Tackling Serious Fraud and White Collar Crime

The Policy Review Document: "Tackling Serious Fraud and White Collar Crime" can be found here.

Introduction

I would like to start by thanking you all for coming and by thanking the Law Society for kindly hosting this event.

We’re joined by a mixture of specialist lawyers, students and journalists.

I will begin by explaining how the document that you have in front of you fits in with our policy making.

The Labour`s Policy Review is a comprehensive process of discussion looking at every aspect of Labour’s policy

In order to support the development of our manifesto for 2015.

Through the Policy Review, we in Labour`s Shadow Cabinet team are looking at how we can create the change needed in our economy and society

To build an economy that works in the interests of working people.

Ed Milliband has often spoken about the importance of Responsible Capitalism

And if we are serious about this, and we are, we need a safety net.

Policing the City goes to the very heart of this agenda.

The Shadow Home Secretary Yvette Cooper has already committed a future Labour Government to bringing in an Economic Crime bill at last year’s party conference.

The central argument is that we must have an up to date law on corporate criminal liability, robust penalties

And properly resourced, confident law enforcement agencies,  staffed by the very best people who are motivated by the notion of public service.

When I speak to members of the public about this they tell me that as far as they are concerned

  • The City is above the law and that white collar criminals get an easier ride than other offenders.
  • the authorities don’t want to rock the boat when it comes to investigating the biggest names in UK PLC;
  • That when they are investigated, the cases are fiendishly complicated because sophisticated crooks are so far ahead of the game;
  • And that when there are convictions.

The fines are so small companies shrug them off and the crooks themselves at most, get sentenced to a few months playing bridge in a cushy open prison.

That perception exists and you know what, a lot of it is true. Whilst the man who steals your wallet gets a stretch - the man who steals your pension may gets away with it.

We need to put a stop to this which means the criminal law, sentencing policy and funding structure of fraud prosecution all needs radical overhaul.

The problem

Five years ago, a corporate culture of reckless risk-taking brought the economy of the Western World to its knees.

The public rightly believe that the only people who have been punished for that are them.

Those who were acting dishonestly have not been punished.

No-one has gone to jail.

Last year, it emerged that our major banks, had been rigging the London interbank lending rate for years.

This was not the work of one rogue employee.

It seems to have been endemic with open boasting about it and bottles of Bolly. 

This is nothing less than institutional, sector-wide contempt for the law.

Similar allegations have now been levelled against oil companies.

As these scandals broke, the public demanded action.

And what did they get?

The unedifying spectacle of the Serious Fraud Squad and the Financial Services Authority squabbled amongst themselves over who should investigate.

Not because they both wanted to take on this high profile investigation, make their names whilst going into battle on behalf of the public – but because neither of them wanted to take it on. It seemed to be all to difficult and expensive.  

The root cause of the pitiful state of affairs is that the Conservative-led government does not regard fighting white collar crime as a priority.

In fact, they see it as an irritant.

Why do I say this? This is not party political point scoring, it is based on evidence.

Look at their attitude to the Bribery Act.

Now Labour is very proud of the Bribery Act.

Its radical and a world leading piece of legislation

And yet there have been a number of press reports  that the govt is planning to water it down as part of their “red-tape” challenge.

I find it extraordinary that this Government believes that a law stopping our companies bribing people can ever be seen as red tape?

Cameron and Osborne need to understand that turning a blind eye to fraud and corruption is not good for UK PLC.

It drags our nation into disrepute. It undermines our financial centre.

In the One Nation economy that we want to build,  we cannot have an elite that is above the law. A criminal wearing a collar and tie is still a criminal.

We should throw them in jail and we should throw the book at the companies that allow these spivs to thrive.

To do that will require major changes to the criminal law, sentencing and funding structure of the Serious Fraud Office.

Those changes need to be informed by what we know works.

Because not every jurisdiction is as defeatist about white collar crime as the UK.

Fraud prosecutors in the US have a formidable reputation.

That is why last autumn I went there to talk to them.

