Recent development in the investigation and prosecution of serious fraud in the UK
Harry Travers
Shaul Brazil -
It is no exaggeration to say that there is an atmosphere of crisis in the UK concerning the investigation and prosecution of serious fraud.
In the last year, two worrying events have taken place which are of particular importance.
The first is the finding by the High Court in judicial review proceedings that the Serious Fraud Office (SFO) acted unlawfully in ending its investigation into allegations of corruption concerning the Al Yamamah contract between BAe Systems Limited and the Kingdom of Saudi Arabia. The second is the excoriating criticism of the SFO contained in the report by former US prosecutor Jessica de Grazia, published in June 2008, comparing the performance of the SFO with two prosecution agencies in New York.
It is proposed in this article to touch briefly on these developments while commenting on one theme which seems to be recurring throughout, namely the palpable pressure on UK fraud regulators to emulate the apparent success of their US counterparts by the introduction of an "Americanised" system of investigating and prosecuting serious fraud. There is, however, a considerable body of opinion both among the public at large and within the legal profession that the wholesale importation of US methods of investigating and prosecuting serious fraud would be unworkable and might well result in injustice.
The US system of plea bargaining was described in Tom Wolfe's famous novel, The Bonfire of the Vanities, as the sort of system where "witnesses perjure themselves and prosecutors enlist the perjury; when a district attorney throws a man to the mob for political gain", and there are many in practice in the US system who still hold that view. Although, as discussed below, there are some aspects of the US system which could usefully be replicated in the UK, clearly we should think long and hard about bringing into our system anything approaching the US system of plea bargaining.
US PRESSURE FOR AMERICANISATION
The impetus to the view that the UK system should become more Americanised seems to come from two sources: from the US itself and from within the UK. In relation to the pressure coming from the US, there appear to be three areas of international business crime which impact on US business and where the perceived lax treatment of offenders in the UK is seen by US regulators as distorting competition between UK and US companies. As a result, the US is placing ever more pressure on the UK - and other countries - to be as tough with offenders as US regulators are. The three areas are international cartels, the corruption of overseas officials and breaches of international sanctions.
As far as cartels are concerned, such conduct has been subject to criminal sanction in the US far longer than has been the case in the UK. Section 188 of the Enterprise Act 2002, which creates an offence of dishonestly entering into cartel agreements, came into force only in June 2003 and until very recently there had been no prosecutions under the Act. Conversely, in the US, individuals both US nationals and foreigners are regularly prosecuted for cartel offences.
Cartels involving UK resident companies can affect the US marketplace as much as those involving companies resident in the US. Indeed, many cartels will involve multinational companies with transnational business operations. Increasingly, we have seen the US authorities prepared to exert influence over the prosecution of UK cartel members by the UK authorities.
One example of this has been the recent marine hose case. In June 2008, three UK executives became the first individuals to be prosecuted and convicted in the UK for cartel offences. It should be noted, however, that the defendants were initially arrested in May 2007 in Houston by the US Department of Justice (DoJ) and charged in a US federal court. The defendants agreed to plead guilty in the US but, pursuant to the terms of their plea agreements with the DoJ, their sentencing hearings were deferred to allow them to return to the UK to plead guilty to charges brought by the UK's Office of Fair Trading (OFT).
The second area of criminality in the UK of apparently great concern to the US is the corruption of overseas officials. The reasoning, of course, is that if US companies are not allowed to secure lucrative overseas contracts by bribing foreign officials, then why should their foreign competitors be allowed to do the same with impunity? It was for this reason that the US government took the lead in exhorting its international trading partners to sign up to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1997 (the Convention).
Despite the UK government's ratification of the Convention and the consequential enactment of the Anti-Terrorism, Crime and Security Act 2001, it seems that if the US authorities take the view that the UK is not effectively prosecuting corruption, then they will step in themselves. Hence the current US investigation into the BAe case, which was instigated following the decision of the SFO to stop its own investigation (as to why, see below).
The third area of criminality in relation to which the US has an interest in seeking to ensure that the UK brings successful prosecutions is the breach of international sanctions. Insofar as US foreign policy is dependent on international sanctions, the effectiveness of those sanctions is seen as massively impacted by even a relatively small breach. The US is therefore placing pressure on countries around the globe to prosecute companies suspected of being in breach of the pre-war sanctions against Iraq and the connected alleged abuse of the Oil for Food Programme, such companies being named in the report published in October 2005 by Paul Volcker.
Again, the US is well ahead of the UK in securing convictions for "sanctions busting", a fact not unnoticed by the de Grazia report. However, not only is a perceived lack of success in prosecuting sanctions busting in the UK seen as damaging to US foreign policy, it is also presumably seen as creating an unfair competitive effect on US companies, with UK firms apparently benefiting from the illegal contracts with Iraq while US firms are prevented from so doing by effective sanctions-busting prosecutions.
