Prosecuting Serious Fraud March 2011

Around this time three years ago we were all getting to used to the dreaded phrase 'credit crunch' and its unpleasant consequences - around that time the American investor Bernie Madoff, must have been a worried man. Readers will recall that the extremely successful trader Madoff pleaded guilty in March 2009 to fraud charges in the US - accepting that the asset management arm of his firm was really just a giant 'Ponzi fraud'. Such frauds are really very simple in their conception; you take money from one investor and pay it to an earlier investor pretending that, that is the return on his investment.

Today the National Fraud Authority estimated in its latest figures (January 2011) that fraud is costing the UK over £38 billion per year. We are certainly seeing an increase in heavyweight fraud allegations coming to charge. Over the last three years fraud allegations have been springing to the fore with almost boring regularity. Fraud investigations range from the mundane exaggeration on a mortgage application to embezzlement by multi-nationals and wealthy businessmen on a global scale. Times are a changing - more existing frauds, large and small, are being exposed and more people are prepared to take risks - either to commit a fraud or invest in an 'opportunity' they might not have done 3 years ago. In this article we look at the prosecution of fraud offences and have a glance at the future.

Serious Fraud Office

The SFO was established in April 1988, its remit has never been to prosecute all cases referred to it; it takes on the largest most complex cases, often with an international dimension and where the value of the fraud exceeds £1m. It has been extensively criticized over the years for the poor conviction rate in the cases they do prosecute; the conviction rates for SFO cases fell from 82% in 2002/03 to just 61% in 2007/08. There has long been a demand for a shake-up and the SFO was frequently compared to the American Securities & Exchange Commission and other agencies which were seen as tougher and more effective. That comparison now seems a little unfair given that America seems to be the birthplace of the credit crunch and greatest fraud of all time (Madoff); not to mention the Enron scandal. The SEC came under fire for failing to prevent Madoff, meanwhile the SFO increased its success rate in 2008/09.

The SFO has now refocused and there is a greater concentration on fraud prevention and the use of the civil courts. The SFO obtained its first ever Civil Recovery Order in a case in which the firm Balfour Beatty was required to pay £2.25m in 2008 in connection with corruption allegations. No criminal conviction was required.

International Co-Operation

The authors of this article were involved in a case (SEC v Manterfield) where the US SEC pursued a British hedge fund manager who was alleged by the U.S. authorities to have operated a fraudulent investment scheme in the United States. The SEC's website described the unusual move of seeking a freezing order from a foreign court; i.e. the High Court as Mr. Manterfield held assets here. The case in part revolved around issues about whether the SEC's action was truly civil in nature given the draconian nature of some the penalties that could be imposed on Manterfield in the US in the event of failing in the 'civil' action.

The world's financial prosecution authorities seem to becoming together more and more to tackle the credit crunch and international fraud. A recent example is the global settlement reached last year between the SFO, the American Department of Justice and BAE Systems PLC. This was a first; a coordinated global settlement of criminal investigations in two jurisdictions. BAE Systems had been fighting long-running investigations of bribery allegations in several countries. In the UK, the company agreed to plead guilty and pay £286m in fines in the UK - and a far larger amount in the US in connection with regulatory filings and undertakings.

Very recently the UK and US authorities dealt with a company M.W. Kellogg Ltd. That company tipped off the authorities themselves about contracts which it suspected had been obtained by bribery and corruption. The company paid £7m following an uncontested High Court civil recovery action where no fault was placed on the firm - the money represented the proceeds from the tainted contracts.

This approach by the SFO of co-operation with other agencies and encouraging companies to self-report has its difficulties - especially when it comes to so called 'plea bargaining'.

Plea Bargaining

The Attorney General's Guidelines on Plea Discussions In Cases of Serious or Complex Fraud was introduced in May 2009. It is at least a step towards US style plea bargaining. On 25th September 2009 Mabey & Johnson Limited an English company supplying bridging equipment, largely to the third world was sentenced at Southwark Crown Court after pleading guilty to corruption offences prosecuted by the SFO. It was fined £3.5m and had a confiscation order made against it in the sum of £1.1m. It was significant because it was the first successful prosecution of a company for overseas corruption and was also the first time that a case was disposed of following the SFO's engaging in plea discussions with the company under the AG's Guidelines.

