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
Enforcement, FCA enforcement, FSA enforcement, Insider Trading, Market Abuse, SEC enforcement, Sentencing

Going Inside for Insider Trading

It is always assumed that sentences in the US for any crime are significantly higher than they are in the UK, but nowhere is this more starkly exemplified than in white collar crime.  The recent sentence of 9 years in prison for Mathew Martoma for insider trading is the latest proof of the truth of this assumption.  Previous long sentences for this offence included 12 years in 2011 for Matthew Kluger, and 11 years in 2012 for Raj Rajaratnam in the notorious Galleon case.  Both Kluger, a corporate lawyer, and Rajaratnam, a hedge fund owner, were senior professionals who, like Martoma, were deemed to have been insiders in possession of explosive unpublished information, which they deliberately used to their own advantage.

The UK record over the last few years in insider dealing cases has been good, but the longest sentence any individual has received is the 4 years handed out to James Sanders of Blue Index in 2012.  It should be pointed out that the maximum sentence under section 52 Criminal Justice Act 1993 is 7 years, and also that the sums involved in the cases brought by the Financial Services Authority have been small by comparison with the US blockbusters, rarely exceeding £1m, and in most cases much less.  In Operation Tabernula, the FSA’s (now FCA) largest insider dealing investigation, the profits made by the two defendants who have so far pleaded guilty were £245,000 and £500,000.  Martoma’s actions in arranging for hedge fund SAC Capital, where he worked as a portfolio manager, to sell its entire position in drugs company Wyeth and Elan just ahead of bad news about a new counter-Alzheimer’s product, are said to have made a profit of $275m for SAC, and a bonus for him of $9.3m. His sentence included the disgorgement of his bonus and the loss of a house in Florida.  In addition, he will never work again in the financial services sector – or in any other professional capacity – in his lifetime. Preet Bharara, the US attorney responsible for the SAC convictions, and for about 80 other successful insider dealing convictions, had demanded that the sentence should be 15-20 years, but the judge rejected this claim as excessive.

As for SAC, it settled its differences with the SEC last November, paying a fine of $1.2bn.  Eight SAC employees were charged during an investigation that lasted several years.  Six pleaded guilty.  Martoma’s case, involving events in 2008, marks an end to the proceedings.  But one person who was not indicted was SAC’s owner, Steven A Cohen, in spite of the assertion by Bharara that “insider trading at SAC was substantial, pervasive and on a scale without precedent in the history of hedge funds”.  Cohen strongly denies this claim, and Bharara, in spite of pressurising Martoma to give evidence against his former boss, failed to get evidence to indict him.  SAC Capital continues to do business, albeit with some restrictions. Cohen is still at its helm.

The focus by the FSA since 2007 on insider dealing, and the successful prosecutions brought against more than 20 individuals, as well as civil market abuse cases, appear to have had an impact on market conduct.  Two civil market abuse cases in particular, against US hedge fund owner David Einhorn, who was fined £7.2m in 2012 in connection with trading in Punch Taverns stock ahead of a funding announcement, and Ian Hannam, a senior investment banker at J P Morgan Cazenove, who the Upper Tribunal found guilty of two counts of market abuse in 2014, have spooked the market. A Market Cleanliness report published by the FCA in 2013 stated that after remaining stable for the four years to 2009, the level of abnormal pre-announcement price movements declined to 21.2% in 2010, 19.8% in 2011 and to 14.9% in 2012. This is the lowest level since 2003. The fall took place in a year of weak takeover activity and against a backdrop of the Regulator’s ‘continuing focus on market abuse and enforcement activity in this area’.  Whether the US experience is the same is not known, but one might expect that the tough sentencing of senior market professionals will have had an impact.

Corruption, Deferred prosecution, Fraud

Welcome to The Fraud Board, a new blog site for UK fraud and related regulatory issues

Welcome to the new McGuireWoods London LLP fraud blog: The Fraud Board, which has taken over from our highly rated Bribery Library site.  There are various reasons for the change, but the main rationale is that while the subject of Bribery remains very important in the economic crime landscape, and will continue to feature strongly in our blogs, other fraud and regulatory issues are increasing in significance.

The Serious Fraud Office is investigating a number of Bribery cases, some of them involving the Bribery Act 2010.  All fraud lawyers and other professionals, including ourselves, are watching this space on behalf of clients, to see how the SFO will deploy the new provisions in the Act, in particular sections 6 and 7.  How far will they go to prosecute corporations under the failure to prevent offence?  How will the defences play out in practice?  What level of detail will it be necessary to deploy to disprove an assertion that a corporation’s systems and controls were inadequate?  How will the section 9 Guidelines work?  How will the SFO use the new powers to negotiate Deferred Prosecution Agreements?  What is the future of internal investigations after the SFO Director’s recent criticism of practices adopted during investigations, in particular relating to privilege?

Meanwhile, other economic crime issues have been grabbing the headlines.  The Attorney General, speaking at last week’s Cambridge International Economic Crime Symposium, restated the Government’s intention of introducing legislation to prosecute firms for failing to prevent fraud offences generally, and therefore we may expect to see large fines deployed against businesses for allowing economic crime to flourish.  This follows calls by the Director of the SFO for such an offence to be created, and is seen as a response to the allegations made in the Libor and Forex investigations, which will make it easier to take action against firms, at the same time as being an attempt to raise ethical standards.  However, given that there has been a similar offence in relation to money laundering (now regulation 45 of the Money Laundering Regulations 2007) since 1993 which has never been used, it will be interesting to see how the ‘failing to prevent’ offences work out in practice.

Other new initiatives include a reinvigorated push to take senior management to task for their part in corporate wrong-doing and failures.  Section 36 of the Financial Services (Banking Reform) Act 2013 is one sign of the impact that the work of the Treasury Select Committee is having in this area.  Whether the attempt to criminalise reckless banking will work out in practice is open to question, but there can be no doubting that the gloves are off.

Working equally hard to make management accountable is the Financial Conduct Authority, with the Senior Persons Regime and other measures such as attestations designed to ensure that there is clear liability at board level for all aspects of financial firms’ activities.  This will be given added impetus by the outcome of the enquiry into the FSA’s handling of the failure of HBOS between 2008 and 2012.  The FCA has promised to be more aggressive in pursuing regulatory offences generally, intervening early to prevent mis-selling of financial products, and generally working hard to protect consumers.  How will this work out in practice?  Firms may well continue to be relatively content to settle their disputes with the regulator, but individuals are likely to continue to tough it out.

Civil fraud actions occupy an equally important space in the economic crime landscape, either in conjunction with prosecutions, or as an alternative where law enforcement does not have the resources or the capability to take action.  Seeking redress for the victims of fraud, whether the wrong-doing is committed by financial institutions or criminal gangs or computer hackers, through litigation enables lawyers to take control of the process on behalf of their clients and to pursue remedies in increasingly imaginative ways.

The Fraud Board will examine all these issues, and others, bringing the experience of Vivian Robinson QC, David Kirk and Adam Greaves, and their supporting team both in McGuireWoods London LLP and across the firm’s US offices, to bear on the topics that matter.

Corruption, Enforcement, Fraud, Self-reporting

The Director of the SFO criticises corporations which commission internal investigations before self-reporting

Following an article published in Legal Week in August authored by Ben Morgan, the joint head of bribery and corruption at the SFO entitled “Coming Clean – the argument for cooperating with the SFO on corporate crime”, we commented on this in a blog dated 18 August 2014 setting out some of the issues which corporate clients have to consider when deciding whether or not to self-report possible criminal issues to the SFO.  We offered the view that: 

  • the SFO’s position as stated by Mr Morgan had perhaps been oversimplified; 
  • that a number of corporations and their lawyers were struggling with these issues and debating them privately with the SFO; and 
  • that the issues would benefit from a public debate. 

