The short arm of the law

The case turns on the allegedly reckless approach to due diligence in Lloyds’ support of the bailout of HBOS, in the form of a £10bn loan, alongside facilities provided by the Bank of England.

It is also alleged that Lloyds failed to alert the markets and investors to the size and terms of the HBOS facility, withholding critical information, which ultimately led to Lloyds’ share price collapse.

The Fraud Act 2006 came into force in early 2007, bringing in wide-ranging changes to the law of fraud.

The Lloyds case is one of a number of legal claims where attempts have been made to obtain compensation for losses during the financial crisis, arising from what is said to have been deceptive behaviour at the highest level of banks and financial institutions.

These civil cases raise important questions regarding the efficacy of the criminal regulatory, investigation and prosecution process, following the financial crisis. 

Many of the accusations levelled in these claims, including actively misleading investors and withholding key information, might equally have been the subject of criminal charges.

The Fraud Act 2006 came into force in early 2007, bringing in wide-ranging changes to the law of fraud increasing the scope of conduct captured by the criminal law and making it much easier for prosecutors to make charges stick.

Section 2 of the Act criminalises “fraud by false representation”, including with the intention of “exposing another to a risk of loss”. A false representation may be “express or implied” for the offence to be committed.

So, there is no need to prove actual losses; merely, that dishonest false representations exposed any other party to the risk of loss.

Section 3 deals with “fraud by failure to disclose information”, which the defendant is under a “legal duty to disclose”, again with the intention of exposing any person to “a risk of loss”.

Finally, but perhaps most importantly of all, Section 4 makes it an offence to commit “fraud by abuse of position”, including by dishonestly omitting to take action to safeguard the “financial interests of another person”, when the defendant is expected to do so.

Under all three sections, fraud under the 2006 Act carries a maximum sentence of 10 years’ imprisonment per offence, an unlimited fine, and engages the draconian confiscation procedures available under the Proceeds of Crime Act 2002.

The Proceeds of Crime Act came into force as long ago as 2003 and includes some of the broadest criminal money laundering offences anywhere in the world.

Playing a part in handling the proceeds of any sort of crime, including all the Fraud Act offences, with even “suspicion” of its origin, carries a maximum sentence of 14 years.

This legislation has been available to the Serious Fraud Office, the National Crime Agency and the Crown Prosecution Service, to deal with exactly the sorts of alleged behaviour at the highest levels of major financial institutions, which is coming to light in several civil cases.

In practice, there have been no more than a handful of prosecutions arising from the financial crisis with criminal investigations tending to focus on the low-hanging fruit of middle and junior management, rather than the key decision-makers.

As long as investigators and prosecutors fail to deploy the weapons long available to them from the criminal law, those at the very top of the financial tree are unlikely to be deterred from exactly the same behaviour, which had such drastic consequences almost a decade ago.

Chris Daw QC is an expert in criminal fraud and business regulation for Serjeants’ Inn Chambers