and implementation may have the effect of ensuring that the Board is made aware of the number of SARS filed with the National Crime Agency, and this should result in better control over the level of money laundering that passes through the City of London. Allocating responsibility for anti-bribery controls to a main board director should ensure that this gets the attention it deserves from a bank’s management. Appointing a director to lead on financial crime prevention could have the effect of achieving just that. Such a range of ‘Senior Management Functions’ could help to improve both the conduct of the bank, and its capacity to influence others. It will be an outward sign of high ethical standards and a good culture at the top.

However, some have commented that the regime will give rise to unforeseen consequences. For one thing, there may be significant difficulties in negotiating terms with Senior Managers, in particular in defining in the ‘Statement of Responsibility’ what their responsibilities are. Any Senior Manager faced with the prospect of signing up to a statement of responsibility and making an attestation will surely seek legal advice, and will try to limit the level of risk they may run. At the same time, the firm’s HR department will want to include a detailed and comprehensive list of responsibilities to ensure that it complies with regulations. Once this process is complete, a system of recording actions and decisions will be put in place, and this will require extra staff, as well as involving the senior manager in a greatly increased work-load. A culture of note-taking and finger-pointing will develop. Staff at all levels may become unnecessarily risk averse. Compliance departments, which have grown exponentially over the last few years, will increase in size even more. A new breed of ‘compliance directors’ masquerading as Senior Managers may come into existence, leaving the real work of making profits to be done by Bankers who don’t sign up to anything.

What changes will we see when a future regulatory or criminal breach is detected in a bank’s systems?  It can be asserted with confidence that there will be new and different and as-yet undreamed of types of misconduct aimed at increasing a bank’s profitability and bankers’ bonuses. The PCBS spoke of reforms “that will endure when memories of recent crises and scandals fade”. Maintaining control over new business models and technological advances (this month’s bright shining means of out-performing the market is next month’s criminal activity), deciding which broadly accepted ‘practices’ are dubious (LIBOR manipulation, FOREX fixing and PPI were all broadly accepted by major financial institutions), or simply identifying and investigating misconduct, are no doubt all part of a good compliance regime, and the new measures are essential to emphasise the need for senior management to pay proper attention to compliance issues, new and old.

Proposed measures in the UK to defer bankers’ bonuses, in some cases, according to the Governor of the Bank of England, for a very long time, and the capacity to claw back remuneration where unacceptable risks have been taken or other conduct issues arise; and the implementation in the US of Dodd-Frank requirements to disclose the ratio of the CEO’s pay to that of its ‘median employee’; are additional measures which will dampen the appetites of risk-takers to join main-stream banks. And quite right too, many will say.

The problem may be that by putting senior managers under such a high level of risk, at the same time as curbing their compensation, there will be a dearth of applicants for senior posts, and those who do apply will simply satisfy a risk-averse appetite – which is probably not going to appeal to shareholders looking to maximize the profits of a bank and push up the share price. The fate of Anthony Jenkins, until a couple of weeks ago the ‘safe pair of hands’ installed as CEO at Barclays to replace the investment banking guru, Bob Diamond, perhaps illustrates the problem. A safe pair of hands is not necessarily what you need if you want to see a bank making profits, and to retain senior staff who drive the bank forward, and therefore Jenkins was axed. Chairman John McFarlane said the bank needed to become more efficient: “What we need is profit improvement. Barclays is not efficient. We are cumbersome.” Where will banks draw the line between ambition and being cumbersomely safe?

One can predict that the new regime will probably make it easier to call senior bankers to account for the failings of their institution, although there may be trouble ahead. The PCBS complained that it had been difficult in the past to take action against senior managers. Reports into the Financial Services Authority’s handling of investigations into the conduct of senior management in RBS leading up to the financial crisis concluded that it had not been possible to take enforcement action against Fred Goodwin and his fellow directors. The long awaited report into the handling of potential allegations of misconduct arising out of the collapse of HBOS may also find that the FSA was justified in not taking action against any top level management; it may, on the other hand, be highly critical. What it will undoubtedly show is how immensely complex the process of enforcement might have been. The few attempts the FSA had at taking action against senior managers in the wake of the crisis were almost universally, and expensively, unsuccessful. The new regime will undoubtedly facilitate the scapegoating of a named individual for failing to spot misconduct in a designated area, but unless that individual can also be linked to the misconduct, the punishment will simply be for inefficiency. A substantial fine and prohibition from working in the financial sector, coupled with reputational damage, are serious penalties which should have a deterrent effect, but if the purpose of the regime is partly, at least, to assuage the public’s demand for bankers to be pilloried for allowing misconduct in a bank, I fear that a regulatory fine for a technical failure is not going to cut the mustard.