We concluded that blog by saying that these issues, when considered in depth, and if aired publicly, may reinforce the SFO’s arguments for self-reporting, rather than undermine them, so a public debate should be beneficial all round in order to dispel corporate anxieties and misunderstandings. 

On 27 August 2014 The Times newspaper published an article in its business section “Fraud Office attacks fraud crime reports” in which the director of the SFO, David Green CB QC, was quoted as saying that he is “against businesses commissioning their own reports into allegations of serious misbehaviour that often “cleared” the subject of any illicit activity”.  He complained that the SFO was often handed privately paid for investigations by expensive external lawyers that contained an “inherent conflict”…  The report itself may tend to minimise the problem one way or another.  Later claims of legal privilege on witness statements taken by the external lawyers can be questionable.  And, of course, the crime scene can be churned up by the investigation.  The SFO will never take such a report at face value and will drill down into its evidence and conclusions”. 

There is no suggestion in The Times article that Mr Green is currently pushing for a change in the law in order to address his stated concerns. 

The Times article then goes on to cite a couple of apparent examples, one in the United States and one in the United Kingdom, of large professional service firms having produced reports following internal investigations which, the article intends the reader to infer, were not entirely candid in their conclusions, or had adopted too narrow a remit at the onset.  We make no comment on the fairness or accuracy of these cited examples. 

The article concludes that although more than 100 SFO staff are working full time on SFO investigations into LIBOR rigging and foreign exchange market (“FOREX”) manipulation, Mr Green warned that “…it was likely that the SFO was a long way from getting to the bottom of much of the criminality in the City…”  The size of the white collar criminal legal sector servicing the City of London suggests there is a lot more work out there that the SFO could be doing…” 

While one has some initial sympathy for the Director’s comments, when considered in further detail, a number of other issues come to mind: 

  • Encouraging corporations not to hire external solicitors to advise them on whether they have potential criminal issues within the company could lead to:
  • Corporations inadvertently (or otherwise) covering up their own wrong doings, having not had the benefit of objective, experienced external advice; 
  • Alternatively, because most corporations do not employ in-house lawyers with white collar defence experience, corporations failing to recognise at all that conduct within the organisation was criminal or should be reported to the SFO; 
  • And/or, in the absence of objective external advice, corporations (or at least individuals within the corporations) will themselves “contaminate the crime scene” (to use the Director’s phrase) and/or to destroy evidence such as deleting electronic data or destroying hard copy documents.  The external advisers would not be able to watch and ensure evidence is properly preserved. 
  • Many corporations would not even recognise or accept that self-reporting to the SFO was something that they should even consider, let alone act upon. 
  • Experience tells us (by which I mean white collar lawyers generally) that self-reporting by corporation is almost always done on the strong advice of reputable external law firms rather than from a corporation’s innate desire to “come clean” and confess to an investigating/prosecuting agency.  Corporations are already fearful that by self-reporting they will bring a huge amount of adverse publicity and incur significant costs, and therefore by discouraging corporations from taking external legal advice, we think that corporations are far less likely to self-report, not having any guidance as to the potential outcome, rather than more likely.  People (including legal persons) are far more likely to bury their head in the sand if they do not receive expert advice. 
  • Further, it should be remembered that the SFO’s nominal budget has been reduced drastically under the current coalition government, due to cutbacks in all government departments.  Although this has been addressed/reversed to some degree by so-called “blockbuster funding” from the Treasury in relation to specific investigations, the SFO is still seriously underfunded.  The current practice of corporations carrying out extensive internal investigations and handing over their report to the SFO is actually helping the SFO because a lot of the leg-work has been done by the company itself and this is very costly work.  Of course, every corporation accepts that the SFO will want to drill down further into the evidence later.  The suggestion that the SFO itself has the resources to undertake dozens (or perhaps a great deal more) of the initial investigations itself is unlikely to ever be supported by government funding as the SFO’s annual budget would need to double or treble.  The current system offloads huge costs on to the corporations. 
  • Further, given the slow pace of the SFO’s current investigations, which may take several years before charges are laid against any defendants and even longer before they conclude with a trial, this will make the process of justice even slower not faster, which is bad for justice and bad for business. See for example an article in the Financial Times of 28th August 2014 entitled “Regulatory Revenge Risks Scaring Investors Away”.
  • Although The Times article of 27 August 2014 cites a couple of examples where reports carried out by external advisers are thought to be flawed (in fact the American example is the only one of which there seems to be explicit criticism that the professional services firm is alleged to have “toned down some of its criticism”), no credit has been given by the article or by the SFO for the (probably) scores of cases of self-reporting that go on every year to the SFO that has been conducted in a perfectly acceptable and honest manner.  Perhaps there should be more clarity (albeit anonymised) of these statistics? 
  • Even if the SFO were much better funded, and let’s say its budget were trebled, that would still not be justification for saying that corporations should not able to take legal advice on activities that have been conducted within the organisation or by the organisation with third parties.  It remains a fundamental principle of our constitution that people and legal entities should be able to take legal advice and that that legal advice should remain legally privileged i.e. confidential to the client, unless the client waives his right to privilege.  If you had a client who had/may have committed some other type of crime, you would not send him off to the police to make a confession on their own, would you?  You would want to understand your client’s own story first. 

The engagement of external lawyers by corporations is still the safest and best option as those external law firms not only have their own firm’s professional brand reputation to protect in giving full honest and fair reports, but the lawyers who form those organisations all owe personal duties to the court not to mislead it. Their report would have been prepared in the knowledge that, if disclosed to the SFO as part of a self-reporting procedure, it could end up being scrutinised by the court.  

Whilst there is a “crime scene” it is mostly consisting of paper and electronic documents, and witness evidence, and not the forensic DNA evidence seen on television dramas.  “Contamination” will therefore be different, but the deletion or alteration of documents mostly itself leaves an evidential trail, so it is not clear whether there is really a serious problem here.  We would have been interested to have seen some examples cited in The Times article as to Mr Green’s specific concerns.  Further discussion is required, publicly, if this suggestion is to be considered seriously. 

Perhaps the Director’s real gripe concerns an inequality of arms i.e. that large corporations are usually much better funded than the SFO itself.  That may be true, but that is a question for the government to address in terms of how serious it is in pursuing serious economic crime in the UK.  Removing corporation’s rights to take external legal advice on any perceived problems within the corporation would be throwing the baby out with the bath water.  The Government should perhaps allow the SFO to keep more of the money it recovers through civil settlements, criminal fines levied by the Court as a result of the SFO’s prosecutions and monies disgorged by defendants under the Proceeds of Crime Act.

Corruption, Enforcement, Jurisdiction, Senior Executives, Settlement

The Long Arm of British Anti-Corruption Laws and the impact on individual defendants

Bruce Hall, the former Chief Executive Office of Aluminium Bahrain Bsc (“ABLA”) was sentenced on 22 July 2014 to 16 months in prison for conspiracy to corrupt in relation to contracts for the supply of goods and services to ALBA during the period September 2001 to June 2005.  The Serious Fraud Office (“SFO”) press release is here.

Followers of this blog will remember that the SFO also prosecuted Victor Dahdaleh, a British/Canadian billionaire, whose trial collapsed at the end of 2013.  We blogged previously here , here and here.