However, after that flying start the SFO's co-operation with overseas authorities and enthusiasm for plea negotiation has hit a series of criticisms in the Courts. In March 2010 the British chemical firm Innospec pleaded guilty to conspiracy to corrupt in exchange for an agreed fine and confiscation deal. This may have been acceptable to the US authorities dealing with the case on the other side of the Atlantic but here the Courts were very troubled by the process - the original Judge describing the deal as 'wrong' before recusing himself. The SFO got there in the end but only just and since then there have been more high level judicial criticisms of the plea bargaining approach in other cases. This leaves the SFO's policy of wrapping up 'deals' with companies with the help of the US authorities in grave doubt. For our part, though 'deals' maybe tempting they are 'wrong' in principle. If there is evidence the Crown should prosecute or use the civil recovery route - and if there isn't - then there isn't.

There is now evidence that Plea Discussions are branching out into the more mainstream cases - the authors are involved in a case where the CPS allege that the defendants are all involved in a massive series of mortgage frauds (over £300million) leading to the near collapse of a Bank. Non one has been charged yet but the CPS have asked the defence whether discussions about a plea can place. Such discussions can never form part of the evidence if the talks fail but do form the foundation of any agreed basis of plea which flows from such discussions.

Civil Recovery

The authors are presently engaged in an appeal case which involved a lengthy trial of a man and woman accused of drug trafficking and money laundering. The alleged offences themselves took place between 10 and 20 years ago in Spain and Portugal - in Portugal there were two criminal trials and both were acquitted! The case was pursued here complete with evidence that would never normally be seen in a criminal court. Much of the evidence was in the form of hearsay account in witness statements. There was no jury. What kind of trial is this - answer a civil trial at the High Court. What the police could not prosecute in the UK for lack of evidence was pursued in the civil Courts by the Serious and Organised Crime Agency (SOCA) under its powers of Civil Recovery contained in the Proceeds of Crime Act 2002. We are seeing more and more of this.

SOCA's powers to claim civil recovery of what it says are the proceeds of crime have been extended to the major law enforcement agencies since April 2008. We have already mentioned the SFO who are now using this power. Customs and Excise too are starting to get used to the idea of pursing a civil remedy. Their man does not go to jail but may lose everything he owns - all on the lower standard of proof of the balance of probabilities.

It is that standard of proof which is now under challenge - the case of SOCA v Gale and others is being heard at the Supreme Court in May 2011. Developments in human rights case law and in confiscation law has presented the highest Court in the land with an opportunity of insisting that where criminal allegations are made the criminal standard of proof should apply - whatever label is put on the proceedings. Watch this space.

Criminal Trials Without a Jury

The Criminal Justice Act 2003 introduced the notion of non-jury criminal trials in cases where there is a clear and present danger of jury 'knobbling'. The first such trial has already taken place and convictions secured. But the Act sought to go much further and introduce - as perhaps almost the norm, the possibility of trial without jury in cases of complex fraud. However, after the Act came into force the then Attorney General subsequently sought to repeal those provisions and to replace it with new provisions under the Fraud (Trials Without a Jury) Bill. It is with pleasure we report that the Fraud (Trial Without a Jury) Bill was voted down by the House of Lords in March 2007.

Thus in the midst of so much change and so many threats to our basic system of criminal justice it is ironic that it is the un-elected side of Parliament which, yet again, strives the furthest to preserve our most precious liberties.

Authors

Jonathan Lennon is a Barrister specialising in serious and complex criminal defence case at 23 Essex Street Chambers in London. He is a contributing author to Covert Human Intelligence Sources, (2008 Waterside Press) and has extensive experience in all aspects of the Proceeds of Crime Act 2002.

Aziz Rahman is a Solicitor - Advocate and Partner at the leading Criminal Defence firm Rahman Ravelli Solicitors, specialising in Human Rights, Financial Crime and Large Scale Conspiracies/Serious crime. Rahman Ravelli are members of the Specialist Fraud Panel.

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