FCA enforcement, Libor, Market Abuse, Sentencing, Serious Fraud Office

Reflections on a Sentence: Spooking the City

Tom Hayes emerges from his trial at Southwark Crown Court for Libor manipulation as a very considerable loser, who took some very bad decisions in the course of the SFO investigation and trial (and perhaps deserves his long sentence for the level of stupidity displayed alone, although the Judge specifically stated that he took no account in passing sentence of the way his defence was run). At the same time, the reputation of the SFO has increased enormously. Let no one underestimate how serious and complex the investigation was, and how difficult the case was to bring to court, particularly as a ‘manageable’ trial. All involved at the SFO deserve great credit for their skill and determination, and for holding their nerve. This was just the kind of case that the SFO was set up for, and it has achieved one of its central aims: to show that bad conduct – whether fraud or bribery – will be investigated and punished. The remaining Libor cases will be approached with confidence. David Green CB QC’s tenure as Director may be extended. The SFO’s future looks more assured. The City Slickers’ column in Private Eye could not quite bring itself to say ‘Well done’, and their brief report is buried in the middle of the column, but the SFO will be relieved to have avoided the scornful headlines that not guilty verdicts would have spawned.

The 14 year sentence slapped on Tom Hayes by Mr Justice Cooke on 3 August for a series of conspiracies to defraud will not only have shaken the defendant and pleased the SFO; it will also have sent shock waves through the City. No doubt the learned Judge had this very much in mind when preparing his sentencing remarks. Like Admiral Byng, who was executed in 1757 for failing to stop the French taking over Minorca, Haye’s conduct was deemed worthy of being dealt with by means of a deterrent punishment that would, as Voltaire put it, ‘encourager les autres’.

The bare facts are that Cooke J sentenced Hayes to 9.5 years for each of the 4 counts of conspiracy to defraud that related to his time at UBS, to run concurrently, and 4.5 years for each count for his Citi bank activities, also to run concurrently, but consecutively to the UBS counts. Therefore Hayes faces the prospect of 7 years in jail, most of it in uncomfortable surroundings, and 7 years on licence, prohibition from employment in the financial services sector, a Confiscation Order, and trying to find a new way of earning a salary to support his family.

One may, like Hayes’ father (perhaps understandably) describe the punishment as being ‘cruel and unusual’ and thus flouting Human Rights principles. Another view is that it is about time that it is recognised that serious and serial dishonesty in financial markets deserves to be punished much more severely than has traditionally been the case, and that therefore the Hayes sentence paves the way for a tougher regime that will genuinely encourage other financial professionals to behave better. Take your pick.

Against that background it is interesting to see how the learned Judge reached the conclusion that a 14 year sentence was appropriate, what light it sheds on the case, and what impact it will have on future fraud sentencing (not just in Libor cases). What are the prospects for a successful appeal against sentence?

Paragraph 16 of Cooke J’s sentencing remarks states:

“The maximum sentence is 10 years for a count of conspiracy, which is generally recognised as too low.”

‘Generally recognised’ by who? This is a curiously unjudicial remark. Clearly the legislators, who have had plenty of opportunity, have not ‘recognised’ anything of the sort.  As recently as 2012 the sentence for benchmark rigging was fixed at 7 years (section 91 Financial Services Act 2012). Prosecutors might want longer sentences, but their voice is not the only one in this debate.

The Judge went on:

“The starting point for a Category A case of high culpability based on a loss figure of £1m is 7 years. The figures here exceed that by a distance, and the number of counts must drive the sentence up.”

Here the Judge raises the interesting question of ‘loss’. What loss, to any identifiable loser, was caused by Mr Hayes’ manipulation of Libor? In paragraph 7 of the remarks, the Judge admitted: “It is effectively impossible to assess the scale of the losses caused to the counterparties to the trades in which you participated”. He went on to talk about the effect of the movement of the Libor rate by a basis point: it might benefit a Hayes traded fund by between $500,000 and $2.5m, but whether it caused consequential losses was more difficult to calculate.

So the detriment to any identifiable loser is ‘almost impossible’ to calculate. “The number of victims is not clear on the evidence, but you and your employers had many counterparties to trades which were affected by what you did” (paragraph 13(f)). In other words, the Serious Fraud Office did not try (or alternatively, knew it was not possible) to prove any loss suffered by identifiable individuals or entities.  However, Hayes himself admitted that his manipulation of the rate led to him ‘winning’ several £millions, and it follows, it is said, that counterparties would have lost by similar amounts.

This leaves the size of the gain for Hayes personally. Although one might think that gain and greed formed the basis both of the motivation and disapprobation, the Judge dealt with this in an aside: Hayes skewed the rate “in order to gain an advantage for your bank’s trading profit, with the concomitant benefits which would come to you as the result of trading success, in the shape of status, seniority and remuneration, particularly by way of bonus” (paragraph 6). Curiously, he did not include the concomitant benefits in the sentencing guidelines which he listed in paragraph 13 as forming the basis of his calculation.

There will be an application for a Confiscation Order, and it will be interesting to see how this will work out in practice, but perhaps case the Hayes trial was more about ethics and reputation, with the sentence reflecting the current climate of hostility towards bankers, and seeking to improve their conduct. Future sentences in complex fraud cases will be more severely sentenced, and prosecutors will be encouraged to believe that they can succeed in getting convictions against the City fraternity.