Bruce Hall decided in 2012 to plead guilty to the charges laid by the SFO in 2012.  He accepted that he had received £2.9 million in corrupt payments between 2002 and 2005 including 10,000 Bahraini Dinars in cash from Sheikh Isa Bin Ali Al Khalifa, a member of the Bahraini Royal Family and, at the time, Bahrain’s Minister of Finance and ALBA’s Chairman.  The payments were made in exchange for Mr Hall agreeing to and allowing corrupt payments that Sheikh Isa had been involved in before Mr Hall’s appointment as CEO to continue as a result of the corrupt payments received.  Mr Hall was ordered to pay: 

  • £3,070,106.03 within seven days, or face serving an additional term of imprisonment of 10 years; 
  • compensation to ALBA in the amount of £500,010; 
  • £100,000 as a contribution to the prosecution costs. 

The Judge presiding over the hearing, Judge Loraine-Smith said: 

“In any view, this was an extremely serious use of corruption…you breached the trust that was placed in you as the CEO of ALBA…corruption has been described as an insidious plague that has corrosive effects across communities…there was a reluctance by you to accept that what was done by you was as corrupt as it so obviously was…” 

Judge Loraine-Smith also noted that Mr Hall had cooperated with numerous authorities throughout the investigation.  The Judge held that if he had not been so cooperative, he could have faced around six years in prison, close to the maximum sentence for conspiracy to corrupt (under the old, pre-Bribery Act 2010 laws).  As a result of his cooperation Mr Hall was entitled to a 66% reduction in his sentence and a further one third reduction due to entering a guilty plea.  In addition to which, the 119 days that Mr Hall spent in prison in Australia awaiting extradition to the United Kingdom would be taken off his sentence. 

As part of Mr Hall’s mitigation, he also agreed to divest himself of other corrupt payments which he had received during his time as the CEO of ALBA.  These payments were not part of the indictment as the SFO did not have jurisdiction to prosecute for the conduct acknowledged by Mr Hall.  In order to recover the other payments received by Mr Hall, which amounted to US$900,000, the director of the SFO launched proceedings under Part 5 of the Proceeds of Crime Act 2002 in the High Court. 

Although the SFO had a fairly spectacular failure during the ALBA case in its prosecution of Victor Dahdaleh (on which we have blogged previously – links above), the prosecution of Bruce Hall is another SFO success story and should properly be regarded as such.  Even though the prosecution took place under the pre 1 July 2011 (the date the Bribery Act came into force) corruption laws, which pre-date the Bribery Act 2010 and which are still being used to prosecute for offences which took place prior to that date, nevertheless this case amply demonstrates: 

  • That British anticorruption laws can affect foreign individuals living outside of the UK, and that extradition treaties can be utilised to force those individuals to face trial in the UK; 
  • That the SFO and the British courts will use the Proceeds of Crime Act 2002 to force individuals to disgorge the profits made from corruption. 
  • The investigations/prosecutions can hang over an individual (or indeed a corporate defendant) for many years – in this case the SFO formally opened its investigation in 2009.  For most people that may mean their lives are in limbo during the whole period, and they may be unable to obtain employment during that time, or at least at the same level or in the same industry.
  • Practices of corruption which are regarded as almost de rigeur in many countries around the world will be viewed very differently indeed if they come before the English courts which have repeatedly stated that defendants are no better than “common criminals”.

The inference to be made from this court order is that  the crime of corruption really doesn’t pay, especially for board level directors, and that individuals who get involved in (or permit existing arrangements to continue unabated) international corruption are at risk of being prosecuted in one or more jurisdictions around the world and are liable to lengthy terms of imprisonment as well as very substantial penalties and orders for disgorgement of payments.  That said, one one view, for wealthy defendants like Victor Dahdaleh, there is still an argument for aggressively defending these prosecutions because Mr Dahdaleh’s trial collapsed (the SFO’s statement on the collapse is here) and he is no longer being prosecuted, whereas Bruce Hall pleaded guilty at an early stage for the very same allegations, and Mr Hall by contrast has suffered all the penalties set out above.  As with all prosecutions, the way a defendant pleads to them is ultimately his/her own decision and often a complete gamble, but the orders made by Judge Loraine-Smith on 22 July 2014 show that the courts will make substantial discounts in sentencing as a result of a guilty plea and cooperation with the prosecution, and this should encourage defendants to work out for themselves the benefits of cooperation.

Corporate sentencing, Corruption, Deferred prosecution, Enforcement, FCPA, Plea bargaining, Self-reporting, Settlement, Whistleblower

Coming clean – the argument for cooperating with the SFO on corporate crime*

*This title is taken from an article published in Legal Week last week which we quote in full below.

Following the recent sentencing of four individual defendants in the Innospec corruption investigation by the SFO, Ben Morgan, the joint head of bribery and corruption at the SFO wrote the following in Legal Week last week, as follows:

“4 August was the day that four men were sentenced for their part in the Innospec leaded fuel corruption case.

There was a real spread of sentences – four years’ imprisonment, two years’ imprisonment, 18 months’ imprisonment and 16 months’ imprisonment, suspended. Two had pleaded guilty to corruption, and two had been found guilty by unanimous jury verdict after a three-month trial. In his sentencing remarks, His Honour Judge Goymer made very clear the seriousness of offending of that nature, and the sentences reflect that.

After the years of investigation, legal challenge and the trial, the moment had finally come for those given custodial sentences to be taken from the dock. So what can we take from this?

1. ‘White collar’ crime will be treated no differently to any other crime

In his remarks, the judge said: “None of [these defendants], I expect, would consider themselves in the same category as common criminals who commit crimes that involve dishonesty or violence” – a sentiment widely shared across the senior ranks of the City. But it is obvious that that is a dangerous belief to hold if the temptation arises to commit, go along with or turn a blind eye to corruption.

The truth is that those who breach the criminal law in any forum will be treated equally, and I would be surprised if anyone seriously argued that should not be the case. The comfort, distance and apparent safety of the boardroom is indistinguishable from any other environment in which crime is committed, and is just as capable of resulting in a custodial sentence. Corporate crime is not a special category of crime-lite, to be treated less seriously than real crime. Surely the opposite is true when one takes into account the potential harm a senior individual can cause through the misuse of their privileged position.

As His Honour Judge Goymer said when dealing with the issue of human accountability for corporate crime: “[i]t follows that those who have a high level role in the organisation or management and by their own pleas or by the jury’s verdict are shown to have been knowingly involved in corruption must bear a heavy responsibility in the criminal law”. That is a view that I suspect resonates more comfortably with the public perception of those who commit highly impactful institutional crime.

2. In overseas corruption cases, the defence of ‘it’s just the way things are done’ is no defence at all

This is a short point, probably uncontroversial but worth revisiting. Few would put the positive case that just because people in a particular jurisdiction are known to tolerate corruption, it is acceptable to participate in that behaviour, particularly if they see less scrupulous competitors achieving an advantage.

A linked concern from the perspective of an individual is where they join or are promoted into the senior echelons of a company and find that questionable conduct is taking place or expected; it’s just the way things are done in that company. It can, I imagine, be immensely hard to stand up to that as the new person, but the risks of failing to do so are clear.

The trial judge commented during sentencing: “[t]he corruption in this company was ingrained, it was endemic and it was institutionalised. It is no excuse to say that things had always been done in what the jury and I came to know during the trial as “the Indonesian way”, and he went on to describe another economic argument said to mitigate the conduct in question as “a convenient and cynical excuse for the corruption”.

The lesson here is that whatever the prevailing context, the courts in England and Wales will view corrupt conduct with clarity and precision, uncluttered by whatever concession an individual may have made to themselves to justify their act or omission.

