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Investment Fraud and Regulatory Issues

3 May 2016
4 min read

Many of our clients who are facing possible investment fraud prosecution are professional people who are regulated by a supervising body; either personally or through their company, or in some cases both. There is an interface between the civil regulatory process and criminal litigation. That meeting of processes can sometimes produce fault lines which can be exploited. This is a particular feature of many investment fraud investigations.

Pension Fraud

A good example of how regulatory issues can have a significant impact on a prosecution is a pension fraud case that was heard in Birmingham in 2014.

Those selling pensions are regulated by the Financial Conduct Authority (FCA). Those administering pensions are regulated by the Pensions Regulator (TPR) – and to a limited degree the FCA too. The FCA is the firewall protecting the consumer against mis-selling; the TPR is the firewall protecting the HM Revenue and Customs (HMRC) from improper pensions attracting tax relief.

The case centred on whether the pension schemes being offered were truly “pensions’’ and whether tax relief – known as “Relief at Source’’ (RAS) could, therefore, properly be claimed. In fact the Finance Act 2004 sets out the circumstances in which HMRC must pay out RAS and s150 provides a definition of “pension scheme”. The Birmingham case was thrown out at half time following submissions on the Finance Act and other regulatory provisions. The prosecution’s appeal was un-successful.

A significant reason for the failure of the case was that under the Finance Act the individual investors were making proper contributions – despite allegations that they had been conned.

This pension scheme was registered with the TPR. Thus, all the formal statutory and regulatory boxes were ticked so the scheme under consideration was, by definition, a pension scheme. It therefore followed that the tax relief, the RAS, was properly payable as a matter of law and was lawfully obtained. HMRC had simply cast their case improperly as they had not understood the technical regulation of pensions. It was a proper consideration of the statutory and regulatory provisions of the pensions industry that saved the day for the defence.

Given that allegations of pension fraud by small FCA-registered firms offering SIPP pensions are the flavour of the month, we fully expect that there will be many more cases like this where HMRC’s case demonstrates a flawed understanding of technical regulation.

And we expect that our clients, working with our lawyers and possibly outside experts, can expose this HMRC weakness to our positive effect.


Regulatory Investigations

Very often regulators, such as the FCA, will conduct their own investigations and even conduct civil/regulatory interviews before turning the case over to HMRC or others when they believe the case might be a criminal one.

In many cases, the regulator will work hand in glove with the police. This usually makes complete sense. But great care has to be taken by the police, HMRC or other bodies in such situations so that, for example, civil regulatory powers are not misused to gather evidence actually intended for a prosecution. The right to a fair trial guaranteed by Article 6 of the European Convention means that a suspect can simply refuse to answer questions. He has the right not to incriminate himself. That Article 6 right is simply stated but can, in fact, be very complex in its operation.

In R v F [2009] EWCA Crim 1639 the Financial Services Authority (FSA) and SFO were conducting an investigation.

F was an Independent Financial Advisor charged with investment fraud offences. The police, who had been working with FSA, applied to the Crown Court for a Production Order for bank accounts. The application was refused.

The FSA later applied to Magistrates’ Court for a search warrant but did not disclose the fact of the previous Crown Court refusal. That failure to disclose, and the FSA’s subsequent action, led the trial Judge to stop the case as an abuse of process. The prosecution were saved – just – by an appeal to the Court of Appeal. The Appeal Court re-iterated that in circumstances such as these the regulator had to be careful, or in the Court’s word ‘mindful’ of the requirements of a fair criminal trial. We are always surprised at this fi rm where there is lack of concern about a regulator providing information to the police or other body. In R v Kearns [2003] 1 Cr. App. R 7 the Court of Appeal considered the position where material was produced under compulsion for one apparent purpose but actually used for another – a criminal prosecution. The Court found that much depends on the true purpose of the disclosure demands:

i.e. whether (a) the information demanded was factual or an admission of guilt and whether (b) the demand for the information and its subsequent use in proceedings was proportionate to the particular social or economic problem that the relevant law was intended to address.


This second part of the test suggests a degree of discretion. In R v K [2009] EWCA Crim 1640 K had disclosed certain tax off ences as part of ancillary relief proceedings in a divorce case. He was then prosecuted. The Court of Appeal found that K had had to provide information under pain of imprisonment, and though there were circumstances where the “social purpose” of admitting such evidence in a criminal prosecution was proper, protecting the Revenue was not one of them.

So it can be seen that where a criminal investigation has involved the use of a regulator working with the criminal investigators, should be astute in identifying whether civil/regulatory powers are being inadvertently misused.

These points are often missed. Company Investigations The pitfalls that can exist when there are parallel proceedings of the type described above are, to a lesser degree, also present where a company conducts an investigation into someone; usually a senior employee.

Back in 2008, this firm was involved in Cancer Research UK v Morris & Morris [2008] EWHC 2678 (QB). In that case, a senior employee was accused of defrauding his employer. The employer took certain investigative measures including interviewing the employee before suspending him and calling in the police. The employer then issued civil proceedings freezing the assets of the employee and his wife. We represented the employee at his High Court hearing in response to the freezing order and successfully argued that the provision in the order for the release of interview notes to the police was unlawful as the employee had a right not to incriminate himself under Article 6 and, as no caution was given, the police could not be given the interview material.

We were recently involved in a significant money laundering case where a bank employee tipped off the authorities about a suspicious transaction. The employee was then used by the police to provide information to them about confidential banking activity – without bothering to secure a Production Order from a Judge, which is the usual means of securing confi dential information.

That formed a central part of our defence case statement and the case was dropped because of evidential difficulties.

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