But wait a minute: all this Libor manipulation ended several years ago. Hayes is therefore perhaps being punished for something that happened in a different era, pre-crash. Any message that will be ‘heard’ by bankers will include the thought that they have dealt with that aspect of bad behaviour, and everything is different now (let’s conveniently forget that foreign exchange fixing continued well after Libor manipulation had been outed). There is a large element of truth in this, and Libor and Forex manipulation will not happen again – at least not in the same form, and not until people forget about the bad times, and new forms of misconduct are invented. As appears to have been made clear by the Chancellor, the era of being tough on banks is nearing its end, and the regime of tough financial regulation briefly put in place by Martin Wheatley, whom he recently sacked as CEO of the FCA, will be transformed into a regulation-lite package by his successor. So there might be some shoulder shrugging: good times are just around the corner, UK plc can look forward to relying on its financial sector to underpin the whole economy for a few more years to come, and bankers can dream of new and more-or-less honest ways to make super-profits and big bonuses.





Deferred prosecution, Enforcement, Plea bargaining, Senior Executives, Serious Fraud Office, Uncategorized

An Eerie Silence

There’s an eerie silence in the world of fraud prosecutions in the UK. A Libor trial is about to start, a FCA land banking prosecution is on trial at Southwark, but with reporting restrictions, and a couple of weeks ago David Dixon, author of a Ponzi Scheme, pleaded guilty; and Julian Rifat, having entered a guilty plea in the long-running Operation Tabernula case, was sentenced to 19 months in prison for insider dealing. But the City Slicker pages of Private Eye have not been full of critical comment about the ‘Serious Farce Office’ for some weeks – no doubt to the hearty relief of SFO Director, David Green QC – and apart from the odd reference to continuing enquiries, and the recent embarrassing fine by the Information Commissioner, there is indeed little to report in the Spring of 2015.


The 2014 year end produced a slew of good results for the SFO: there were convictions in JJB Sports, Arck LLP, Smith and Ouzman Ltd and Sustainable Growth Group in November and December. Although these were comparatively minor cases by SFO standards, and did not receive much media coverage, they were undoubtedly complex and serious cases which required skillful and determined preparation and presentation. Less welcome was the dismissal in February of a savagely criticized application for a Voluntary Bill of Indictment in the case against six directors of Celtic Energy.


In the pipeline are some challenging cases. Decisions are awaited about the Qatari refinancing of Barclays in 2008, which might involve some senior Barclays executives, corporate prosecutions arising out of the Libor scandals, not to mention Tesco and FOREX.  The Rolls Royce corruption enquiry and a number of other Bribery Act enquiries are being pursued. No doubt consideration is being given to disposing of some of these cases by way of Deferred Prosecution Agreements. Although this form of Alternative Dispute Resolution, imported from the US, was originally touted as an economic way of sanctioning large corporations, without running the risk of causing the kind of collateral damage that saw the demise of Arthur Andersen in the wake of the Enron scandal, in practice it appears that the process is neither quicker nor cheaper than simply bringing a prosecution.


It is now nearly a year since DPAs were made available to some UK prosecutors, but none has so far been deployed. Part of the reason for this might be the level of judicial supervision, from a very early stage, that has been seen as a vital part of the UK version of DPAs (sections 7 and 8 of Schedule 17 of the Crime and Courts Act 2013). The US version has much more limited judicial input, and therefore there has been no handy precedent to provide guidance and ‘lessons learned’.


It is assumed that very senior judges will oversee the first few UK DPAs, and will set the standards, and this will probably lead to some hasty cutting and pasting of the 25 page ‘DPA Code’ issued by the DPP and the Director of the SFO under Schedule 17. Prosecutors therefore, not surprisingly, are feeling their way carefully in the build up to their first DPA. They will be conscious that negotiated agreements between prosecutor and defence have never found favour with the UK judiciary, and the disapproving words of Thomas LJ will be ringing in their ears from the 2010 judgement in Innospec.


The first concluded DPA will be crawled over by all commentators, not to mention those lawyers acting for large corporations who are feeling their way towards a settlement. Meanwhile, the waiting game, and lots of speculation, continues. One outcome that will be eagerly awaited is the public and media reaction to a concluded DPA. Will such a case be reported as a victory for justice, or as an example of big business buying its way out of trouble?


Meanwhile, there are rumours that the plans hatched in 2010, but discarded in early 2012, to gather all the fraud prosecutors under one roof are in the process of being revived. Out with the alphabet soup of authorities responsible for this work; in with a team of prosecutors run by the Crown Prosecution Service, prosecuting cases brought to them by law enforcement, mainly the City of London Police Economic Fraud Department, but also including the newly formed Economic Crime Command. This would mark the end of the SFO, and with it the unified investigating and prosecuting system advocated by Lord Roskill in 1985. It might also lead to the demise of the FCA’s criminal prosecution powers, under which the financial regulator prosecutes a narrow range of economic crime, including insider dealing.


Whether this plan gathers sufficient support in the right quarters to be brought, blinking, into some form of reality probably depends to a significant extent on whether the SFO can bring its current crop of difficult investigations to a successful conclusion. Those at the SFO will be aware of this pressure, and will want to prove the naysayers (including City Slicker) wrong by securing convictions in high profile cases. However, the outcomes of all the Libor cases, and the current crop of corruption investigations, not to mention Barclays, are unlikely to be evident much before mid-2016, which will coincide with the end of Mr Green’s contract. So if performance based judgements are to be made, they will need to be deferred.


