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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

Understanding Failed and Bailed: A Deep Dive into SFO Investigations

Author: Azizur Rahman  2 June 2014
4 min read

The Serious Fraud Office (SFO) has been left red faced after having to seek an emergency financial bail out – to repay the taxman over wrongly reclaimed VAT. What does this mean for its future? And for UK companies?

It is often said that those without sin should cast the first stone. It’s a rather ancient way of saying that you should make sure your own affairs are in order before you look to examine and criticise those of other people.  A “Do as I do’’ approach compared to a “Do as I say’’ one. But whatever phrase you want to use for such an attitude, you can bet that the SFO is feeling it should have been more of a “Do as I do’’ outfit in the light of recent news.

In fact, if anyone has to take such an approach, and be seen to be doing so, it is the SFO. It is the body that investigates financial wrongdoing and protects society by prosecuting those it believes are guilty of fraud, bribery or corruption. The SFO, therefore, has to be seen to be acting impeccably and with perfect financial probity when it comes to the law.  Which makes it all the more embarrassing that it has had to seek £19M in emergency funding this month. To heap further shame on it, the reason it needs the money is because it has to pay HMRC for wrongly-reclaimed VAT and the fine that followed as a result. To anybody, this would be a big financial setback and a major loss of face. To an organisation that exists to ensure financial integrity this has to be seen as a tragedy; although farce is another term that could be used accurately in this case.

News of the SFO’s cap in hand approach to finance came out via a report from the Commons Justice Committee. The Committee announced good news and bad news for the SFO. The good news was that the SFO had been granted the £19M it was so desperate to gain; making its annual budget £55M. But the bad news was that the size of the request for extra cash was so large that it raised the question of whether the current funding arrangements for the SFO “are sustainable’’, to quote the Committee. This is not a ringing endorsement of the SFO’s previously-stated desire to seek extra funding from government as and when it needs it for major investigations and any resulting trials.

SFO Director David Green has made it clear on a number of occasions since the Libor scandal that his organisation felt it could seek extra finance whenever a really big investigation presented itself. This month, however, he appears to have had his hands full explaining that the £19M embarrassment was due to “historic legal liabilities’’ relating to payment of VAT that date back to his predecessor Richard Alderman’s time as director. The wrongly-reclaimed VAT relates to fees paid to counsel between 2009 and 2012. At present, Mr Green faces the issue of a claim for £300M being brought against the SFO by the Tchenguiz brothers in relation to their controversial and much-criticised arrest by the agency in 2011. Mr Green has indicated that he may seek more than the current £24M in emergency funding secured for this year as he looks to bring more people to trial while, at the same time, trying to manage the major problems of the Tchenguiz brothers’ legal action. The SFO has stated that the VAT problem “has not hindered our operations in any way’’. But while that may be the case for the short term – now that it has effectively been bailed out by government – the longer-term prospects are nowhere near so cut and dried.

One reason for the uncertainty is that, as we write this, the Attorney-General’s department is examining SFO funding as part of the spending discussions for the financial year 2015-16. With the Justice Committee now about to ask the Attorney-General whether it feels the SFO’s ability to ask Parliament for extra funds is something that could or should continue, it remains to be seen what resources the agency will be able to command in future years. Any decision will have wide-ranging implications for companies or individuals that the SFO plans to investigate, now or in the future. It could, with some justification, argue that extra funding is only going some way to restoring some of what was taken in budget cuts that its previous director agreed to. With Rolls-Royce and Barclays investigations eating into resources, not to mention the Libor investigation itself, the SFO can argue a case for having genuine need of the extra millions.

But the VAT fiasco could not have come at a worse time, with Mr Green having made it clear this month that the SFO’s job is not to be “a regulator, an educator, an advisor, a confessor, or an apologist’’ when it comes to helping companies with ethics and compliance issues. He has said before that UK companies’ compliance with the Bribery Act is not something the SFO is duty bound to educate people about. His compliance statement came at an unfortunate time for the SFO, with its VAT problems giving the impression that the agency is more of a “Do as I say’’ rather than a “Do as I do’’ organisation. Yet the SFO’s problems can prove useful for the rest of us: a useful reminder that keeping your house in order (to use another phrase) is important for everyone in business.

As experts in compliance, we frequently help companies of all sizes and in all business sectors make sure they are operating in total accordance with the law. Such compliance advice ensures that companies can either prevent illegality being carried out in their name or, at the very least, make sure it is flagged up early and acted upon. Mr Green’s reluctance to speak on ethics and compliance may be understandable. But we already know that UK government guidance calls for compliance programmes and their effectiveness to be considered by the SFO when it decides to prosecute or enter into a deferred prosecution agreement (DPA) with a company where wrongdoing has been identified.

Quite what view it has taken of its own misdemeanours is likely to remain within its own four walls. The SFO is arguably in a position that few other companies and organisations ever find themselves in: it has a pre-arranged ability to request extra funding, good relationships with other agencies that investigate business wrongdoing, its own in-house experts in all manner of legal fields and an ability to set the parameters of business investigations.

The fact that it was still unable to make sure it met its legal requirements can be viewed with a smile by the rest of us. But the serious point it highlights regarding compliance should not be ignored.

Azizur Rahman C 09369

Azizur Rahman

Senior Partner

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Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.

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