UK PRESSURE FOR AMERICANISATION
The second source of impetus that the UK should become more Americanised in prosecuting and investigating fraud cases comes from inside the UK itself, in particular the government and law enforcement agencies. We were told in the de Grazia report that, whereas the Southern District of New York's conviction rate for SFO-type cases in the six-year period from January 2002 was 97 per cent, the SFO's five-year average conviction rate has dropped from 82 per cent to 61 per cent since 2002 to 2003.
It is axiomatic that trials are expensive and high conviction rates are politically appealing. If the US system achieves a higher conviction rate with less money spent, then no wonder the UK authorities would like to import large parts of the US system into the UK. No wonder they asked a former US prosecutor to conduct a study and make recommendations. But whether such an importation would create a fairer or more just system in the UK is another matter. The cynic might suggest that that is of secondary importance to the government in any event.
Both the BAe litigation and the publication of the de Grazia report are developments worth reporting in their own right.
In relation to the BAe litigation, the actions of the SFO in stopping its investigation were challenged in judicial review proceedings brought by two pressure groups, as a result of which the High Court ruled that the decision to stop the investigation because of a threat made by the Saudi Arabian government was unlawful. The court held that the SFO had failed to appreciate that protection of the rule of law demanded that it should not yield to the threat made by a foreign government. The reasoning of the court was that while it accepted that submission to a threat to national security may be lawful on public interest grounds, it is only lawful when it can be demonstrated to the court that there was no alternative course open to the decision maker. It remains to be seen whether this requirement will withstand the scrutiny of the House of Lords, the UK's highest court.
As far as the publication of the de Grazia report is concerned, as mentioned, it contains a comparison of the SFO with the US Attorney's Office for the Southern District of New York (SDNY) and the Manhattan District Attorney's Office (DANY). The report condemns the performance of the SFO as compared with the SDNY and DANY and states that the lack of focus in SFO investigations is "a matter of grave concern" and is the primary internal cause of the SFO's lower productivity and conviction rates. It says there are "skills shortages" among SFO lawyers, that "some case controllers do not exercise sufficient control over investigations" and that "most assistant directors do not exercise sufficient oversight of case controllers". It goes on to say that there are some "in key positions on the senior management team who lack the operational knowledge, experience and perseverance required to supervise, mentor and problem solve, and to command the respect of the troops". As a result, according to de Grazia, a "‘pass the buck', risk adverse, ‘complaint' culture has developed in the SFO", which "discourages robust decision making and innovative and effective use of powers", and has also led to a "culture of delay".
In pointing to perceived leadership deficiencies as the cause of the culture of delay, the report, as well as being, on the face of it, grossly offensive to the senior management team, fails adequately to link the delays in the investigation and prosecution of fraud to the lack of police resources made available to the SFO, and to the problems with the current system of disclosure of documents to the defence (which places a very onerous burden on prosecutors to identify all disclosable material). Both of these factors are mentioned elsewhere in the report, and neither, of course, are the fault of senior management. The failure to provide adequate police resources is particularly worth emphasising, as the report states that it is a by-product of central government policy, which excludes fraud from the list of police performance indicators.
The report states that the culture in the SFO is demoralising, but it is the report itself which appears to have had the demoralising effect. According to a report in The Guardian newspaper on 10 June 2008, the deputy director and no fewer than four assistant directors have already left the SFO, or are leaving.
Two months before the publication of the de Grazia report, the new attorney general published a consultation paper on the introduction of a formal plea negotiation framework for fraud cases in England and Wales. While, in fairness, the system now proposed, in the words of the attorney general, does not represent an attempt to replicate the system operating in the US, it can be seen that there is pressure in the UK for our system to adopt large chunks of what are perceived to be the advantages of the US system. However, such a move would rightly not be without its critics.
At the recent International Bar Association Conference on Transnational Crime - sponsored by this publication - US attendees were on the whole wary of such a development. One well-known Florida white-collar crime attorney, referring to the US system of plea bargaining and the wholly disproportionate discounts on sentence available to accomplices who plead guilty and give (not necessarily reliable) evidence against others no more culpable, said: "I wouldn't recommend our system to anyone; it's a dastardly system."
Other US attorneys warned about the dangers of importing the powers of US prosecutors to their UK counterparts without importing the safeguards hammered out over decades by US defence attorneys. Others disagreed and said that, on the contrary, there were no safeguards or very few safeguards, and that the most useful tool US defence attorneys had when dealing with US prosecutors was a pair of knee pads - "useful for begging".
The de Grazia report characterised those who had the temerity to criticise the US system as being "non-specialists", but that is plainly not the case. Many parts of the US system can be lauded, and there would be little objection to bringing them into the UK. For example, this would include the freer disclosure by the prosecution of material potentially useful to the defence (which would save prosecution resources in having to decide what to disclose to the defence), the introduction of better systems for vetting cases on an ongoing basis in the SFO, greater allocation of police resources to the SFO, and means testing for the state funding of legal representation.
Many other aspects of the US system are far less palatable and, in the authors' opinion, offend the culture of commensurate and fair criminal justice in the UK. Despite the pressures set out above, there is certainly no consensus that they should be imported here.