There is of course another area of uncertainty – the Election. What cunning plan will a new government, post-election, hatch for the future of the SFO? Even if the Conservatives remain in office, it is likely that Mrs May, the progenitor of the 2010 plan to bring all fraud prosecutors under one roof, will move on to a new post. Will a new Home Secretary, with many other pressing priorities, have space in the legislative programme to create a new structure? A Labour administration, while wanting to show that it has plans to be tough on corporate law-breakers, particularly those at the helm of big banks, will probably have better things to do than plan a wholesale revamp of the existing counter-fraud landscape.


There are undoubtedly some compelling arguments for unifying fraud prosecutions, including that there would be no turf wars about who should be responsible for a fraud prosecution. Where contention would remain is in agreeing the acceptance criteria and priorities for the super prosecutor. It could not possibly handle all fraud complaints, any more than that the police could investigate them, so there would need to be a cut-off point, and that would probably mean that any case with a financial loss of less than £250,000 would not be taken on.


There would also inevitably be a divide between the various fraud ‘typologies’: City fraud, boiler rooms and consumer offences, bribery, market abuse and cyber crime are likely to be dealt with by separate teams with very different specialisations. The intelligence requirements for each are radically diverse, and the divide between allegations of senior boardroom misconduct in major UK banks on the one hand, and the activities of career criminals committing boiler room frauds on the other, is immense. Market abuse requires a degree of experience, in terms of both the legal and factual elements of the offence, that must rely significantly on market specialists. Such knowledge can of course be acquired, but it is not cheap, and successive governments have shown a marked reluctance to spend the kind of money on counter fraud measures that is desperately needed.


So, for Fraud watchers, this feels like the calm before the storm for both prosecution and defence.

Enforcement, FCA enforcement, Financial Conduct Authority, Fraud, Serious Fraud Office, Uncategorized

FCA Enforcement Performance: Part 2 – The Forex Effect

Only a couple of weeks ago I was commenting on a NERA report that had found that in the period between April 2012 and October 2014 the FCA had imposed fines of over £1bn, in sharp contrast to the preceding decade during which a paltry £320m had been levied.

Now, on 12 November 2014, the FCA has set another UK record: in one day it has exceeded the previous 30 month record, by fining 5 banks, Citibank, HSBC, JPMorgan Chase, RBS and UBS for gross and persistent misconduct in their Forex trading rooms more than £200m each, totaling £1,114,918,000.  Other banks, including Lloyds and Barclays, have yet to reach a settlement of the FCA claims, and therefore the final tally is likely to exceed £1.5bn.  While this pales into insignificance compared with the $56.5bn penalties imposed by US regulators, it marks a step change in attitude.  

Citibank, JPMC and UBS have also faced huge fines from their home regulators, including the CFTC and Finma.  Other regulators, including the infamous Department of Financial Services and the EU, are carving out their own settlements, and there is much more pain to come.

The FCA’s current slice of the action is, nevertheless, sizeable, and since the fines go to the Exchequer, the Chancellor may be thinking that the recent surprise £1.7bn levy from Brussels is not looking quite so problematic, but that ignoble thought apart, what is the point of such massive fines?

Fines imposed by the financial regulator on firms are designed to punish, to deter, and to express public outrage.  The size of the fines perhaps reflects a need to punish more harshly than before, because it is clear that the banks were not deterred from continuing the kind of bad behavior they had indulged in over Libor.  Knowing that such misconduct had been uncovered and was in the process of being punished, some major banks continued with Forex mismanagement for many months, only finally stopping in October 2013. 

The concept of punishing a business is slightly artificial, and the problem with imposing a fine is that those who feel the effects may include the shareholders and the employees, who are innocent of wrong-doing.  As it happens, the banks’ share prices were not greatly affected by the news of the fines, but the impact may be longer term, perpetuating the losses made since the global financial crisis and leading to further shareholder pain.  Shareholders can, of course, seek to ensure that the firm is deterred from misbehaving again by exerting pressure on the Board, and in any event are not, according to some, to be much pitied as they enjoyed the profits of the boom years during which so much misconduct boosted profits. 

The public may feel that some sort of justice has been done, although they will also want to ask, as happened in the Libor investigations, whether the individuals within the banks who cooked up the deception are going to be called to account.  Many headlines since the fines were imposed quote politicians and others calling for prison for the wrong-doers, and they are asking why management did not step in.  And if so, how far up the executive ladder are the guilty parties going to be found?  

The traders who developed stratagem to fix the market in their favour can be relatively easily identified, and therefore prosecuted (although that process is unlikely to be simple in spite of the childish bragging in on-line banter already uncovered by investigators).  But did their line managers know about this, and who at board level was responsible for ensuring that the traders were behaving honestly and ethically?  What was the tone at the top?  Did senior management, in the wake of the Libor scandals, take the time to check out conduct in similar markets? The Serious Fraud Office is already looking at all this, and while considering whether criminal charges should be brought in relation to Forex in much the same way as charges have been brought for Libor rate fixing, they will be carefully considering line responsibility.

