The London Anti-Corruption Summit in May brought the fight against economic crime back into the spotlight. One major outcome of the summit was the announcement of a consultation on expanding the scope of “failure to prevent” laws regarding economic crime.
“Failure to prevent” currently covers only bribery and tax evasion committed by corporates. However, the consultation will consider extending the concept into other areas of economic crime including fraud, money laundering and false accounting, which historically have been incredibly difficult to prosecute.
It is worth noting that the furthering of this legislation would increase the substantial compliance burden on corporates, at a time when there are already doubts around the continued competitiveness of UK business following the vote to leave the EU.
There does, however, appear to be sufficient public desire for this, so it is likely that corporates will have to adapt and improve and/or implement procedures to ensure there are sufficient safeguards in place to prevent employees and agents of the company from engaging in those types of offences where the conduct is also for the benefit of the company.
The high profile nature of many economic crime cases – particularly those involving banks – means there is great pressure on prosecutors to secure convictions of some sort. As such, low-level employees involved in these types of crimes often bear the brunt of prosecutors’ attentions, due to the comparative ease of prosecuting them.
Director of the Serious Fraud Office (SFO), David Green QC, reiterated his full support for the proposals at the recent Cambridge Symposium on Economic Crime. He said: “The 'identification principle' requires the prosecutor to identify the 'controlling mind' of the company and prove that person was complicit in the offence under investigation.
"In a world of increasingly complex corporate structures, the identification principle can hobble the prosecutor in those cases where it is right to prosecute the company.
"The principle is illogical…operates unfairly…[and] creates unhelpful incentives for senior executives. A 'failure to prevent economic crime' offence would significantly increase the prosecutors’ reach in those cases where a company should be held to account for the conduct of persons associated with it.”
It is easy to understand why Mr Green is such an ardent supporter of extending “failure to prevent” legislation. Alongside increasing corporate accountability, it will expand the SFO’s powers by providing a new avenue to approach corporate investigations.
The SFO’s poor performance in prosecuting corporates shows that for the SFO this is much needed: in the past five years, they have achieved only two convictions of corporate entities – Smith and Ouzman in 2014 and Sweett Group in 2015.
Aside from these convictions, two Deferred Prosecution Agreements (DPA) have also been approved. The result is that only four corporates have been held accountable by the Serious Fraud Office in the past five years. Though it will submit it has been held back by existing legislation, this is still a poor result and shows that the SFO is unable to effectively target corporate entities.
This can be seen also in the flagship Libor case, in which Mr Green has acknowledged the agency’s inability to work effectively in prosecuting corporates. He said: “We could not touch the bank for which [Tom Hayes] worked whilst manipulating Libor. That bank was held to account for Hayes’ conduct in a New York courtroom, where vicarious liability made the prosecution a much simpler matter.”
Legislation aimed at increasing corporate liability for crimes committed in their name could potentially increase SFO’s ability to fulfil their mandate. However, there is no guarantee that the SFO would be successful in cases using the new legislation. Further assessment of the Libor trials paints a mixed picture.
Following the successful and widely publicised prosecution of Tom Hayes in August 2015, the second trial proved less auspicious. Six Libor submitters were alleged to have conspired with Hayes, but the jury found them all not guilty, leaving Hayes effectively convicted of conspiring with no one. The third trial saw one guilty plea, three convictions and no verdict being reached for two defendants, for whom the SFO will be seeking a retrial. This highlights the inconsistency within the SFO’s performances, even in a trial making up more than 10 per cent of the SFO’s budget in each year since 2013.
Inconsistency is also evidenced in other aspects of the SFO’s work. While a rising budget is no guarantee of success, a drastic decline in performance highlights clear weakness in a prosecuting agency, particularly with expanded powers potentially on the horizon. The SFO’s budget has risen by £22m since 2011-12, while a three-year moving average of convictions has dropped from 76 per cent to 65 per cent (2010-2013/2013-2016).
The nature of the SFO’s work is often pointed to as a reason for the year-on-year variation in figures, which can, to a degree, be accepted. However, this does not excuse the worst conviction figures in 16 years, particularly when considering that the SFO’s budget reached its highest level yet in 2015-16.
Mr Green has stated that “we are well equipped and confident in [our] exacting role and mission”, but the results appear to disagree with this assessment.
Particularly relevant in this context is the result of the Olympus investigation in late 2015. After a Court of Appeal ruling, the SFO was forced to offer no evidence as the charge levelled – misleading of auditors by the company under audit – was ruled as not being a criminal offence. The Financial Times noted that other charges could have been used to present a better chance of conviction.
The agency is not achieving enough relative to its budget at present, and the increased potential for new investigations will only increase the financial pressure the SFO operates under by spreading funds and staff more thinly. The SFO states that it has never refused an investigation for budgetary reasons, but unless they become more efficient or see an increase in funding, this record is unlikely to continue.
The SFO is unable to offer sufficient backing to any expanded legislation, based on present performance. Declining conviction figures and continued failure in high-profile cases hardly inspire confidence, and the SFO must stop this slide to enforce any new legislation. A focus by the SFO on DPAs could, conceivably, increase the number of co-operating corporates, reducing costs and increasing efficiency.
In the meantime, further legislation will serve only to increase the pressure on the SFO, at a time when cracks in its current structure are already showing.
Brian Swan is a partner at Stokoe Partnership Solicitors
Key points
There is great pressure on prosecutors to secure convictions of economic crime.
The SFO’s poor performance in prosecuting corporates shows that expansion of the "failure to prevent" laws will be needed.
The agency is not achieving enough relative to its budget at present.
