RegulationNov 2 2022

SFO reform won't make a difference without better resources

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SFO reform won't make a difference without better resources
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The government’s new economic crime and corporate transparency bill, which is going through the House of Commons, promises to significantly increase the scope of the Serious Fraud Office’s powers by enabling it to compel third parties – including individual witnesses, suspects’ employers and other corporate entities such as financial institutions – to hand over materials and provide it with explanations at an earlier stage of its enquiries.

If enacted, the proposals would hand the SFO a considerable investigative tool, however, it remains to be seen how much advantage the embattled agency could take of any such new measures as it struggles for survival.

A new era

The SFO, the UK’s prime law enforcement agency for investigating and prosecuting complex and/or serious fraud cases, was established in the 1980s following decades of dissatisfaction with the previous system.

At the time, its novel structure of combining investigators and prosecutors was seen as revolutionary. Its newly created ability to require individuals and corporates to answer questions and produce documents – in contrast with traditional police investigations – was considered the cornerstone of the SFO’s toolkit and signalled a new era for law enforcement.

The SFO’s statutory power to compel third parties to produce information after service of a “section 2 notice” is draconian: a section 2 subject must attend the SFO’s premises and cannot rely on their right to silence to not comment during their interview.

The SFO will have had to do the groundwork first before being able to rely on section 2.

Furthermore, section 2 notices require the production of material to the SFO that would otherwise be protected by business or professional confidentiality – only stopping short of forcing the disclosure of legally privileged information, such as advice given by a lawyer to their client.

The main restriction on the SFO’s use of information and documents obtained via section 2 is that they cannot be relied on as evidence to charge and prosecute the person providing them to the SFO (unless they mislead the agency or give inconsistent statements).

 

In practice, this has meant that the SFO has frequently used section 2 powers to interview witnesses and those on the fringe of its horizon (as opposed to suspects), as well as regularly evoking section 2 to obtain suspects’ electronic, employment and financial records held by third parties.

Given its draconian nature, at present, the SFO can use section 2 powers only where it appears to its director that there are reasonable grounds to suspect that an offence involving serious or complex fraud has been committed (and once an internal checklist of criteria has been met).

In other words, the SFO will have had to do the groundwork first (and officially open an investigation) before being able to rely on section 2 to further build its case.

The only exception to this rule relates to allegations involving offences under the Bribery Act 2010 where the UK has jurisdiction to investigate and prosecute but the underlying conduct took place abroad.

The reform proposals would bring the SFO’s general powers in line with those in relation international bribery cases by allowing the SFO to issue section 2 notices in all its enquiries at an earlier, pre-investigative stage, without first having to satisfy itself of its suspicions on reasonable grounds.

It has been widely reported that the SFO is struggling to fill vacancies.

If enacted, the SFO would not be likely to use its enhanced powers against suspects for the reasons set out above – although in the early days of an investigation, the line between suspects and witnesses is sometimes blurred.

Instead, employers, agents, banks and other third parties may expect to receive section 2 notices even more frequently to allow the SFO to determine whether it is worth opening a formal investigation into allegations.

Resourcing issues

Section 2 notices are often wide-ranging and can be resource-intensive, therefore their increased use would come with greater compliance burdens for receiving entities, while also requiring the SFO to have enough resources to review and assess what can amount to considerable volumes of electronic data.

Companies would need to be alive to the internal issues that receiving a section 2 notice may indicate and be ready to address them – including meeting SFO expectations on self-investigation and reporting – while also treating whistleblowers fairly and adequately.

Without adequate investigative resources, the SFO’s ability to fulfil its potential will remain hampered.

Meanwhile, while an expansion in section 2 powers would allow the SFO to open more targeted investigations based on prior information already in its possession, the agency’s workload and success rate will remain reliant on its ability to appropriately resource cases.

It has been widely reported that the SFO is struggling to fill vacancies and that the government is looking to significantly cut its resources, while rumours of an SFO/National Crime Agency merger or a significant SFO reorganisation have also been swirling around for some time.

Without adequate investigative resources to support any increase in its statutory powers, the SFO’s ability to fulfil its potential will remain hampered.

Neil Swift is a partner and Diana Czugler is a senior associate at Peters & Peters