The timing of the publication of the Final Notices consequent on the settlements reached with the banks is interesting.  This has been achieved with commendable speed, given the significant hurdles that FCA Enforcement will have had to get over.  Some have complained that the FCA must have cut corners and wrapped up the deals ‘on the hoof’, but by any standards, this is an impressive performance.  It may, of course, be the case that the banks, still reeling from Libor, just wanted to get the bad news out of the way at the earliest opportunity, and to move on, and were therefore eager to settle.  It may also be that the investigation teams will have learned lessons from Libor that enabled them to proceed more efficiently. In addition, the banks themselves were forced to undertake much of the investigating work, thus reducing the FCA’s burden.  But as Tracey McDermott, FCA Director of Enforcement pointed out, even with the bank’s help it took her team 45 man years to get the case to this stage, and the outcome is surely one the FCA can be hugely proud of.

One subject on which there may have been discussion is the extent to which the final results of the Enforcement investigations into the failings by the banks could be published in advance of any criminal action.  There must have been a risk that the SFO would insist that any such publication might prejudice a criminal trial.  However, since no criminal proceedings are yet before the courts, it could be argued that there was nothing to prevent publication. While, therefore, the FCA will be as keen as anyone to ensure that there is no possible prejudice to any criminal process, the regulator will have wanted to perform its duties to the market, and get its message across, at the earliest opportunity.  The FCA is very keen to show that it has got a grip on banking misconduct, and that the UK banking market is moving on from the mistakes of the past.  Any delay in publishing a Final Notice diminishes the impact of the publication, and any possible prejudice to a trial that is unlikely to take place for some years was rightly ignored. 

So, a very good day for the FCA, but, of course, not the end of the Forex saga.  There will be more FCA fines against firms, and individuals are likely to face regulatory action. This will now be relatively straightforward.  A more difficult challenge will face the SFO, and it is likely to be some time before the fraud prosecutor can reach any conclusions about criminal charges, and much longer before any cases get to trial.  The Libor trials are due to get under way in 2015, and will probably still be going (in the absence of guilty pleas) in 2016.  It might well be 2017 before Forex hits the courts.




FCA enforcement, FSA enforcement, Market Abuse, SEC enforcement

Law Enforcement Bliss: The SEC As Policeman, Judge and Jury

New York’s Southern District Court Judge Jed Rakoff is always worth listening to.  He expresses trenchant views about the rule of law elegantly and politely.  He is fearlessly independent. Prosecutors in the US, who are normally prone to swagger just a bit, probably find his comments and rulings rather irritating.

In a speech to the Practicing Law Institute on 5 November the Judge directed a passing swipe at the Security and Exchange Commission’s in-house administrative court, complaining that increasing enforcement powers granted by Congress have led to the SEC bringing more and more cases before this court.  Rakoff is concerned that this policy risks hindering the development of the law, because ‘it would not be good for the impartial development of the law in an area of immense practical importance’ without providing the opportunity for evidence and law to be tested by ‘impartial jurists’.

The Judge makes the point that the SEC’s record of success in front of its own administrative court is 100%, whereas it has suffered a number of defeats in recent insider dealing jury trials.  Any prosecutor will acknowledge that although he or she might give their right hand to win every case, such a high success rate is unhealthy.  It suggests either that they are only taking on the low hanging fruit, or that their system is artificially skewed against the defendant.

In the UK, the Financial Conduct Authority and its predecessor, the Financial Services  Authority, have had a similar internal ‘court’ since 2000, the Regulatory Decisions Committee.  The RDC receives proposals from Enforcement, with supporting evidence, which seek to impose penalties on individuals and firms which are alleged to have breached regulations.  The matters before the RDC can range from a defaulting IFA, resulting in a £50,000 fine and prohibition, to a Libor settlement with UBS of £160m. In regulatory cases, the Committee decides whether to issue a Warning Notice, and then hears representations from both sides before deciding whether to issue Decision and Final Notices.  Many cases settle and the Final Notice is an agreed document.  Those who want to contest a Final Notice published after a contested hearing can appeal to the Upper Tribunal, where the appeal will be heard by a Judge.  The members of the RDC are employees of the FCA, but are, in my experience, strongly independent – some within the FCA would say, too independent!  The Committee’s existence has been challenged over the years, not least by the Regulator itself, and consideration was given to abolishing it when the FCA was set up in 2013.  However, no better system for arbitrating and disposing of the majority of regulatory cases could be found, and the work of the RDC continues.

Some, but by no means all, of the cases that come before the RDC might amount to criminal offences as well as regulatory breaches.  The most obvious example of this is insider dealing/market abuse, but there are other borderline cases where, for example, an allegation of lack of integrity – a breach of Principle 1 of the FCA Principles for Business – might equally be viewed as dishonesty.

Because insider dealing is both a regulatory (section 118 Financial Services Act 2000) and a criminal (section 52 Criminal Justice Act 1993) offence, a decision by the FCA to litigate a case in front of the RDC is one which most people accused of such activity in the UK will usually welcome.  The prospect of a criminal conviction and a prison sentence (maximum 7 years) is removed.  The worst that can happen – and it is bad enough – is a fine, disgorgement of profit, and, if the individual concerned is an approved person in the financial services regime, a prohibition from being involved in financial services for a fixed or indefinite period.  If an individual wants to face criminal charges, and chance his luck in front of a jury, he can probably engineer that result simply by being obstructive and uncooperative, but no one has so far chosen this option.

