Tackling Serious Fraud and White Collar Crime

Roger Sahota writes for Progress Online on 27 June 2012 With the coalition facing growing criticism for it’s failure to get to grips with city crime, Labour’s policy review on Tackling Serious Fraud and White Collar Crime, announced last week, makes welcome reading.

In the past few years the United Kingdom has unfortunately cemented an international reputation as the weakest link in the global fight against corporate crime. This is partly due to the weakness of the Serious Fraud Office as a prosecutor and investigator of fraud but also to the government’s refusal to consider much needed changes to the law on fraud and sentencing policy.

The introduction of Deferred Prosecution Agreements (DPA’s) in April of this year has been the coalition’s main anti-fraud initiative. It is hoped that DPA’s will encourage companies to pre-empt a prosecution by self-reporting wrongdoing or bribery before settling a type of plea bargain on agreed terms. This would include signing a statement outlining their conduct, paying a substantial fine, making reparation to victims and implementing compliance procedures.

But many fraud lawyers believe that DPA’s are likely to be a damp squib if introduced in isolation without other reforms. Corporations have little reason to fear weak and poorly resourced prosecution and investigative agencies and so have no incentive to self-report.

Furthermore, the law as it stands makes it difficult to prosecute companies for the illegal acts of their directors, employees or agents. To secure a conviction it is necessary to show that the individuals responsible for commissioning an offence represent the “directing mind or will” of the firm. In a small company this may be easy to establish. Problems arise with large or medium sized ventures where the directors are some distance away from the day to day actions of their employees. Consequently, according to one eminent Law Professor, our current law on corporate liability “works best in cases where it is needed least (i.e. small companies) and works least where it is needed most”.

It is well known that US prosecutors have had far greater success in holding companies to account for fraudulent behaviour than their British counterparts. Experts have long argued that our criminal law on corporate liability, fraud sentencing policy and the culture of our prosecuting authorities all need a US style makeover. Labour’s policy review promises this in three key areas.

First, by advocating a change in the law to introduce a far lower threshold for determining corporate criminal liability. In the US corporations are liable for the actions of their agents that are within the scope of their duties and benefit the company.

Second, by calling for much stiffer financial penalties, based on a percentage of turnover, for firms that engage in fraudulent behaviour and longer prison sentences for fraudsters. The fines imposed by the FSA or FCA and the courts in England are weak by international standards. For example, the Department of Justice extracted a £230m fine from Barclays for it’s role in the LIBOR scandal in comparison to £60m obtained by the FSA. The highest fine imposed in a SFO case is £2.2m compared with a $3 billion fine imposed in the US against GSK.

Third, the review suggests that the SFO would benefit from recruiting more talented young lawyers from private practice to work on specific cases. Young American lawyers fight to join prosecution teams to gain valuable trial experience on flagship cases before embarking on lucrative careers in top law firms.

These changes are urgently needed, as is clear from the reaction to news that the SFO, not the US Department of Justice, will prosecute the first LIBOR case concerning allegations that the interbank lending rate was manipulated. The SFO’s decision is seen by some as good news for the first accused Tom Hayes, a former UBS trader, because he has avoided a prolonged extradition battle to the USA where conviction rates and sentences are much higher. Convictions in the LIBOR case may help repair the SFO and UK’s tattered reputation for fighting fraud to some extent, but the case for serious reform remains compelling.