3. There is a clear incentive to co-operate with the SFO, both as an individual and as a company

The key point here is the suspended sentence one of the defendants received. It is entirely a matter for the court what sentence it imposes, and the SFO can make no guarantee about that, nor should it. But we know that in this case the two suspects who pleaded not guilty received a four-year and an 18-month sentence respectively, and a suspect who pleaded guilty immediately received two years’ imprisonment, but the suspect who pleaded guilty immediately and cooperated with the SFO’s investigation – including giving evidence for the Crown at trial – did not go to prison.

There is an overwhelming imperative on executives who suspect corruption in their organisation to speak up. There has always been a moral driver for that, but now there is a tangible, practical one too. If you know of something and you are not implicated yourself, then covering it up or passively going along with it can create its own legal risk. And if it is too late for that and you are already implicated, it seems your options are quite clear: fight and risk prison, or come clean and cooperate and, hopefully, don’t.

For now there is one final significant point to all of this. I have spoken publically about the decision a company itself has to make when it suspects it has a corruption issue, which is to choose its fork in the road. Does it want to keep the matter from the SFO, and run all the risks that entails, or does it choose to cooperate with the SFO in the hope of, effectively, a more lenient outcome if it turns out there has been criminal conduct?

I have given my reasons before about why I say the latter position is the obvious legal, commercial and moral choice, and since deferred prosecution agreements became available, numerous companies have come to talk to us. Notwithstanding that, I continue to encounter forceful opposition in the legal community, if not the business community, to the suggestion that a company would choose to speak to us, one of the reasons for which being, apparently, the difficulty the board members might have if they themselves are potentially exposed.

In light of the sentencing guidance this case offers, I wonder how credible that argument is. Is it now more or less likely that a conflicted board member would seek to cooperate with the SFO? If they do, is it more or less likely that the SFO will learn about and have evidence to demonstrate corporate offending? And what then for the company and the remaining directors who tried to bury it?”

First, credit where credit is due, the Innospec case is one of the SFO’s success stories, although the mass media is generally more inclined to knock the SFO when things go wrong than praise it when things go well. The SFO has had more than its fair share of failures over the years including in recent times but it has also had its successes which usually go unsung.

In relation to the points made by Mr Morgan about the risks of not self-reporting to the SFO when corruption has been discovered and cooperating with it from the outset, as opposed to the alternative of sweeping the discovery under the carpet, we are in substantial agreement with him, although we feel that there should be more public acknowledgment by the SFO of the difficulties practitioners and their corporate clients are facing with regard to other issues including:

  • If a corporation decides to self-report to the SFO, to which other investigating/prosecuting agencies around the world will the SFO send this information, in consequence of its international intelligence sharing agreements, thereby potentially multiplying the risks of several sets of legal costs and fines around the world. It is not just a question about reporting to the SFO but its like making a report to many foreign prosecutors, without knowing who they might be. The biggest fear for most defendants is that US prosecutors will crawl all over them and that the level of potential fines can be catastrophic to a company’s balance sheet. There are some current corruption investigations, well reported, where many jurisidictions are now involved and carrying out their own investigations.  Of course, that risk is still there whether or not a company self-reports, or is reported by a whistleblower, or comes to the attention of the SFO by other means, but what we do know from  our own experience and from discussioons with other law firms that this is a factor which really worries corporations when considering whether or not to self-report: that the investigation will run out of control, become extremely expensive, and could cause immense damage globally to the company.
  • An additional factor is the age-old question of legal privilege. The SFO’s position seems to be that when a company self-reports, it expects it to be as open as possible about its internal investigations and, for example, to disclose all witness statements prepared by the corporation’s external lawyers, effectively meaning that legal work that the client and the lawyers undertook, prior to entertaining any discussions with the SFO, and which was undertaken in the expectation that the work product was fully confidential/privileged, should be passed to the SFO and confidentiality/privilege waived. Apart from anything else, these statements may have been taken from employees who felt obliged to cooperate with the company because of their employment contracts, but who were not explicitly made aware that they could be implicating themselves in any criminal conduct. They may not have considered protecting their own interests at the time of giving the statement and may not have had their own counsel.
  • The current trend of corporate defendants coming to settlement arrangements with the SFO (approved by the court), whether in the form of ”civil settlements” or whether through the newly enacted deferred prosecution agreements, places individual defendants in a much more difficult position to defend themselves in any subsequent prosecution, by reason of the corporate defendant having implicated the individual defendants when being forced to make its written plea as part of any “deal” to be approved by the court. As Ben Morgan acknowledges in his article, some of those people may have board positions and may have a personal conflict of interest (which may not be known to other board members, at least at the outset of the investigation).

These issues, and others, we dare say, are currently being considered by lawyers all over the UK (and abroad) in their dealings with the SFO, when considering whether or not to make a self-report, and are giving rise to considerable consternation in corporations at the highest level which are considering the SFO’s recommendation to self-report at the earliest opportunity. These are not easy issues to grapple with, and will differ from case to case, but we feel that there could be considerable benefits resulting from a more public debate with the SFO about how to confront and reconcile them. It is clear that even where there is no current US investigation, the fear of future prosecution by US prosecutors may be the driving force in corporate defendant’s decision-making processes whether to cooperate with UK prosecutors in a current investigation, and that these fears are a direct result of international cooperation agreements for the sharing of criminal intelligence (for example between the SFO and the US DOJ and SEC).

Funnily enough, these issues when considered in depth, may reinforce the SFO’s arguments for self-reporting, rather than undermine them, so a public debate should be beneficial all round.

Compliance programmes, Corruption, Enforcement, Fraud, Whistleblower

UK GOVERNMENT’S RESPONSE TO THE DEPARTMENT FOR BUSINESS, INNOVATION AND SKILLS “WHISTLEBLOWING FRAMEWORK: CALL FOR EVIDENCE”

A theme present in a number of press articles on “Whistleblowing” over recent months has been that, despite regulatory advances, whistle-blowers continue to be ignored, hushed or retaliated against. 

This theme of “fear of reprisal” is central to the Government’s published response to BIS’s recent call for evidence into the current whistleblowing framework.

Following the changes introduced by the Enterprise and Regulatory Reform Act 2013  to the whistleblowing protection framework, BIS had in July last year begun seeking evidence, of which the call for evidence formed a part, on whether any aspects of the protection framework no longer worked in the way originally intended, and whether further changes are needed.

From our reading of the recently published Response we make out some of the key points and developments that will arise from the call to evidence are as follows: 

1.      Categories Of Disclosure Which Qualify For Protection 

The Response noted that there had been a called for additional categories to be added to the six categories of disclosure which currently qualify a worker for protection; they included:

 

     (i)            The incentivisation or incitement of others to conceal wrongdoing;

     (ii)            Misreporting or pressure to misreport;

     (iii)          Financial irregularities;

     (iv)          Professional malpractice;

    (v)          Mismanagement of public funds by public bodies or private bodies in  receipt  of public funding;

     (vi)          Abuse and misuse of power;

     (vii)           Gross waste or mismanagement of funds;

     (viii)           Serious abuse of authority;

     (ix)            Breach of contract, employment malpractice and human rights abuses;

      (x)            Breach of standards of conduct/professional standards;

     (xi)            Whistleblowing abuses outside of the UK; and

     (xii)            Any other matter of public interest. 

As set out in the Response the Government considers that all of the above were already captured under the existing six categories, other than two (vi) and (vii). 

These two were considered by the Government to be too difficult to define and recognising that they could create uncertainty as to what type of activity would result in protection being available – they therefore declined to commit any change “in this area at this point”.  