In a market abuse case in 2012, David Einhorn, President of a US hedge fund, Greenlight Capital, was fined £3.5m, with Greenlight being fined a similar amount, in connection with the sale of its holding in Punch Taverns.  Although Einhorn hotly denied that he had done anything wrong, he decided not to challenge the RDC’s decision.  In that case, which involved questions of wall-crossing, it might be said that there were some unresolved issues at the conclusion of the case.  The RDC, in effect, exonerated Einhorn of deliberate misconduct, finding only that he ought to have known that what he did was wrong.

In another recent and high profile case, Ian Hannam, who had been Chairman of Capital Markets at J P Morgan Cazenove, challenged a decision by the RDC that he had committed market abuse.  He appealed to the Upper Tribunal which, in May this year, upheld the RDC’s decision.  The ruling runs to 130 pages, and no one reading it will think that it has in any way restricted ‘the impartial development’ of financial services law.  To the contrary, the ruling clarifies the law in a number of important respects.  The fact that a jury was not faced with the legal and factual complexities, leading to guilty or not guilty verdicts which are entirely unexplained, does not strike one as a disservice to justice.

There is, however, a problem which mirrors a theme which Judge Rakoff has frequently articulated.  Libor was originally treated as an administrative breach, with Barclays being fined by both the FSA and the SEC in June 2012. This sparked a public outcry – why was no one being prosecuted in the criminal courts for such outrageous misconduct?  A cosy settlement with the firm, with no senior person being brought to account, came nowhere near slaking the public thirst for revenge.  There was a hasty reassessment of the position, prompting the Serious Fraud Office to open an investigation, which has now led to 13 individuals being charged with criminal offences, and awaiting jury trial in 2015.  One individual has pleaded guilty.

At the same time, the FCA is being asked questions about its failure to take action, either regulatory or criminal, against senior bankers in the wake of the global financial crisis.  Recent legislation and public criticism are ramping up the pressure to take criminal proceedings against unethical banking practices.  The fact that such cases, whether criminal or regulatory, are immensely difficult to investigate and prosecute does not deter those who are baying for blood.

Interestingly, however, when such cases do come to court, the results, like the SEC’s criminal insider dealing trials, are mixed.  Juries, when they hear the facts in court, as opposed to the newspaper headlines and the posturing of politicians, do not always convict.  On the 3 November 2014 a jury in a federal court in Fort Launderdale took just two hours to bring in not guilty verdicts against a senior UBS executive, Raoul Weil, in connection with off-shore tax havens sheltering the wealth of 20,000 US citizens.  No doubt the US Internal Revenue Service, which prosecuted Weil, would have welcomed the opportunity to try the case in its own administrative court.

Civil fraud jurisdiction, Corruption, Fraud, Serious Fraud Office

Civil fraud damages claims begin in the UK following a corruption prosecution by the SFO and the DOJ against Innospec and others

In a recent decision of Mr Justice Flaux in the case Jalal Bezee Mejel Al-Gaood & Partner v Innospec Limited and Others, the Claimants sued for damages which they claimed arose as a result of the Defendants having bribed the Iraqi Ministry of Oil (“MOO”) to purchase their chemical products, TEL.  The claim for damages was for losses which the Claimants alleged they have suffered as a consequence of the unlawful means conspiracy on the basis that, but for the bribery and corruption, the MOO would have started to purchase the chemical additives distributed in Iraq by the Claimants, MMT.  The loss claimed, as quantified by the Claimants’ quantum expert, was US $26,572,603.

Reliance was placed by the Claimants on the fact that the Second Defendant and others had been charged by the United States Department of Justice and had pleaded guilty to criminal offences principally under the Foreign Corrupt Practices Act 1977 in relation to bribery and corruption in Iraqi and Indonesia.  In addition, civil proceedings were brought by the United States Securities and Exchange Commission against the Second Defendant and certain others as well as criminal proceedings pursued in England by the Serious Fraud Office against the First Defendant and certain others in relation to which various Defendants either pleaded guilty or were found guilty after a jury trial. We have blogged previously on the long running Innospec case including here for example.

In his 78 page judgment Mr Justice Flaux said that by the end of the trial it was common ground between the parties that in order for the claim to succeed the Claimants had to establish three matters on a balance of probabilities:

  1. That there had been a decision by the MOO in October or November 2003 to replace the Defendant’s chemical product TEL with the Claimants’ chemical product MMT and to continue using TEL only until stocks were exhausted;
  2. That that decision was not implemented because the promise of bribes by a Mr Naaman procured the MOO to enter into the 2004 agreement and that prevented sales of MMT and;
  3. That, but for the promise of bribes, the decision would have been implemented and the MOO would have replaced TEL with MMT from early 2004 onwards so that the “counterfactual scenario on which the claim is based would have occurred…”.