I had discussions with the Federal Attorneys in the Southern District of New York and Washington, as well as with lawyers in private practice.

They were helpful and hospitable and they were impressive .

In the United States, fraud prosecution is taken very seriously.

The best young lawyers compete to work for the flagship fraud-busting teams at the Federal Attorneys Offices in Manhattan and for the Justice Department in Washington D.C.

These teams then compete to take on the biggest cases.

They are hungry for the prestige of putting the most sophisticated criminals in the dock and extracting blockbuster fines for the companies that set them loose on their customers and the general public.

Look at what is happening in the US Department of Justice. It is tougher with British banks than the British authorities.

For example the DoJ fined Barclays $160m (£101m) for Libor-rigging.

The UK Financial Services Authority fined them £60m.

And the Serious Fraud Office is still investigating.

The Department of Justice fined RBS $150m for LIBOR-rigging.

The FSA fined them £87.5m.

And the SFO is still investigating.

The Department of Justice has also fined HSBC £1.25billion for money-laundering and Standard Chartered £227 million for evading sanctions on Iran.

And It isn’t just the US authorities who are more front-footed than ours.

Look at the work of the European Commission is investigating British oil companies for Libor-style rigging of oil prices.

Ofgem recently gave them a clean bill of health.

And the SFO is still scratching its head wondering whether it should investigate.

To be fair to the SFO, it is having to do a lot on a budget of very little.

It’s funding has been slashed by 25% since the Coalition took office.

In 2008 – 2009 the budget was £53m this year it is £31m and we’ve yet to hear how much more their budget is going to be cut.

 It is having to investigate and prosecute the most complex of  crimes on a budget of £30m.

It only prosecuted 20 defendants last year, convicting 14.

It has levied not a single criminal fine. Not one against an individual, nor against a company.

The agency has had a torrid time. It is no longer just doing star turns in Private Eye but appearing before the Public Accounts Committee.  

The departure of its previous director, Richard Alderman, was marred by a scandal surrounding the payment of £1m in unauthorised exit payments and allegations of cronyism.

The SFO is under new leadership now.

There is a lot of goodwill behind the new director David Green and I really like what I have heard him say about taking the SFO back to its prosecutorial roots.

And we are seeing the SFO take on a lot of very ambitious work.

It has belatedly taken up the Libor investigation after initially recoiling from it on grounds of cost.

There are also investigations into Rolls Royce, EADS and Autonomy.

I want the SFO to succeed. And when I visited them yesterday, I told them so.

But they have to do better and we politicians have to do more to help as things stand, the dice is loaded against it.

Corporate criminal liability

English law on corporate criminal liability insulates companies from prosecution.

Under English law, companies are only criminally liable if it can be proved that a director was personally involved in the wrong-doing. This is known as the “identification doctrine”. It is an extremely high threshold.

An employee, or a number of them can be involved in fraud, but unless it can be shown that the Directors were helping to draft the emails, its very difficult to prosecute the company.

We should look at changing this.

It seems to me there is a very good case for holding companies vicariously liable for their employees’ economic crimes, unless they can demonstrate that they had adequate compliance procedures in place. This isn’t impossible.

The last Labour government did this in our Bribery Act

We were told by anti-corruption campaigners that the identification doctrine effectively meant that companies could never be prosecuted for bribery of foreign officials,

no matter how much they benefitted from that crime. So we changed the law.

The Bribery Act is a model we could build on US laws goes even further than I am suggesting.

In the US, companies are criminally liable for all offences of their employees where these benefit the company.

There are no defences.

The prosecutor has discretion over whether to charge and if so whether to prosecute or strike a deal.

In these deals, the company admits the wrong-doing and pays a substantial fine.

The company also agrees to help the prosecutor pursue the individual criminal, pulling back the veils and allowing the authorities in.

This puts US fraud prosecutors in a position of considerable strength. 

When I went to the US last autumn, the fraud attorneys I spoke to all agreed that vicarious liability is the key to success.

They also expressed concern that our on-going adherence to identification doctrine was making the UK a weak link in the fight against international financial crime.

