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Informed by U.S.
Experience, U.K.
Embarks on Major Anti-Fraud Law Initiatives
By Thomas E. Dwyer Jr. Esq.
Introduction
In a span of less than eight
years the United Kingdom (UK) has completed, or come close to completing,
the most significant overhaul of law, regulation and practice in the area
of white collar criminal investigation and prosecution in its history. As discussed below, the entire United States anti-fraud statutory matrix,
developed since the Racketeer Influenced and Corrupt Organizations Act of
1970 (RICO), has served as much of the basis for UK revisions in this short
period of time. In further proof of
this thesis, on June 10, 2008 the UK
Attorney General released a compelling white paper it commissioned from
former U.S.
prosecutor Jessica deGrazia.[i] DeGrazia completed a review of the UK
Serious Fraud Office (SFO), a newly created office charged with
responsibility for all major white collar investigations, and made
recommendations on a variety of topics including investigatory tactics, disclosure,
plea bargaining, sentencing, professionalism and training. Her conclusion, suggesting a revised UK investigation and prosecution model, was
based in large measure on her comparison of two New York City prosecution offices and the
SFO. Additionally, as recently as
June 23, 2008, over 600 circuit judges in the UK
expressed strong disapproval of the proposed implementation of US style sentencing guidelines in the UK. Without question we are — and for
the foreseeable future will be — witnessing a wholesale export of US
white collar criminal jurisprudence.
Aggressive
new white collar crime tactics
A. Revision
of anti-fraud law
The most significant recent UK
statutory changes undoubtedly relate to alleged fraudulent activity. Financial crime in the UK costs at
least £13.9 billion annually, increasing to £20 billion when income tax and
EU related fraud are taken into account.[ii] In 2002, after an exhaustive multi-year
review, the UK Law Commission released its 105-page Fraud Report with the
intent to encourage focus on an area of law reform that had long been
debated by judges, prosecutors and defense counsel. The Commission’s report reflected
“widespread concern that the current legislation [was] not fit for
purpose in the 21st century.”[iii] Rather than a complex matrix of many
fraud provisions, the Commission recommended one general fraud statute,
writing that “[t]he offense of fraud would be committed where, with
intent to make a gain or to cause loss or to expose another to the risk of
loss, a person dishonestly . . . makes a false representation . . .
willfully fails to disclose information, or . . . secretly abuses a
position of trust.”[iv]
In November 2006, the new
Fraud Act was approved, creating a legal definition and substantive offence
of fraud. Section 12 of the Fraud
Act clarifies the liability of company officers for offenses by the
company, providing that if “persons who have a specified corporate
role are party to the commission of an offence under the Act by their body
corporate, they will be liable to be charged for the offense as well as the
corporation.”[v] Under the Act, while a defendant’s
conduct must be dishonest and his intention must be to make a gain (or
cause the risk of a loss to another), no gain or loss must actually be
proven. Additionally, Section 13(1)
of the Fraud Act minimizes the ability of UK company persons to rely on the
privilege of self-incrimination, by providing that a person is not to be
excused from “answering any questions put to him in proceedings
relating to property, or . . . complying with any order made in proceedings
relating to property, on the ground that doing so many incriminate him or
his spouse or civil partner of an offence under this Act or a related
offense.”[vi] However, the Act also provides that such
statements are not admissible against the defendant.
Finally, adding to the
complexity of current fraud law in the UK is the recent introduction
of the Criminal Justice and Immigration Act of 2008 (CJIA).[vii] The CJIA allows the director of the SFO
to approve the use of disclosure (discovery) powers where it appears that
there may have been a corruption offense involving a foreign official. In turn, this will allow the SFO to
compel British companies to provide evidence about alleged corruption
abroad.
B. New
and aggressive investigatory tools
A campaign to attack
financial proceeds of alleged criminal activity began with the Proceeds of
Crime Act of 2002 (PCA).[viii] Among the effects of the PCA were the
creation of an Assets Recovery Agency; new provisions for the recovery of
property obtained through unlawful conduct; provisions for search and
seizure of cash suspected of having been obtained through unlawful conduct;
and provisions for investigation and enforcement co-operation between the UK and
overseas authorities. Perhaps the
most noteworthy section of the PCA was Part 7, which created liability on
the part of solicitors, accountants and insolvency practitioners who
suspect their clients of tax evasion.
Such practitioners are required to report their clients to the
authorities without telling clients they have done so. Practitioners who do not comply with the
Act are subject to a maximum penalty of 14 years in jail.