After a four week trial, Mr Justice Flaux decided that the Claimants case was not made out on the facts and also failed on grounds of causation.  There was much technical evidence about the use of the various chemical products and their test results.  Mr Justice Flaux said

“Overall, although there clearly was criminal wrongdoing by Innospec and Dr Turner and, as is accepted on their behalf, their conduct was reprehensible, that wrongdoing did not prevent sales of MMT and was not causative of any loss.  ….there is no suggestion that MOO officials were bribed to place those orders: they were placed because the MOO needed TEL and, at least until refining equipment was replaced, the strategic decision within the MOO was to carry on using TEL, at least at Baiji and Basra…in the circumstances, the Claimants have failed to establish that the wrongdoing alleged against Innospec caused them loss and the claim fails on that basis as well…”

Although not strictly necessary, the judge went on explain that in relation to the claim for quantum, there were considerable risks and problems with the Claimants’ claim for loss because the Claimants themselves had engaged in corrupt practices in making payments to the government of Iraq and that, as a distributor, if their supplier, Ethyl, had discovered this earlier than they actually did discover it, they may have terminated the distributorship agreement at an earlier date and this would create additional uncertainty in relation to their loss calculation.  The last few pages of Mr Justice Flaux’s judgment are very interesting from the perspective of understanding the difficulties of valuing such claims when there are a number of variables and hypotheticals to take into consideration.  However, the considerations made by Mr Justice Flaux are all far too detailed to summarise in a blog post, but nonetheless they are interesting to practitioners who have a spare couple of hours to digest his very carefully reasoned judgment.

Nevertheless, this case demonstrates that the English court will seriously entertain civil damages claims which arise out of corruption prosecutions, even though in this particular case the claims failed.

Civil damages claims similar to this case already take place in the United States (indeed there was at least one in the US of which TheFraudBoard is aware which related to the same set of prosecutions), so we should expect a body of civil jurisprudence related to corruption investigations to grow steadily over the next few years in England, as the Serious Fraud Office begins to prosecute companies and individuals more frequently for corruption offences, both under the Bribery Act 2010 and the laws which predate this Act, which still cover offences occurring prior to 1st July 2011.


Financial Conduct Authority Enforcement Performance

NERA Economic Consulting has recently published an analysis of the penalties imposed by the UK financial regulator since April 2012[1].  The startling headline is that the level of fines in the 18 months since April 2012 is over £1bn, whereas in the previous decade fines totaled less than £320m.  What is the reason behind this massive increase?  Has the FCA (which took over from the FSA in April 2013) just got tougher, or has it been easier to impose fines because the ‘accused’ have been major firms and High Street banks with long pockets and a propensity to settle, and because the issues under consideration since 2012, mainly the benchmark cases of Libor and Forex, have provided ample excuse for large fines?  In addition, has the even higher level of fines imposed in the US for similar misconduct prompted an escalation in both tariff and expectation?

It is tempting to see the high level of fines against firms set out in the NERA report as representing relatively easy pickings.  This is not to say that the investigations into Libor and Forex have been anything other than massively complex, or that fixing the level of penalty is easy, but there is an element of the domino effect – as soon as Barclays settled with the SEC and the FSA in June 2012, it was inevitable that the other major banks, and related financial businesses, who participated in Libor rate fixing would soon follow suit.  One may anticipate the same if it emerges, as expected, that there has been serious misconduct in the Forex market.

It is also tempting to see all this against a backdrop of the fall-out from the global financial crisis.  Regulatory action against the banks for their failings leading up to October 2008 was relatively limited, and there has been a public thirst for some level of revenge.  The delayed response to PPI mis-selling, other mis-selling cases, the ‘London Whale’, and the benchmark fines, have given the regulator something to crow about, at a time when its response to the crisis in general, and to the RBS and HBOS failures in 2008 in particular, is under attack.

Another interesting headline is that, by contrast, the numbers and levels of fines against approved individuals have fallen ‘sharply’.  Is this because the FCA has found it easier to pursue firms which will, as stated above, seek to settle, both to take advantage of the discount, and to get the problem off the balance sheet?  And because individuals will tend to tough it out, and rarely settle?  The answer to these questions is a qualified ‘yes’, the qualification being that, as the NERA report makes clear, the fact of criminal proceedings for Libor misconduct, and other cases, has caused delays in finalizing regulatory cases against individuals.  Final notices against individuals cannot generally be published until related criminal proceedings have concluded.  There is therefore something of a log jam of penalties against individuals.

Nevertheless, the numbers and levels of fines against senior individuals for regulatory misconduct outside the benchmark arena remain relatively low.  This is partly because it has proved very difficult to pin the blame for large failings on specific members of the boards of financial firms, and partly, as stated, because individuals tend to contest allegations, often with a degree of success.  The regulator is, however, seeking to take more enforcement action against individuals, and has emphasised this ambition.  It has sought to reinforce its position by introducing ‘attestations’ and the senior persons’ regime, as well as new criminal offences such as section 36 Financial Services (Banking Reform) Act 2013 – reckless banking – which should make it easier to prove misconduct against individuals.  It will nevertheless be interesting to see whether these new powers will prove to be effective.

Over the next 18 months we may expect to see the levels of fines against firms remain high.  It is also likely that enforcement action against individuals will result in significant fines during this period, and that penalty levels will exceed those in recent years.  Both results will in large part be due to the benchmark cases, and therein lies a challenge for the FCA: there has been much comment about the extent to which the Libor and Forex cases have taken up Enforcement resources, to the possible detriment of other types of enquiry.  It is difficult to know whether this is true, and it will no doubt be hotly denied by FCA management, but the numbers to watch in the next year or so will be those that do not relate to benchmarks.

At the same time, the NERA report rightly stresses the extent to which the FCA views its consumer protection objective as a core value, and it is likely that statistics relating to this area of endeavour, in particular, for example, early intervention into the mis-selling of products, investigating Pay-Day loan providers, and restrictions on financial promotions, while not necessarily producing large penalties, will demonstrate that the FCA has teeth.