Well we should change that.

Now in an attempt to be seen to be doing something,

The Coalition government has just brought into law deferred prosecution agreements that try to mimic US plea bargains.

However, as it is shown in the Policy Review document, even the staunchest supporters of bringing plea bargains into English law insist that they will not work without vicarious liability.

The prosecutor must have the upper hand.

Sentencing

If we change the law on corporate responsibility we may see an increase in prosecution of companies and so we should have a penalty structure worthy of receiving them. 

Once given the upper hand, US fraud prosecutors are able to demand penalties that are a real deterrent.

The highest fraud fine to result from an SFO prosecution was £2.2m. The highest fine clinched by the DoJ was $3 billion.

For the companies that the SFO investigates, a couple of million is just a cost of doing business.

It’s no deterrent at all.

In the US, companies know that if they are prosecuted, they face fines in the tens or even hundreds of millions.

And on occasion billions.

Companies and their lawyers know that because the US Sentencing Guidelines lay out in detail how a fine will be calculated and then multiplied over and over according to the aggravating factors present.

In that respect, the US guidelines are like the European Commission’s framework for cartel fines which also offer clear guidance on how to ratchet up the penalty.

The European Commission fines have the additional teeth of being based on a percentage of turnover.

Now that is meaning it.

And why not?

Why shouldn’t we introduce a system where sentences are based on a percentage of the last 3 years turnover?

The man who steals your wallet, if the court decides he is to be fined, first finds out how much he is worth in order to make the fine fair.

We could begin with a percentage of turnover and then have multipliers dependent on a number of factors including culpability and mitigating factors based on the extent of assistance given. 

But a change to sentencing policy doesn’t just have to be about serious and I hope scary fines, it should also be about measures to improve corporate governance and our sentencing guidelines could set out how these will be monitored.

A readiness to change could also be a mitigating factor. 

Because what we want is culture change.

For companies, as for individuals, a sentence should be a mix of punishment and rehabilitation.

Having mentioned sentences for individuals, there is also case for bringing the maximum sentence for fraud in line with the maximum sentence for money-laundering.

That would mean raising it to 14 years from 10 years.

Funding

Now all this might sound a bit ambitious for the SFO on its £30 million a year.

Although the SFO’s historic woes have not entirely down to being under-resourced, resources are important.

These crimes are expensive to investigate. They require forensic expertise. They require sifting through millions of pages of documents.

That £30 million isn’t going to get them very far, especially when they are investigating Barclays, EADS, Rolls Royce and Autonomy all concurrently.

We have learnt that because it is so short of money, the SFO now has to go cap in hand to the Treasury to get funding for investigations that are likely to cost more than £1.5 million.

It will do so in secret.

I have argued that this gives the Chancellor George Osborne a secret veto on fraud investigations.

Which is not a good look for someone so closely associated with big business and the City.

This is not justice being seen to be done.

The US approach to topping up the funds of fraud prosecutors is much more appealing and involves making good use of the proceeds of crime.

Where possible, confiscated assets are returned to victims.

There are, however, many instances where the victims cannot be traced.

In these cases, the proceeds are poured into a central fund and every year,

teams of prosecutors bid for a portion of the funds to invest in asset-tracing and law enforcement. 

This not only acts as an incentive for fraud prosecutors, but also delivers the poetic justice of using criminal assets to catch criminals.

We already have the beginnings of such a system in the UK.

Under the Home Office’s Asset Recovery incentive Scheme, 18% of confiscated criminal proceeds are retained by investigators and prosecutors.

We could have a similar system here and put the large fines – or part of them – into the pool as well.

In these austere times, when taxpayers’ money is in such short supply and acute demand, we need to explore these kinds of alternative means of funding.

The SFO can actually boast some success in this area.

Income gained through probes increased 62 per cent in the 2011-2012 financial year, to £6.6m from £4.1m over the previous year.

I understand that David Green is keen for the SFO to benefit from this success by expanding the Asset Recovery Incentive Scheme.

