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

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.





Corruption, Enforcement, Self-reporting

The Serious Fraud Office bribery charges against Alstom

“From this autumn, we will start to see cases adopted by us, under our recalibrated focus on top tier work, coming to trial…we have much in the pipeline.” 

David Green CB QC, Director of the SFO, addressing the Cambridge Symposium on Economic Crime on 2 September 2014

One such case is the SFO’s bribery case, being brought on pre-Bribery Act era law, against a subsidiary of the French headquartered engineering company, Alstom.

This month formal charges have been placed against Alstom, in which it has been accused by the Serious Fraud Office of paying bribes to officials in various countries totalling more than €6 million in order to win contracts for the provision of transport in India, Tunisia and Poland.

The charges have been laid against Alstom’s UK arm, Alstom Network UK, who face six counts of corruption and conspiracy, which include allegations that the company hid payments using consultancy agreements.

According to a report in the Financial Times, the SFO alleges that Alstom bribed officials or agents of the Delhi Metro Rail Corporation by paying nearly 20 million Rupees to a company called Indo European Ventures in 2001 and another €3 million to another company, Global King Technology in 2002.  The SFO claims that the payments were made “as inducements or rewards for showing favour to the Alstom Group in relation to the award or performance of a contract”.

On a side note following initial reports in Indian media which suggested that both the Indian Government and the Delhi Metro Rail Corporation knew nothing of the charges, the Indian Government is reported to now be approaching the SFO for relevant details concerning the case.

The SFO further alleges that in Poland Alstom paid €824,000 to officials in 2001 in exchange for selling 62 trams to Tramwaje Wasrszawskie, and disguising the bribes as payments that formed part of the consultancy agreements with Fagax Engineering and Kavan.

Prosecutors allege a similar conspiracy in Tunisia where Alstom apparently paid €2.4 million to government officials in order to secure a contract to provide 30 trams and infrastructure work in Tunis, by paying an entity called Construction et Gestion NEVCO.

The current proceedings only involve charges against Alstom Network UK, but the SFO has written to a number of former employees including foreign nationals to inform them that it intends to charge them with corruption offences over the next year.

The SFO has, we are told, been investigating Alstom for five years, which itself emerged from another investigation started by the Swiss Office of the Attorney General in October 2007.

The Swiss AG’s probe concluded in late 2011 with Alstom having to pay a penalty of CHF 38,500,000 for “corporate negligence”. Alstom is also reportedly being investigated in other countries including the United States and India.

While the recent sentencing of Bruce Hall, the former CEO of ALBA, and the Innospec 4 should earn the SFO reprieve from the ‘lack of activity’ critics, there is still some way to go to hush those who voice disapproval over the, arguably unavoidable, length of time which it takes to conclude investigations and bring prosecutions.

Even if the protracted nature of regulatory invesitgations is a fact of life one cannot ignore the impact that they can have on an entire company, especially when conducted all or in part in the public domain.

This fact must also affect companies considering whether to self-report a potential issue, which the SFO encourages, when to do so they have to embrace the prospect of a long and uncertain road to resolution, a 24 hour news-cycle, and the accompanying taint that can be cast over an entire business regardless of the remoteness of the potential issue in the organisation.

In Alstom’s case for all those unconnected with the alleged conduct (the Swiss probe for example considered contracts going back to 1990), they are nonetheless linked with the effect and outcome of the investigation and prosecution. For management, employees, shareholders, business partners as well as potential recruits and sources of business, close to a decade is a long time for such a cloud to be hanging overhead.

As a company responsible for around 96,000 employees globally, and currently experiencing other commercial struggles, they have no doubt been keen for some time to resolve the matter appropriately and move on with the business of business.

 We will return further to this story as it develops.


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


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.