[1] ‘Trends in Regulatory Enforcement in Uk Financial Markets. 2014/15 Mid-Year Report, by Robert Patton.  Published 20 October 2014.


Civil fraud jurisdiction

English Court grants worldwide freezing order in support of London arbitration where assets are outside the UK

A recent decision by the Commercial Court in the case of U&M Mining Zambia Limited v Konkola Copper Mines Plc [2014] All ER (D) 136 in which the Claimant’s application to continue a worldwide freezing order over the assets of the Respondent, Konkola, was granted, is significant for those conducting international arbitrations in London.

Worldwide freezing orders are, of course, normally granted on an ex parte basis in order to prevent the dissipation of assets by a defendant/respondent.  The defendant then has the opportunity to try to set it aside on a number of grounds.  The noteworthy ground which we consider in this blog post is that the Court considers it “just and convenient” to allow the freezing order to continue.

What is unusual about this case is that the Court upheld the freezing order even though there are no assets in the UK.  The Court held that where the seat of the arbitration is London, it would ordinarily be appropriate for the Court to issue orders in support of the arbitration, although there may be reasons why it is not appropriate from time to time, even though the seat of the arbitration is in England. So a worldwide freezing order will not necessarily be granted in every similar case.

In addition the Court decided that:

  • The fact that enforcement of the arbitral award would take place in Zambia was not sufficient to make it inappropriate for the Court to grant a worldwide freezing order;
  •  Even if the Zambian Court could also grant a freezing order, this would not make it inappropriate for the English Court to do so.

It is therefore possible for two courts to be appropriate forums in which to bring an application for a worldwide freezing order – in the case of London, because it was the seat of the arbitration, and in the case of Zambia because of the residency of the respondent, Konkola.

This decision should further encourage the choice of London as the seat of the arbitration in international contracts, where assets are not actually located in the UK.

Enforcement, Serious Fraud Office

SFO Bashing, Chapter 49.

No one could accuse the Serious Fraud Office of living a charmed life.  It is regularly accused of stupidity and inefficiency by a hostile press, and not infrequently the government weighs in with destabilising tactics, either by slashing its paltry budget, or by planning to redesign the counter fraud landscape.

A report this week in the Financial Times suggested that the Home Secretary is revisiting plans to dismantle the SFO, either by rolling it into the National Crime Agency, or by some other merger of fraud investigators.  These plans first surfaced in about 2010, at a time when proposals for the NCA were being fleshed out.  The NCA, which took over from the Serious Organised Crime Agency last year, has a division devoted to economic crime – the Economic Crime Command.  In its current form the ECC has more of a coordinating and prioritising function than an investigating capacity.  For example, it scans the fraud horizon, assesses which type of fraudulent activity most needs to be addressed, and works with fraud investigators to put together a team to tackle the problem.  It focuses on intelligence, seeking to create an intelligence ‘hub of hubs’ drawing on the various separate hubs which both public authorities and private enterprise maintain.  A core aim is to work with the private sector to prevent fraud, and to identify ‘key nominals’ and ‘facilitators’ who operate in the world of economic crime.

One of the guiding principles of the NCA, and the ECC, is to identify and attack organised crime groups (OCGs).  The ECC recently estimated that of the 7500 identified OCGs in the UK, about 1350 operate in the fraud sphere.  Whether this emphasis on OCGs in relation to fraud assists in the prevention and detection of fraud in general is a moot point.  It may well be argued that boiler rooms, for example, and other forms of investment scams, are closely linked to organised crime. Applying investigative techniques that assist in breaking up OCGs may usefully underpin such fraud investigations.  However, City fraud of the kind that the SFO is currently tackling is not organised crime, and trying to treat it as such will not add value to any investigation.

It is of course possible that if there were to be a merger between the ECC and the SFO, a separate specialist ‘City fraud’ unit would be set up to concentrate on City malpractice like Libor and Forex rate rigging, and that this unit would not be fixated on OCG issues.  However, that would surely be an uncomfortable fit.  One wonders whether the complications of such a merger would be worth the trouble.  Either it would entail simply shifting the SFO’s investigators and support staff over to the ECC, in which case it is difficult to see what the point of the merger would be, or it would involve a wholesale rethinking of fraud investigation structures.  Either way this would involve a major change from the SFO model, in that prosecutors and investigators would no longer be working alongside each other in unified teams.

There are alternatives to the ECC option.  All serious City fraud (including possibly that currently prosecuted by the Financial Conduct Authority and the Competition and Markets Authority) could be delegated to the City of London Police, with the CPS prosecuting the cases.  This would also involve a separating prosecutors and investigators. At the same time it runs the risk of losing some complex specialist knowledge and back-up.

Perhaps Mrs May’s reputed plans will have the benefit of stirring up a useful debate.  Nearly thirty years on, can it be said that the Roskill model, as adapted by the Criminal Justice Act 1987, has worked?  Should we start again?  What other options are there for tackling serious fraud?  However, they could also have the effect, as other commentators, including former Solicitor General, Edward Garnier, have stated, of providing a very unwelcome distraction at a time when the SFO needs as much support and stability as it can get.