Quality of staff

While we do need to reform the law and sentencing and funding on fraud prosecution, we should not lose sight of the fact that the SFO will only be as good as the lawyers and investigators who work for it.

This has been an issue recently.

The agency’s bungled raid on the Tchenguiz Brothers was denounced as incompetent by a high court judge.

The SFO now faces a £200m law suit from the Brothers.

David Green recognises the need to drive up standards, and with it morale.

He has recently undertaken a hiring drive from the independent bar to make sure the SFO has the expertise it needs to take on its ambitious caseload.

I understand that 50% of the LIBOR team comes from outside the SFO.

I find this very encouraging.

One of the things that really struck me in the US was how much the public prosecutors’ offices benefitted from a revolving door with the private sector.

Young lawyers keen for trial experience and to make their name compete fiercely to become fraud prosecutors.

Having made their name, many then go into private practice, although some stay on and some who go back into private practice later return to the public sector.

Public service prosecution is a magnet for talent and an opportunity to be seized.

This is something that we need to foster in this country, where our prosecutors, both in the SFO and the Crown Prosecution Service have too often been regarded more as a branch of the civil service than the legal profession.

That all adds to the perception that the UK is a country where fraud prosecution is not taken as seriously as it should be.

That is why we need to learn from jurisdictions that do take it seriously.

I know that there are other pressing issues for fraud prosecutions such as disclosure – trying to get the balance right between the interests of justice and ensuring that prosecutions are not overwhelmed by their duty to disclose huge amounts of documentation.

And I’d be very interested to hear people’s views on this.

I also think that we should consider changing section 2(a) which currently gives the SFO the power to do an initial investigation after bribery and corruption allegations but not in allegations of fraud.

As many people here know the SFO can only investigate where they have reasonable grounds to suspect an offence has been committed.

This is very difficult in the case of fraud where an offence is often hidden. There is no dead body and no trail of blood.

But there may be concerns raised by whistleblowers and investors.

The SFO may want to do an initial scoping exercise or attempt to establish if the allegations are just malicious.

I know that sometimes when allegations are made in the media companies are tempted to say that they are fully co-operating with the SFO – this is just PR – when in fact they are just giving the SFO access to a tiny corner of the issue.    

Conclusion

From exploring all different regimes out there for enforcing economic crime I believe I have identified the characteristics that make somewhere that takes fraud prosecution seriously.

The law must not insulate companies against conviction. The UK’s does.

The law needs to be such that it offers prosecutors at least a sporting chance of success. Ours doesn’t.

Plea-bargaining is only worthwhile where prosecutors have the upper hand. Ours don’t.

Sentences need to be scary. Ours aren’t.

In addition to being scary they need to be transparent and have some sort of rationale. Ours are not.

Sentences need to rehabilitate as well as punish. Ours don’t.

Successful prosecutors are well-incentivised and resourced, even if that means exploring alternatives to spending more public money. Ours are not.

Fraud prosecution needs to be viewed as prestigious and at the cutting edge of the legal profession. We are still some way from that over here.

However, this is not just an exercise in listing the short-comings of our system.

I hope I have identified where we can look for positive solutions.

Extending the advances we have made with the Bribery Act towards vicarious liability would be one solution. We know this approach works in the US. 

Equipping our courts with robust and detailed sentencing guidelines for companies and individuals is also essential. Again, the US provides an interesting template, as does the European Commission and its fines based on a percentage of turnover.

Replenishing the depleted resources of the SFO with proceeds of crime is something that we have already been doing but could do more of.

So please don’t be put off by the document’s dreary cover. It contains lots of bold, exciting ideas that I hope will inform and inspire the manifesto for 2015.

Emily Thornberry

14 June 2013

The Law Society

Coverage in the Financial Times: http://www.ft.com/cms/s/0/88ec24d6-d50d-11e2-9302-00144feab7de.html#axzz2Wez3YJqO and the Guardianhttp://www.guardian.co.uk/politics/2013/jun/14/labour-fines-corporate-fraud


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