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FINANCIAL CRIME: An Introduction

Chambers 2021: Financial Crime: Individuals – Overview article

By Ross Dixon, Ben Rose and Andrew Katzen of Hickman & Rose solicitors

Introduction 

In April 2019, Lisa Osofsky, Director of the Serious Fraud Office, issued a stark warning to those suspected of white collar crime: “You can spend 20 years in jail for what you did or wear a wire and work with us.”

At the time, many understood this statement as marking the beginning of a new era for financial criminal investigations. But over a year on, has the game has really changed for individuals in these cases? Recent developments suggest not. Or at least not yet, and not in most cases.

The past twelve months have seen some notable successes for the SFO. The agency has made successful use of Deferred Prosecution Agreements (DPAs) to net significant sums from companies which admit wrongdoing. It has wrapped up a number of ‘legacy’ matters by closing investigations or bringing charges. It has achieved convictions in the long-running Unaoil matter.

But there have also been failures. The high profile prosecution of four senior individuals at Barclays ended without any convictions. None of the trials of individuals following DPAs struck with their employers resulted in a conviction.

The fact that no single individual has yet been convicted following a DPA is something that merits attention. Is this a statistical quirk resulting from the low numbers of cases? Or does it tell us something significant about how DPAs are effecting individuals in financial crime cases?

Unexplained Wealth Orders (UWOs) and Account Freezing and Forfeiture Orders (AFFOs) have been increasingly used to try to recover criminal property from individuals through the civil courts. While UWOs have attracted most of the headlines (perhaps partly due to their media-friendly soubriquet ‘McMafia orders’), AFFOs have proved the more popular way of tackling financial crime without the need to secure a criminal conviction.

Meanwhile – and just as with almost every other area of modern life – COVID-19 has significantly impacted financial crime. State agencies have had to deal with serious and unforeseeable practical obstacles to carrying out their day-to-day work. There has been a growing backlog at the courts. And while the pandemic continues, the charging of serious fraud has been given a lower priority by the CPS.

At the same time, the new tough economic conditions have meant that for many companies, the prospect of conducting an expensive and time consuming investigation into suspicions of financial wrongdoing may prove very unattractive.

News and Developments 

The twelve months since the previous edition of this guide was published have seen a mixed picture of success for the Serious Fraud Office.

July and December 2019 saw the conclusion of the Sarclad Ltd and Guralp Systems Ltd matters respectively. Both cases involved the prosecution of individuals following the conclusion of DPAs with the companies they worked for. In neither case was any individual convicted.

February 2020 saw the end of what was undoubtedly the UK’s highest profile fraud trial of the year: the prosecution of four senior Barclays executives on allegations of wrongdoing during the last financial crisis. The failure to secure any convictions prompted significant media criticism of the SFO’s decisions in prosecuting the case.

In July 2020 the SFO secured convictions in the first trial of individuals arising from a wide ranging investigation into the activities of Unaoil. However this outcome was overshadowed by criticism of the SFO’s director for communicating with a third party who promised to secure guilty pleas and approached defendants directly with this intention. The trial judge characterised this as ‘taking the bait’ and expressed the view that the SFO should have had nothing to do with this. The result of the review into this matter is awaited with interest.

Meanwhile the SFO made progress on a number of long-running investigations. Two new DPAs were agreed in the first half of 2020 (Airbus and G4S) bringing the total number of agreements since the DPA legislation was first introduced to eight. Airbus paid a financial penalty of €991m as part of its DPA: by far the largest sum for one of these agreements. Individuals are being prosecuted in G4S, with a decision pending in Airbus.

At the same time, a number of the other old, so called ‘legacy’ investigations which long predate the current director have moved forward with cases being closed or charges brought.

Away from the criminal courts, UWOs continue to attract much media attention, with a small number of high profile cases grabbing the headlines.

A UWO requires a respondent to explain how they obtained their assets (often high-end London property). Any failure to respond raises a presumption that the property is the proceeds of crime, greatly assisting a forfeiture application. The National Crime Agency has taken the lead with UWOs and while it has only made a small number of applications, it has had a strong record of success.

In February 2020 the Court of Appeal considered UWOs for the first time. It dismissed an application brought by the wife of a jailed Azerbaijani banker to discharge an order. However, in April 2020 the High Court dismissed a UWO, finding that some of the evidence relied upon was “flawed by inadequate investigation into some obvious lines of enquiry.” Whether this decision slows the number of UWOs remains to be seen.

AFFOs were introduced at the same time as UWOs. They provide a relatively simple way to freeze a bank account and secure forfeiture of the funds if there are reasonable grounds to show they represent the benefit of unlawful conduct. Applications for these orders can be made by law enforcement and a wide range of other agencies including local authorities.

Although AFFOs have not attracted headlines in the same way as UWOs they have proved by the far the more popular measure. The most recently published figures show 670 Account Freezing Orders were made compared to 15 UWOs over the same period.

