Trial and error

There is a growing urgency for government to take effective action on fraud, whether committed by individuals or by businesses. With the proliferation of online fraudsters, individuals risk the loss of retirement savings, while rogue corporate behaviour tarnishes the UK’s reputation as a safe place to do business.

Fraud accounts for 40% of crime committed against individuals in England and Wales, making it the most common type of crime, according to the Office for National Statistics. And in the absence of urgent action, that figure is set to rise.

Between April 2022 and March 2023 there were an estimated 3.5 million incidents of fraud nationwide, 80% of which were cyber-related. The real figure could be far higher, as it is estimated that only 13% of cases are reported to the national reporting centre, Action Fraud, or the police (according to the Crime Survey for England and Wales).

Serious Fraud Office

Public confidence has been shaken by a dearth of successful prosecutions and accusations of mishandling by the main government prosecutorial agency responsible for tackling high-level fraud and related offences: the Serious Fraud Office. A 2023 report by the right-leaning Institute of Economic Affairs drew attention to a litany of ‘spectacular’ prosecutorial failures, calling the SFO ‘mistake prone’ with ‘too many instances of inappropriate or unprofessional behaviour’. The report called for reforms that included the abolition of jury trials and of the SFO itself.

In March 2023 the SFO’s 10-year investigation of three former G4S employees accused of defrauding the Ministry of Justice over a prisoner-tagging contract collapsed; the prosecution barrister declining to offer evidence against the accused because it was ‘no longer in the public interest’. The trial followed a deferred prosecution agreement (DPA) between the SFO and G4S in 2020, which required G4S to pay a financial penalty of £38.5m and the SFO’s £5.9m costs. The MoJ received £121.3m in a civil settlement in 2014.

The collapse of the G4S trial was not an outlier. The successful prosecution of individuals following a DPA is rare, with only one achieved in the 10 years since DPAs were introduced.

New direction

Although large-scale prosecutions of corporates and their staff hit the headlines, lower-level frauds also have devastating consequences. Unlike his predecessor Lisa Osofsky, a former FBI lawyer, the new SFO director Nick Ephgrave has a law enforcement background as former assistant commissioner of the Metropolitan Police.

In his introductory speech at the Royal United Services Institute in February, Ephgrave set out his concerns over the prevalence of fraud targeting and harming individuals. The SFO’s recent announcements – the conviction of an investment manager over a £100m no win, no fee fraud, and arrests in Merseyside and Greater Manchester relating to a suspected £140m property fraud – indicate a turn towards UK-focused cases.

Christine Braamskamp, London managing partner at Jenner & Block, says: ‘The SFO will want to get back on its feet… initially focusing on national issues rather than big, complex, global prosecutions. That may give it some quick successes. This would help to raise morale and should encourage staff retention.’

Ephgrave was clear that big business remains in the SFO’s sights and soon the agency will have more tools at its disposal. The Economic Crime and Corporate Transparency Act 2023 (ECCTA) introduces a new ‘failure to prevent’ offence for fraud, expected to come into effect in early 2025. This creates a trio of ‘failure to prevent’ statutory offences available to prosecuting authorities; with the other two targeting bribery, and the facilitation of tax evasion. Lawyers are awaiting government guidance on the ‘reasonable prevention procedures’ which would constitute a defence. For many companies, that will also be the cue to review existing fraud controls.

‘Clients have implemented a suite of compliance measures to cover bribery and anti-money laundering, because of the strict legislation and defence available to them at least in relation to the “failure to prevent” offence,’ says Ian Hargreaves, a white-collar and fraud partner at Covington’s London office. ‘They have not necessarily been focused on fraud compliance, which is an altogether bigger and more complex beast to control.’

To date, Hargreaves says, ‘there has been little comeback for companies which have concentrated on what they could lose rather than what they have caused others to lose’. The introduction of the strict liability offence, he adds, ‘will create a push for risk assessments and new fraud-focused policies and procedures’.

The 2023 act has already effected changes to the identification principle required for the prosecution of a corporate. Instead of having to prove a ‘directing mind and will’, a new responsibility is placed on senior managers.

However, the difficulty of proving criminal involvement of senior individuals such as board directors has been a major hurdle to successful prosecutions of large, geographically dispersed corporates.

One example is the SFO’s five-year investigation into Barclays bank for misconduct during the 2008 financial crisis. At trial, the prosecution failed to establish that senior executives, including the CEO and CFO, represented the ‘directing mind and will’ of Barclays at the time. The judgment led to widespread calls for legislative change.

Under the new ECCTA provisions, if a senior manager commits an offence the corporate will also be culpable. Although it will be up to the courts to define the precise scope of the senior manager test, the change should make it easier to successfully prosecute the corporate entity. ‘Although the “senior manager” test makes it easier for a corporate to be put on trial for fraud,’ says partner John Binns from business crime firm BCL Solicitors, ‘the budget of the SFO is tiny and there is a backlog of cases, so we should not expect results right away.’

Digital age disclosure

The disclosure process in fraud trials – and trials in general – is a major source of contention. It is fundamental under the Criminal Procedure and Investigations Act 1996 that the defence is provided with all the material capable of undermining the prosecution’s case. But with the exponential rise in digital material, this has become a challenge.