2.      Lack On Information Following Report 

The Response acknowledged that whistle-blowers were discouraged by the lack of information made available following the reporting of a matter to the relevant “prescribed person” (the UK Parliament has approved a list of “prescribed persons” to whom individuals can make reports, including HMRC, the Health and Safety Executive and the Office of Fair Trading). 

While appreciating that transparency is difficult to achieve given the importance of maintaining confidentiality in an investigation of a case, the Government has committed to introduce a requirement for Prescribed Person’s to provide annual whistleblowing reports. The detail to be included within such a report (for example number of disclosures received, numbers of investigations, of those the number of organisations which had whistleblowing policies in place) will be subject to further consultation. 

3.      Definition Of Worker 

Currently an individual eligible to be protected under the whistleblowing framework is someone who meets the definition of “worker” as contained in the Employment Rights Act. It was a question going into the call for evidence as to whether this definition was broad enough to give adequate protection. 

As a result of the call for evidence, the Government has undertaken to broaden the scope of the definition, through secondary legislation, to ensure student nurses are covered. 

Organisations other than health-care providers may want to track developments in this regard as, depending on the approach taken, it is not impossible that the language of secondary legislation may be broad enough to include not just student nurses, but other classes of student workers. 

The Government also affirmed the recent Supreme Court decision in Clyde & Co LLP and another v Bates van Winkelhof  where the Court concluded that members of an LLP can fall within the current definition of “worker”. 

4.      Financial Incentives 

One of the areas of most interest addressed in the call for evidence was that around financial incentives as a means to encourage individuals to blow the whistle. 

As readers may already know, authorities in the US have programmes that reward whistle blowers. For example the SEC offer rewards to individuals any in the world who report violations of US securities laws – whistle-blowers under this scheme can receive up to 30% of any fine if their information leads to the recovery of investor money over $1,000,000 USD. 

So far the known SEC “bounty” record, a not insignificant sum of $14,000,000.00 USD, went to a whistle-blower who provided information in relation to a Chicago-based investment scheme. While not pocket change, this amount does not quite compare to the $104,000,000.00 the IRS paid out to former UBS banker Bradley Birkenfeld, which was paid under a similar IRS rewards programme. 

The UK Government has though taken the position that it does not believe that financial incentives should be introduced to the general whistleblowing framework. While the Response recognised whistle-blowers do suffer detriment to which they should be compensated (unfair dismissal, victimisation or being blacklisted), it concluded that the Employment Tribunal was an existing and adequate avenue for whistle-blowers to seek redress.   

The door though has been left slightly ajar in relation to whether bounty payments would be appropriate in specific cases, notably serious crime and financial regulatory matters. The Response noted that the FCA/PRA are considering this question and will publish statements regarding the impact of incentivising whistle-blowers, and also referenced that the Government committed in its Serious and Organised Crime Strategy to consider the case for incentivising whistleblowing in cases of fraud, bribery and corruption. 

5.      Employees Willingness To Expose Wronging 

As already noted, and which may come as little surprise, the Response acknowledges that the most significant issue considered to be preventing individuals from blowing the whistle, lies in the fear of reprisal. 

What may be slightly more concerning for companies however is that Government have formed the view that two other reasons preventing reporting was either the lack a relevant policies being in place in businesses (which seems alarming given the rise of compliance-based legislation like the Financial Services and Markets Act, and the UK Bribery Act), or that policies in place are not clear enough for individuals to understand. 

In response the Government has undertaken to improve guidance and create a model whistleblowing policy. Any company currently operating some form of whistleblowing policy may want to make a note to sense-check its policy against the Government precedent once published. Any company operating without such a policy would be well advised not to wait for this point to introduce an appropriate policy. 

Given how important a feature of an effective compliance programme a whistleblowing mechanism can be, these concerns should not be ignored. Crucially businesses should be confident that reprisals against whistle-blowers are not an issue for them, and that their organisation understands and trusts any whistleblowing policy and procedure they have in place. Deficiencies in these areas may very well lead to a Regulator challenging the overall effectiveness and adequacy of an organisations compliance programme.

Financial Conduct Authority, Fraud

Forex Investigation – the new blockbuster investigation by the SFO

On 21 July 2014 the director of the Serious Fraud Office formally announced the opening of a criminal investigation into allegations of fraudulent conduct in the foreign exchange market. 

This investigation has been anticipated for some time and relates to the alleged rigging of the £3 trillion a day foreign exchange markets at leading City of London banks over a period of several years. 

According to the Daily Telegraph

  • This investigation raises the possibility of further multi-million pound fines for Britain’s biggest banks over their behavior during and after the financial crisis. 
  • SFO investigators are expected to examine whether individual traders personally benefitted by manipulating benchmark Forex prices. 
  • It is claimed that traders colluded via online chat rooms in groups with names such as the Bandits Club, the Dream Team and the Cartel.

The SFO’s new criminal investigation into alleged currency markets rigging in London, which is home to more than 40% of the world’s foreign currency exchange trading, will join a number of current investigations into Forex market abuse by investigators in other countries across Europe, Asia and the United States.  The SFO’s portfolio of very large investigations into corruption cases, LIBOR and other fraud continues to grow. 

The British financial regulator, the Financial Conduct Authority, has itself already launched an investigation into global currency markets, in October 2013. 

Today’s announcement from the SFO will put further pressure on banks and traders who run the risk of regulatory sanctions as well as criminal prosecutions in one or more countries. 

Such is the seriousness of the matter that, in March 2014, the Bank of England appointed Lord Grabiner QC to adjudicate on whether any Bank of England officials themselves were involved in manipulating the Forex market, and specifically whether any Bank official, during the period July 2005 to December 2013:

(a) was either (i) involved in attempted or actual manipulation of the foreign exchange market (including the WMR FX benchmark), or (ii) aware of attempted or actual manipulation of the foreign exchange market , or (iii) aware of the potential for such manipulation or (iv) colluded with market participants in relation to any such manipulation or aware of any such collusion between participants; (b) was either (i) involved in the sharing of confidential client information or (ii) aware of the sharing of such information between participants for the purposes of transacting business in the foreign exchange market; or (c) was involved in, or aware of, any other unlawful or improper behaviour or practices in the foreign exchange market.

This could well be the largest investigation in which the SFO has ever been involved. Given the scale and complexity of the market itself, and the SFO’s limited resources, it could take years to conclude.  The SFO will undoubtedly have already had to ask Her Majesty’s Treasury for additional “blockbuster funding” to cover the expense of the initial investigation. 

In addition to, potentially, multiple prosecutions of banks and individual traders, the SFO’s investigation may also eventually lead to a surge in civil litigation in relation to those parties who feel that they have lost out as a result of market manipulation, so one can expect multiple class action suits and an uptick in related litigation against the banks in the United States and many other countries, particularly the UK.

Corruption, Deferred prosecution, Enforcement, Fraud

The Serious Fraud Office Reports…

The Serious Fraud Office has just published its 2013/2014 Annual Report.  Anyone reading it in the hope or expectation of gaining some insights into what the SFO does or what causes it concern may be a trifle disappointed: of the 72 pages of the report, I could find only 4 that contained anything of interest.  In four paragraphs on page 1, David Green CB QC, the Director of the SFO since April 2012, sets out his mission: to take on the really difficult fraud cases, as envisaged by Lord Roskill in the Fraud Trials Committee Report in the 1980’s, better cooperation with law enforcement partners in the UK and abroad, and to build up an intelligence capability.  No one could argue with that.  He states that high quality staff have been recruited and retained.  On page 3 there are some statistics about the number of cases in progress (12 new investigations, and 5 trials, of which 3 were completed during the relevant period).  On page 5 there is some analysis of the SFO’s budget, which has been in the region of £35-£39m since 2009, but ‘Blockbuster’ funding for Libor and other cases brought it up to £51,379,000 last year.  On page 27 there is mention of two reviews carried out into a ‘data loss’ incident which occurred a year ago: this involved sending, by mistake, material gathered during an investigation to a witness.

