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.