Osofsky pointed out in a 2022 keynote speech that ‘a standard SFO case’s material, if printed, could fill up 22 London buses’. She also noted that the requirement for the manual review and description of documents ‘runs a deep risk of human error’.

Disclosure issues have led to the failure of many cases. In 2021, two former executives at private security firm Serco were put on trial for allegedly concealing £12m in profits from electronically tagging criminals, a prosecution eight years in the making. The case was dropped three weeks into the trial due to concerns over the disclosure of documents to defence lawyers, which was judged to jeopardise the defendants’ right to a fair trial.

Jonathan Fisher KC is conducting an independent review of disclosure and fraud offences, commissioned by the Home Office and the Attorney General’s Office. He published an interim ‘direction of travel’ report in April, which pointed to a tweaking of the current disclosure regime rather than an overhaul.

Hickman & Rose partner Ross Dixon comments: ‘One change to the current regime that would make a big difference to the way that serious fraud and corruption trials are run would be the introduction of a presumption in favour of disclosure in a small number of categories of material.’

He adds: ‘Take business emails. In these serious cases, huge time and resource are currently being spent by both sides arguing about which of a defendant’s emails should be disclosed. A presumption in favour of disclosure is a much fairer approach and would cut out much of the time currently wasted on these skirmishes.’

There are other categories for which a presumption of disclosure would produce a similarly positive outcome, he suggests, such as a defendant’s work calendar or the business documents to which they had authorised access during the period in question.

Fisher has highlighted, among other things, the future role of technology in simplifying disclosure. The consolidation of current guidelines and protocols into one document is another suggestion. Early engagement on disclosure is important. So is a culture of affording disclosure the importance it deserves, by means of thorough training of those dealing with disclosure and placing responsibility with a designated disclosure officer.

Fisher also raises concerns over the role of disclosure in private prosecutions (such as the prosecutions executed by the Post Office), where the roles of complainant and prosecutor are less clearly defined than in a public prosecution. More is expected this summer.

Plans for the future

Technology was also a focus in the SFO’s five-year strategy, published in April. Proposals include using AI and machine learning to assist with disclosure and resolve cases more quickly. Creating a disclosure regime that works for all parties is crucial, and there is already a shift in culture.

‘Prosecutors have historically worked discreetly so as not to tip off those targeted in the investigation,’ says Hargreaves. ‘Now, in certain cases, the SFO will look to brief a potential target at a much earlier stage and address disclosure up front, to try to reduce the amount of chaos seen with numerous SFO prosecutions in the recent past.’

The pitfalls of relying on technology in prosecutions were recently writ large with the discovery of a software problem in the SFO’s e-disclosure platform, necessitating a review of past and present prosecutions.

The SFO’s strategy document also mentions the incentivisation of whistleblowers, something to which Ephgrave has previously drawn attention. Paying whistleblowers or granting them immunity is a practice already utilised in the US to fast-track prosecutions and build compelling cases. With greater prosecutorial discretion in the US, companies and individual defendants can be encouraged to admit wrongdoing and assist with the investigation, confident that they will be given significant credit. This is absent here.

Peters & Peters partner Neil Swift, who advised one of the individuals in the Serco trial, says: ‘To expect a whistleblower, who might be peripherally involved in the criminal activity in question, to come forward of their own accord when a prosecutor cannot guarantee immunity, and they risk being sent to prison, is a very big ask.’

To date, prosecuting authorities in England and Wales have avoided striking deals with whistleblowers for fear of tainting evidence. There is also, as several lawyers pointed out, an entrenched aversion among juries to ‘snitches’ which might be hard to shake.

As financial crime grows more complex, especially in the crypto realm, the SFO also plans to use more ‘covert’ tactics to investigate and prosecute these types of crime.

This year marks the 10th anniversary of the introduction of DPAs, a law enforcement tool imported from the US and enacted through the Crime and Courts Act 2013. A lucrative source of funds for the Treasury, DPAs have allowed regulators to achieve closure in a number of large-scale fraud, bribery and other economic crime investigations. Thirteen DPAs have been reached so far, including with Rolls-Royce, Tesco, Serco and Airbus. The Crown Prosecution Service secured its first DPA in December 2023 – a £614m fine agreed with the owner of Ladbrokes and Coral bookmakers Entain to settle an ongoing HMRC investigation. Of these 13 DPAs, four were fraud-related.

Unlike in the US, DPAs are only available to corporates, not individuals. Individuals are not protected but are rarely successfully prosecuted. For the moment, white-collar crime lawyers are watching fraud developments closely. Although the ECCTA introduces potentially seismic changes, these have not yet played out.

As the Gazette goes to press, and the UK votes in its general election, many hope that if a Labour government is returned Sir Keir Starmer, as a former director of public prosecutions, will be cognisant of the need for the proper funding of government enforcement agencies.

With the election delaying guidance on the ‘failure to prevent’ fraud offence, lawyers are currently advising clients to stand by to review and update fraud compliance controls next year. As for the ‘senior manager’ change, although its impact has not yet been seen in investigations it is rippling through the world of compliance.

‘There are a number of knock-on effects for corporate clients from the “senior manager” change,’ Binns concludes, ‘including dealing with the possibility that if a senior manager has committed an offence, they may have the proceeds of fraud sitting in their bank accounts. This in turn will trigger the need to self-report. Corporates need to consider all the angles.’

 

Katharine Freeland is a freelance journalist