The remainder of the report, 68 pages, is devoted to accounts, governance statements, risk assessments, lists of salaries, pensions and bonuses, policies, and attempts generally to comply with what might be generously described as transparency requirements.  The Director, as ‘Accounting Officer’, had to sign off on 4 audits and accounts. 

In the old days the annual report was a more festive publication.  It contained some accounts and statistics, but also a good deal of information about how the office works, case studies, photos and profiles.  No doubt this is not the current way of doing things in any government department or agency, but it was more interesting.  It might be said that you can go to the SFO’s website (currently being reinvigorated) to read case studies, and find out about what people do, but the Annual Report was a convenient template for providing an annual review of progress. 

So what are we to make of the SFO’s current state, based on this Annual Report, and on the press reports about the office during the last year?  It may be that the recently demoted Ken Clarke’s review of the law enforcement response to City scandals (see my blog on this last month – ‘Ken Clarke reviews the law enforcement response to City scandals’ – for a critical review of the possibilities) will provide some answers during the next year or so, but I will attempt to flesh out the Annual Report, and provide my own markings. 

First, I will declare an interest: although I have never worked for the SFO, I have had continuous dealings with it since it was set up in 1988, either acting for the defence in their prosecutions (honours about even), or being interviewed for the job of Director (unsuccessfully), or cooperating (more or less successfully) with them as a fraud prosecutor at the CPS and FSA.  I have known, professionally, and in some cases personally, all the Directors and many lawyers and investigators who have worked at the SFO.  In all these dealings I have had huge respect for the work done by the office.  When defending, I always found that the quality of investigation and preparation was high.  It has always been possible, as a defence team, to engage professionally with the SFO about issues and concerns, large and small.  Case presentation, service of documents and trial preparation were always high quality.  When working alongside the SFO while at the CPS and FSA/FCA, I was impressed by the commitment and skill of the people I engaged with.  At the same time, I am only too acutely aware of the massive challenges that complex fraud cases present at all stages of their development, from initial vetting through to trial and verdict. 

I am therefore a supporter of the SFO, and I like to think that my opinion counts for something because of my long association with, and knowledge of, the organization.  Many others, particularly in the press, are less ardent admirers.  Private Eye’s extremely well regarded City Slicker column has for many years referred to the SFO as the ‘Serious Farce Office’ and has derived some pleasure from taking the SFO to task for its failures.  It has never referred to its many successes, including the recent Innospec convictions.  It’s only comment on the Annual Report was to draw attention to the size of various redundancy payments.  Failures and cock-ups are so much more newsworthy.  And of course there have been cases that can be cast as failures, most recently in the Dahdaleh case, where there was some controversy about the reliance placed on a ‘key’ witness who then refused to give evidence; and cock-ups, notably in the applications for search warrants in the Tchenguiz case.  Litigation surrounding the latter continues, and is likely to do so for some time to come, hanging like the proverbial sword of Damocles over the SFO’s head.  The truth is, however, that although the buck stops with the SFO for these failures, the causes were far more random than has been reported. 

The failure of a significant bribery case, and being sued for more that £100m, are not matters for rejoicing, but neither should they be used to justify any attempts to start a debate about whether the SFO is worth having.   Those who comment on the SFO from the cosy distance of never having put a complex fraud case together are entitled to express a view, but it is rarely worth taking seriously.  The reasons for having a SFO are as valid now as they were in 1988: overheated City conduct in the wake of Big Bang has many similarities to the financial sector ethics of the last 10 years. The importance of the City being properly policed and called to account cannot be overstated, given London’s position as a world financial centre and the need to be able to assure investors and businesses that they can safely do business here. David Green is right to state that the current job of the SFO is to tackle these issues.  It should leave ‘standard’ fraud (identity theft, boiler rooms and the like which are committed by career, and sometimes, organised criminals) to the expertise of the City of London Police, the Economic Crime Command and the Crown Prosecution Service.  This is not in any way to underplay the challenges of investigating trying these cases, or the significance of such fraud, which causes loss and distress to thousands of victims, and needs to be robustly tackled.  It is simply to emphasise that complex City fraud needs the kind of unified approach, expertise and special tools that Roskill advocated and that the SFO has developed. 

In the Report, David Green lists some of the cases that the SFO is currently pursuing.  This includes the Libor prosecutions, but also the Barclays/Qatar financing and the Rolls Royce corruption investigations.  There are recent reports that the SFO is to begin an enquiry into Forex benchmark fixing.  These, and other, complex investigations present formidable challenges.  In the days before the SFO’s existence such matters would be consigned to the ‘too difficult’ tray.  Taking on these cases, at the extreme edge of what is possible within the constraints of the UK criminal justice system, is now a vital part of the law enforcement programme. 

Concurrently, the SFO must demonstrate that it can prosecute cases under the Bribery Act 2010, so far untested, and work out how best to take advantage of the new Deferred Prosecution Agreement provisions.  It must find a way to take on senior management, holding them to account for corporate failures and criminal conduct within their organisations. New criminal offences may assist in bringing such cases (although I have my doubts about this). It must try to simplify its cases and speed up the investigatory process.  It must ensure that cooperation with domestic and international law enforcement works effectively.  All of this is very much easier said than done, but they are issues that are bound to be high on David Green’s agenda.  Ken Clarke’s review may also look at all this, in addition, perhaps, to considering whether the Roskill template – unified approach, section 2 notices, preparatory hearings, transfers – needs refreshing in the light of experience, and whether there is scope for adopting the Fraud Trials Tribunal procedure to complex fraud cases (or implementing the part 7 Criminal Justice Act 2003 provisions) in place of jury trial.  

So the Report, if couched in old fashioned school report jargon, might conclude with: “Green could (or perhaps must) do better,” “All to play for,” and/or “Green’s results in the next year will be critical”.  After two years in the job, David Green is now about to start prosecuting the cases he has personally taken on, and his judgements and tactics will be under scrutiny.  I wish the SFO luck with its current caseload and look forward to a more illuminating end of term report next year.

 

Anti-money laundering, Corporate sentencing, Corruption, Deferred prosecution, Enforcement, Financial Conduct Authority, Fraud

Ken Clarke reviews the law enforcement response to City scandals

It is reported that Ken Clarke, the Tory Big Beast and former Home Secretary and Minister for Justice, is conducting a wide-ranging review of the ‘UK’s ability to tackle bribery and white collar crime’ (Financial Times 12 June 2014).  This news coincides with the Chancellor’s Mansion House speech, and the announcement that the FOREX trading benchmark will be added to the benchmarks caught by the recent amendment to section 397 Financial Services and Markets Act 2000 which seeks to identify the manipulation of the London Inter Bank Offered Rate fix as a specific criminal offence.  

Ken Clarke’s review will follow some distinguished predecessors: Lord Roskill’s report in 1985 which led to the establishment of the Serious Fraud Office and the Attorney General’s Fraud Review (initiated by Lord Goldsmith) between 2005 and 2007 both had a close look at the processes and priorities of fraud investigation and trial.  The rejigging of NCIS/NCS/SOCA into the NCA in October 2013 brought with it a dedicated command to deal with economic crime.  The City of London Police’s status as lead force for economic crime has concentrated skills and resources in a critical part of the UK as well as providing expertise throughout the UK.  There are plans in place to improve the sharing of intelligence and the cross-selling of resources between agencies to ensure that cooperation is effective, and to avoid the silo mentality that can become corrosive.  These are encouraging signs that Clarke will note. 