Commentary 

DPAs are clearly an important part of the SFO’s prosecution strategy, with the financial penalties imposed under them used as an indicator of the agency’s success. It is notable that in its 2019-20 Annual Report the SFO records a positive net contribution to HM Treasury of nearly £1.3bn from DPAs. The report states that this is almost six times greater than thee cost to the taxpayer of running the agency during the same period, a sentiment echoed in September 2020 when the Director said such resolutions meant the SFO was “making a significant return on investment.” Whether the SFO’s performance should be measured in financial terms in this way rather than in the number of successful investigations conducted, prosecutions brought and convictions secured, is a contentious question.

For individuals caught up in financial crime investigations the contradictory outcome between a DPA (in which a corporate admits guilt based on the criminal wrongdoing of individuals) and the subsequent acquittal of the same individuals (or the dismissal of the case against them) raises serious concerns.

In this regard, the Guralp Systems and Sarclad cases followed much the same pattern as the Tesco case from December 2018, which was the first of the cases in which individuals were tried after a DPA. In all three of these matters, none of the individuals blamed for wrongdoing in the DPA were convicted.

While only a handful of cases have now completed the journey from DPA through to trial, in those that have, the narrative on which both the company and the SFO based their agreement has not stood up to the scrutiny of a criminal trial.

For individuals caught up in financial crime investigations such contradictory outcomes gives cause for serious concern. This is especially so for senior individuals who may be ‘the directing mind and will’ of a company, and where that company has set its sights on a DPA.

For corporates, DPAs appear to be increasingly viewed as pragmatic and attractive outcomes to any SFO investigation, even if the individuals blamed – and on whose wrongdoing corporate criminal liability may depend – are later acquitted.

If this is how DPAs are now viewed then the recent Barclays case – in which both company and individuals fought the allegations and won – may prove the exception rather than the norm.

For some time now there has been a shortfall between reports of fraud and the proportion of cases investigated by law enforcement or prosecuted on behalf of the state (whether this be by the SFO, the CPS or another agency).

Private prosecutions are one way of bridging this gap and they have proved more popular in recent years. However, the fact that private prosecutions brought on behalf of companies often include allegations against individuals raises concerns about how these individuals’ rights are protected. In this context the introduction by the Private Prosecutors’ Association of a voluntary Code of Conduct is to be welcomed.

As well as private prosecutions, companies and shareholders are increasingly exploring the civil courts for remedies where there are allegations of fraud and financial impropriety by individuals. Hewlett-Packard’s $5 billion claim against the senior executives of Autonomy Plc and the Republic of Mozambique’s claim against senior individuals at Credit Suisse (as well as the bank itself) both arise in the context of ongoing criminal and regulatory investigations and are current cases that illustrate this trend.

The Government’s intention when introducing UWOs and AFFOs was to disrupt crime through tighter civil orders focussed on money and assets. As these measures become more widely used individuals are increasingly likely to face the prospect of losing assets without having been convicted of a criminal offence.

Another trend has been a rise in the number of requests for Mutual Legal Assistance from overseas law enforcement agencies to their UK counterparts. These requests – which are often focussed on proceeds of crime and money laundering – mean an increased risk, to individuals, of being interviewed, having to produce material and having assets frozen.

The German Cum-Ex scandal is a current example of the UK providing extensive assistance to an overseas authority investigating individuals alleged to be involved in a wide ranging tax fraud. Equally, the Airbus DPA is a high profile example of increased cooperation between law enforcement across borders. In this case the SFO worked closely with its counterparts in France and the USA to reach agreements with the company covering all three jurisdictions.

Notwithstanding the disruption caused by Britain’s withdrawal from the EU, cross-border cooperation between law enforcement within Europe and the rest of world is a trend that is likely to continue.

The disruption caused by COVID-19 will take some time to assess. SFO investigations take many years to complete. The proposed establishment of ‘Nightingale Courts’ may help ease the extra burden placed on the court system by lockdown. It is hoped these courts will be fully utilised for long and complex fraud trials to which they appear well suited. It is too early to say whether new fraud investigations will result from the pandemic but already serious concerns have been raised by HMRC that up to £3.5 billion in furlough claims were fraudulent or paid in error.

The pressures imposed by the pandemic have given fresh impetus to calls for complex and serious fraud trials to be conducted by judges sitting alone without juries. While superficially attractive to prosecutors and the Government, to discard such a fundamental pillar of the criminal justice system even in a limited way would, in our opinion, have a hugely detrimental impact on both the fairness of the criminal process and confidence in the criminal justice system. For this type of case, just as much as for any other, the importance of trial by jury in the Crown Court cannot be overstated.

The SFO’s successful efforts to close some of its long-running ‘legacy’ cases should be welcomed. It is in no one’s interests that investigations take years and years to complete, not least those individuals under suspicion who have to live with such huge stress and disruption for such an extended period. It is hoped that the SFO will show a concerted effort to conclude all of its older matters, notwithstanding any additional complications in doing so as a result of the COVID-19 pandemic.

Where such a clearing of the decks will lead the SFO is another question. New ‘blockbuster’ investigations of the type which characterised the previous director’s regime appear thin on the ground. Whether the SFO rediscovers an appetite to take on bigger corporate names in the difficult economic circumstances to come remains to be seen.