What’s the future of large-scale fraud investigation?

Serious Fraud Office
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Christian Annesley
Staff writer
AccountingWEB
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Back in May, the Conservatives pledged in the party manifesto that The Serious Fraud Office would be abolished once the general election was won. Its remit would be rolled into the UK’s wider criminal investigation agency.

Yet since then, the agency has been delivering on some particularly high-profile, big-ticket cases, and an Airbus settlement, potentially its biggest win yet, looks close.

It was confirmed last month that the SFO has been working in close cooperation with French prosecutors on the terms of a potential £1 billion-plus settlement with the French–German aircraft manufacturer Airbus over corruption allegations.  

The deal, called a Deferred Prosecution Agreement (DPA), would be the largest ever in Europe. And, if confirmed, it would be the culmination of a year-long investigation into irregular payments by Airbus to intermediaries. 

Fixers alleged

The allegations that appear to be sticking are that the plane maker, which has huge UK operations near Bristol and in North Wales, used highly-paid fixers around the world to sell its flagship A380 planes into China, Turkey, the UAE and others. Sales to Kazakhstan, Tunisia and Saudi Arabia are being investigated separately. 

The Airbus DPA wouldn’t be the first one this year. David Green, the director of the SFO, in January also presided over the negotiation of a £497m DPA with Rolls-Royce, in which the use of intermediaries was again in the spotlight. Added to that, the SFO this year also agreed a DPO of £129m with Tesco over accounting failures.

Conservative opposition

But Green is set to quit as SFO director in April 2018, and the agency itself has been operating under a cloud given the Tory manifesto pledge to wind it up and given prime minister Theresa May’s long-standing and well-documented interest in ditching the authority.

May has said she favours shifting  the SFO’s activities into an enlarged National Crime Agency, which has a wide remit to tackle all sorts of organised crime. The pledge hasn’t been followed up on since the election, but is still there in black-and-white in the manifesto and no new position has been confirmed.

“We will help Britain’s world-leading police forces and prosecutorial services to fight crime, protect the public and provide security for businesses,” the manifesto said. “We will strengthen Britain’s response to white-collar crime by incorporating the Serious Fraud Office into the National Crime Agency, improving intelligence-sharing and bolstering the investigation of serious fraud, money laundering and financial crime.”

The SFO representatives said in response only that the authority cannot comment on political pledges: “The organisation of law enforcement is a matter for ministers.”

What is the SFO’s main role? 

The SFO has been active since 1988 and is a specialist prosecuting authority tackling the top level of serious or complex fraud, bribery and corruption – and always in the business space, by definition.

It is part of the UK criminal justice system covering England, Wales and Northern Ireland, but not Scotland, the Isle of Man or the Channel Islands.

It takes on a small number of large economic crime cases.  In considering whether to take on an investigation, the director of the SFO considers first:

  • whether the apparent criminality undermines UK PLC commercial or financial interests in general and in the City of London in particular,
  • whether the actual or potential financial loss involved is high,
  • whether actual or potential economic harm is significant,
  • whether there is a significant public interest element, and
  • whether there is new species of fraud

The SFO also pursues criminals for the financial benefit they have made from their crimes and assists overseas jurisdictions with their investigations into serious and complex fraud, bribery and corruption cases.

Since a few days ago – 30 September 2017 – the SFO has also had the power to investigate and prosecute the new offence of corporate failure to prevent the facilitation of overseas tax evasion.  

It is unusual in the UK in that it both investigates and prosecutes its cases – but it reflects how such cases are complicated and lawyers and investigators need to work together from the beginning. 

Push-back on closure plan
Lawyers and other fraud investigations have express concern that any organisational change that would shut down the SFO will distract investigators and bog down cases at a time when Brexit has already introduce huge uncertainties into UK plc.

One former lawyer at the Attorney-General’s Office, Stephen Parkinson, who is now a partner at the law firm Kingsley Napley, said: “It’s dreadful news. It’s not been given any rationale.

“I have two main concerns: firstly, that there will be organisational paralysis; people will leave the SFO in droves so they will lose expertise. Secondly, I fear momentum will be lost and there will be a failure to open cases that should be taken up.”

Robert Barrington, executive director of Transparency International UK, has also called the move an “ill-conceived manifesto one-liner” that seems to contradict Conservative Party pledges to tackle global corruption.

“The SFO has had increasing success in recent years; previous plans to abolish it have been discredited,” he said.

Is it working?

Is the Serious Fraud Office delivering on its responsibilities and landing cases that hold big corporates to account while sending out a wider message about fraud to the wider business community?

Most of the evidence suggests it is.

The SFO has suffered setbacks, including having to pay damages to property tycoons the Tchenguiz brothers after a botched dawn raid, but mostly it is landing its punches, as the Rolls-Royce and Tesco DPAs illustrate. 

The SFO’s annual budget also makes it look like good value in its role of policing big-ticket fraud. Its core funding each year is about £33m, which gets topped up to take on really big cases so that most years it might draw on about £50m. Given the scale of the settlements it is landing, and the deterrent message that sends out too, the system looks to be working. 

What now? 

Whether you agree with deferred prosecutions or not — and some are suspicious of such judicial shortcuts — they are becoming a well-trodden route for the biggest business fraud cases, and they appear to be working for the SFO.

The first ever DPA negotiated by the SFO was in 2015 for $25m from Standard Bank, but since then they have become a common method for the SFO to reach very large settlements.

Given they are delivering and the SFO looks quite effective in its current operational approach, the question now becomes: why change things? What is the benefit to business and to taxpayers? 

In the meantime, Airbus awaits its fate.

It has already publicly admitted to “misstatements and omissions relating to information provided in respect of third party consultants in certain applications for export credit finance for Airbus customers”. Its 2016 annual report also accepts that the SFO and PNF investigation is going to have reputational and financial consequences. It looks like the final reckoning – for Airbus, if not yet for the SFO itself – isn’t far off.

About Christian Annesley

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