At the same time Clarke will not fail to find that resources to fight economic crime have been cut substantially.  The Attorney General’s Fraud Review found that the number of fraud squad officers throughout the regions had fallen by about 40% in 2006 from the numbers dedicated to fraud work in 1985.  The Serious Fraud Office’s budget has been slashed by 50%.  The Crown Prosecution Service budget has also been cut. Even the Financial Conduct Authority’s Enforcement budget, once regarded as being generous, has come under pressure. Funding for the Economic Crime Command is not as substantial as once promised.  Such reductions in resources are stark, and the effect they have is not just on capacity.  The message that such measures sends out is that the government does not, in fact, take fraud seriously.  

David Green CB QC, Director of the Serious Fraud Office since 2012, has consistently denied that cuts in funding are a problem for the SFO.  He points to the availability of blockbuster funding for specific cases like Libor.  However, it is difficult to believe that the massive reduction in the allocated budget to cover the standard running costs of the SFO does not have some impact on the morale, recruitment and retention of skilled staff. 

In addition to funding issues, the SFO has been under threat of dissolution for some years. As the Financial Times article pointed out, there was a plan in about 2010 to amalgamate all fraud investigation (including Financial Services Authority market abuse prosecutions) into the National Crime Agency, with the CPS acting as prosecutor – thus dissociating investigation from prosecution – and it may well be that Ken Clarke’s real agenda is to revive the Home Secretary’s cherished plan to do away with the ‘alphabet soup’ of counter-fraud agencies. 

The SFO also faces a real problem in dealing with an apparent series of recent mistakes has cast doubt on the SFO’s ability to stay in business.  Case failures, like the Dahdaleh corruption case in December 2013, do not help, but the case brought by the Tchenguiz brothers, arising out of search warrants obtained during the Kaupthing investigation, risks causing fatal financial and reputational impact.  David Green currently has on his books a number of fearsomely difficult cases, of which the Libor prosecutions are an example, where the SFO is breaking new ground.  He is also under pressure to bring some significant prosecutions under the Bribery Act 2010, which has been in force since July 2011 without any cases being charged. 

One area in which the government, prompted partly by the work of the Treasury Select Committee and the Parliamentary Committee on Banking Standards, has been active is in creating ‘new’ criminal offences.  It was appalled that no criminal prosecutions had been brought in the wake of the global financial crisis, and it believes that by making dubious and unethical conduct a criminal offence, the level of City scandals, and the risk of future global crises, will diminish.  I have already mentioned the amendments to section 397 FSMA to catch benchmark manipulation, but there is also the offence of reckless misconduct by a banker, in section 36 Financial Services (Banking Reform) Act 2013.  These new provisions have a distinct air of stable doors closing well after the horse has bolted.   The Serious Crime Bill currently speeding unnoticed though the legislative process contains, in clause 41, an offence aimed at professional ‘facilitators’, solicitors and accountants, who assist criminal enterprises when they know, or ought to know, that their assistance is in the furtherance of crime.  David Green wants a new offence aimed at corporations which fail to prevent any kind of fraud within their ranks, similar to the systems and controls offences in section 7 of the Bribery Act 2010 and regulation 45 of the Money Laundering Regulations 2007. 

The problem with all such offences is that they are nigh on impossible to prosecute.  On their face they appear to offer the prosecutor a quick win, but in practice it proves to be much more complicated.  The regulation 45 offence has been on the statute book since 1993 in one form or another, but no criminal case has yet been brought.  Section 36 FSBRA is generally seen as being unprosecutable.  The ‘facilitators’ offence is unnecessary because any professional who aids criminals can be prosecuted, and frequently has been, under existing legislation.  Systems and controls failings – which in the financial services sector are the subject of regulatory action – will only be prosecuted in reality if there is evidence of corrupt or other fraudulent activity.  While it may seem attractive to prosecute a company for failing to stop its employees behaving badly, where the conduct, of which Libor manipulation is an obvious example, is heinous, either the failure to have proper systems in place is actively collusive, or it is a management failure.  If it is the latter, the criminal law is not the appropriate response.  However, the government clearly takes the view that an element of tokenism in creating such offences may have the effect of moderating the behavior of the City Fat Cats. 

In this difficult context Clarke may want to examine the whole question of whether a criminal trial response to City malpractice is either sensible or feasible.  He will want to bear in mind, in considering this question, whether the fact of a criminal investigation, as, for example, in the County NatWest/Blue Arrow case arising out of the 1987 crash, and the Libor cases, has a salutary effect on City standards whatever the eventual outcome.  Blue Arrow was not a howling success for the SFO, but the investigation of top financial institutions and individuals had a massive impact on the City at the time.  The criminal investigation of Libor came about as a result of a degree of public outrage and pressure, and no doubt satisfied some sections of society that ‘something was being done’.  

Clarke may also observe that the FSA’s adoption of its ‘credible deterrence’ policy towards market abuse from 2005 onwards was highly influential.  The FSA had found that bringing regulatory action for market abuse was not having much effect on conduct, and it therefore started to bring criminal cases for insider dealing.  According to the Market Cleanliness Statistic, the stock market was much better behaved in 2012 than it had been in 2006, and although, like all statistics, the MCS is to be regarded with some circumspection, it demonstrates a good trend that may be linked to the bringing of criminal cases.

He will also want to consider, however, whether the criminal courts are the right forum to try the issue of whether someone, or some legal entity, has acted in breach of complex rules of conduct.  Not only is there the interesting question of whether such conduct is truly ‘criminal’, there are also more practical considerations. First and foremost, is the dedication of massive resources to such investigations justifiable?  Second, the delay between the discovery of a fraudulent act and the final resolution of the allegation at trial is far too long.  This is unavoidable because of the complexity of the material and because of the justice system, but the impact of a trial 5 or more years after the events under consideration is greatly reduced.  Third, the risk of failure is high because complex investigations and trials are prone to technical problems (disclosure in particular) that lead to the premature termination of the proceedings.  

There is also a pivotal issue that needs to be urgently reviewed: is the jury system properly configured to cope with the prosecution of serious and complex fraud?  Lord Roskill recommended the setting up of a Fraud Trials Tribunal to replace the jury for such cases, and there is a provision on the statute book – Part 7 of the Criminal Justice Act 2003 – to permit this to happen when the judge rules that the complexity of the case will make it too burdensome for a jury.  Other jurisdictions have adopted the procedure, with surprisingly positive results.  The House of Lords has so far declined to pass the affirmative resolution that is required to implement the provision, but it is time to revisit this important issue. 

No doubt Clarke has many other issues under advisement, but he may wish to consider the impact of an ‘Alternative Dispute Resolution’ approach to fraud cases.  Deferred Prosecution Agreements, introduced to the UK from the US in February this year, may shorten the process and bring much needed economies, but this has yet to be tested, and there is every chance that they will bring with them equal, albeit different, challenges.  Since they can only apply to corporates, the prosecution of individuals will often follow, thus limiting the saving of resources in any event.  In addition, it is open to question whether the public will view such agreements as anything other than a fudge.  They are not criminal convictions, and they carry with them fines which, although they may be substantial, could be thought of simply as a cost of doing business. Their impact in demonstrating that the government is cracking down on corporate wrong-doing may therefore be limited.  David Green is on record as saying that his job is to prosecute, so we might not expect to see that many DPAs and other forms of settlement emanating from the SFO. It is very difficult to fault this approach, but he may come under increasing pressure to get some results from his current caseload.  Clarke will not be able to judge the success of the new initiative, because no DPAs have yet been entered into, but he will no doubt wish to comment on their potential use in the difficult fight against City malpractice. 

 

Associated persons, Compliance programmes, Corruption, Due diligence, Enforcement, Financial Conduct Authority, Gifts & hospitality, Guidance, Senior Executives, Whistleblower

British Bankers Association Updated Anti-Bribery and Corruption Guidance May 2014

The British Bankers Association (BBA) has this month published its new guidance, to assist those in the banking sector to comply with the Bribery Act 2010 as well as the anti-corruption regulatory requirements of the Financial Conduct Authority (FCA).

We at the BriberyLibrary commend this report to all organisations (not just banks) who are endeavouring to comply with the Bribery Act, whether in the regulated financial sector or not, as the principles are the same, even though some of the commentary is particularly directed at banks.  Although the report is 51 pages, it is very readable, and it is broken down into useful chapters.  All-in-all this is a very useful and practical resource for anyone serious about undertaking Bribery Act compliance for their own organisation.

Here are a few highlights, which we particularly liked:

In “Box 1” on page 16 of the report “Meeting the Standard” the BBA reports:

“It is not possible to be entirely prescriptive regarding the characteristics of systems and controls that meet the requisite “adequate” standard, but they may include some or all of the following:

  • The active and ongoing sponsorship by senior managers;
  • Adequate resourcing of anti-bribery work;
  • Standardisation and consistency across the entire business;
  • Risk assessment procedures and bribery prevention policies for different project or business areas;
  • Budgetary authorisation and audit controls in relation to all financial transactions with a review of such requirements on a periodic basis and regular “stress testing” including a procedure to govern the response to changes in both the internal and external environment;
  • A new business approvals process that incorporates anti-bribery and corruption considerations;
  • A clear, consistent and practical gifts and corporate hospitality control system;
  • Controls and processes for the authorisation and tracking of non “business as usual”, gratuitous or “non-core business” payments such as sponsorships, corporate hospitality and expenses, and charitable and political donations;
  • Due diligence on associated persons and controls over outsourcing with standard procurement and tendering processes;
  • Governance over associates’ relationships including pre and post contractual agreements;
  • Enforcement and incident management policies and procedures;
  • Whistleblowing policies and procedures;
  • Enhanced controls where “cross border” activity is undertaken, with particular consideration to the risks arising from facilitation payments;
  • Staff code of conduct and incorporation of standards into employment terms and remuneration policies that embed a zero tolerance policy;
  • Staff training for all employees within an organisation, with enhanced training provided for those staff who have been assessed as holding higher risk positions;
  • Recruitment processes that screen staff based on our risk assessment of the role in question;
  • Communication of policies and procedures;
  • Monitoring, review and evaluation.”

Chapter 3 sets out the regulatory obligations and other anti-corruption laws applicable to banks (and indeed other industries which are regulated by the FCA).  The BBA reminds us that: 

  • It is important to note that FCA authorised firms are under a separate, regulatory obligation to identify and assess bribery and corruption risks and put in place and maintain policies and processes to mitigate such risks;
  • The obligations of the FCA’s rules and principles in relation to the Bribery Act are not identical to the Ministry of Justice’s guidance.  Banks will need to bear this in mind when reviewing the adequacy of their anti-bribery policies and procedures.  The BBA points out that the FCA focus is wider than the Bribery Act’s scope and will cover behaviour falling within the definition of “financial crime” referred to in SYSC 3.26R and SYSC 6.1.1R;
  • Banks (and indeed other regulated companies) need to be mindful that the FCA can take regulatory action against an entity – and/or relevant persons performing controlled functions – for failing to adequately address the risk of corruption or bribery;
  • Unlike the Bribery Act the FCA does not need to find evidence of corruption or bribery in order to take action.  If the FCA does find evidence of illicit payments or inducements, it can refer the company to the Serious Fraud Office which can then investigate and prosecute.  This is what we call at the BriberyLibrary the “double whammy” of being investigated and fined by both the FCA and the criminal court. 

Chapter 4 deals with top level commitment and governance.  One useful point drawn to our attention by the BBA is that the Bribery Act places a heavy focus on “tone from the top” whereas the FCA has extended this concept to further down the organisation.  In July 2013 the FCA’s chairman stressed that “tone from the top” will in itself be insufficient for improving ethical and behaviour standards and instead the FCA will be increasingly looking towards “tone in the middle” as a way of translating tone into observable, on the ground, actions. 

There is also a useful section entitled “Responsibilities of the Board” which refers to the Parliamentary Commission on Banking Standards having made several recommendations on whistleblowing and that the FCA has indicated its support to the principals, and that it intends to consult on these during 2014.  These include a recommendation that a non-executive board member should be given specific responsibility under the Senior Managers Regime for the effective operation of the firm’s whistleblowing regime.  The board member responsible for the institution’s whistleblowing procedures should be held personally accountable for protecting whistleblowers against detrimental treatment.  This, if it becomes law, will be a significant new development. 

In Box 2 on page 24 there is a list of practical examples of driving “tone from the top” which includes the recommendation in larger companies of appointing “business line champions” for anti-corruption so that each part of the business has someone in it who understands that part of the business thoroughly but is responsible for ensuring compliance with the Bribery Act and other regulatory requirements. 

Chapter 5 deals with risk assessment.  This is an area of compliance which many companies do not handle very well and we commend everyone to read this section in particular, as this is useful in assisting companies on identifying their own risks.  In our view, risk assessment is best done by the people within the business (rather than third parties), as they understand best how they operate. 

The BBA points out that there is no exact science as to what risk assessment should include or how to do it, and that a range of resources are available for organisations to draw upon including the 2013 Transparency International “Diagnosing Bribery Risks – Guidance For The Conduct of Effective Risk Assessment”. 

We fully concur with the BBA’s recommendation that whatever risk assessment method is ultimately decided upon, the risk assessment should be fully documented and updated on a periodic basis, in order to reflect the risks and risk appetite of the organisation. 

At Box 3 on page 30 there is a useful flow diagram of the various stages of a risk assessment. 

Chapter 6 deals with due diligence on associated persons/third parties.  There is useful guidance about conducting due diligence on third parties prior to entering into any formal relationship with them including: 

  • Identifying the associated person in validating their credentials and background;
  • Confirming the suitability of their specific skills and experience for the role that they will be performing;
  • To confirm the business sector of the associated person or activity;
  • To confirm the nature of the service to be performed and to verify that such service is necessary and that any proposed payments or benefits are commensurate with those services;
  • To ensure as far as possible that there are no legal restrictions from dealing with the associated person;
  • To give reasonable assurance about past conduct;
  • To identify potential or actual conflicts of interest and reputational risks in order that they can be appropriately addressed as part of the decision-making process;
  • To identify networks and/or relationships with entities presenting enhanced risk e.g. foreign public officials or politically exposed persons. 

The whole of this chapter is particularly useful reading and Box 4 on page 37 is another flow diagram which is an example of “end to end” risk assessment process for associated persons/third parties. 

All in all, we at the BriberyLibrary consider that the BBA’s guidance is thorough, commendable, and has some great practical tips.  We cannot properly do it justice in this blog post.  We strongly suspect that the largest institutions will already be on top of most of the issues canvassed in the report, but for smaller organisations which are not so well resourced, and those which are not regulated by the FCA, this is a particularly useful resource to refer to when planning and undertaking the various stages of a compliance program.