In response, in March 2004
the UK
government released “One Step Ahead, a 21st Century Strategy
to Defeat Organised Crime,” a white paper setting out plans for a new
approach to tackling organized crime.[ix] The Serious Organised Crime and Police
Act of 2005 (SOCPA) established the Serious Organised Crime Agency (SOCA),
which came into being on April 1, 2006, and granted its members the power
to compel individuals to co-operate with an investigation by producing
documents and answering questions, noting “there are safeguards
against self-incrimination and for the protection of legal privilege.”[x] SOCA brought together the National Crime
Squad, the National Criminal Intelligence Service, the investigative and
intelligence branches of Her Majesty’s Customs and Excise on serious
drug trafficking, and the Immigration Services responsibilities on organized
immigration crime. Additionally,
SOCA created “the mechanism by which a defendant can plead guilty and
offer Queen’s Evidence in return for a discounted sentence on a
statutory footing”; provided for the making of financial reporting
orders; placed arrangements for providing protection for witnesses; and
amended the Proceeds of Crime Act to “improve the effectiveness of
the civil recovery scheme and ease the money laundering reporting
requirements on the regulated sector.”[xi]
A further strategy introduced
by the Serious Organised Crime and Police Act was the use of serious crime
prevention orders, a new type of civil order, “capable of being
imposed against individuals or organizations, covering a wide range of
potential prohibitions or requirements…Breach of the order would be a
criminal offense.”[xii] The Serious Crime Act of 2007 made
official the existence of serious crime prevention orders, and clarified
the Government’s position on inchoate liability for assisting and
encouraging crime. Additionally,
section 44 of the SCA created a new inchoate offense of
“intentionally encouraging or assisting an offense.”[xiii]
C. Corporate
manslaughter
The law of corporate criminal
liability has expanded throughout Europe in the last two decades, and has
been the center of robust debate in the UK. One of the most controversial
developments in UK
corporate law has been the passage of the Corporate Manslaughter and
Corporate Homicide Act of 2007 (CMCHA).
Arising from a more general report on “Reforming the Law on Involuntary
Manslaughter” released by the Home Office in 2000, the CMCHA is the
result of almost a decade of discussion in the UK. Section Four of the Home Office report
introduced the idea of “corporate killing,” as well as
“enforcement action against a director or other company
officer.” A draft of the Bill
was introduced in 2005, and the CMCHA itself came into force in April of
2008.
Prior to the introduction of
the CMCHA, the prosecution was required to identify a ‘directing
mind’ at the senior level of a company’s management with whom
the requisite intent could be found.
The CMCHA “sets out a new offence for convicting an
organization where a gross failure in the way activities were managed or
organized results in a person’s death.”[xiv] With the CMCHA, “rather than being
contingent on the guilt of one or more individuals, liability for the new
organization depends on a finding of gross negligence in the way in which
the activities of the organization are run.”[xv] Gross negligence triggering liability is committed
where “an organization owes a duty to take reasonable care for a
person’s safety and the way in which activities of the organization
have been managed or organized amounts to a gross breach of that duty and
causes the person’s death. How
the activities were managed or organized by senior management must be a
substantial element of the gross breach.”[xvi]
The so-called
“management failure test” of gross negligence has been
interpreted to mean that the failures of an organization cannot have
occurred solely at a lower level but must be able to be properly described
as “corporate.” Section
18 of the CMCHA expressly excludes individual or “secondary
liability,” “the principle under which a person may be
prosecuted for an offense if they have assisted or encouraged its
commission.”[xvii] The sanction is an unlimited fine, and
the courts also have the power to impose a remedial order addressing the
cause of the fatal injury. Some have
argued that the bill will be unsuccessful in achieving its goals, as it merely
imposes fines on organizations and doesn’t mete out punishment to
individual corporate directors or members.
D. Environmental
crime
Environmental crime in the UK has not
been codified into a single act, but exists in various pieces of
legislation including the Environmental Protection Act of 1990 and the
Water Resources Act of 1991. A 2004
House of Commons report on “Environmental Crimes and the Court”
refers to the complexity of corporate criminal prosecutions, writing that
“the person most easily prosecuted – the individual posting up
the cards or who allowed the oil spill – is not necessarily the only
person who ought to be punished. It
is very difficult to get behind the crime to the principle offender.”[xviii] The report concluded that, even where liability
can be determined, “the current sentencing system is just not
flexible and imaginative enough adequately to punish corporate bodies or
those in senior managerial positions with them” and recommended the
Government adopt “a much tougher stance with businesses –
regardless of their size and nationality.”[xix]
Additionally, a 2005 report
on corporate environmental crime supported the “creation of a robust
civil penalty regime as an alternative means with which to deal with
environmental crime.”[xx] The report also supported the greater use
of the Proceeds of Crime Act to prosecute company directors. The bill which may have had the most
detrimental impact from a defense perspective, the Corporate Responsibility
Bill of 2002, would have created liability for company directors for
“any significant adverse environmental or social impacts of their
operations.”[xxi] However, after much debate, the bill was
not passed. There remains much
codification to be done in the field of corporate environmental crime
— the recent inclusion of health and safety offenses in the Corporate
Manslaughter and Corporate Homicide Act may be the increased definition and
harsher sentencing the House of Commons foresaw in its recent reports.
E. Antitrust
The Enterprise Act of 2002 introduced
the first statutory leniency program in the UK for those charged with
antitrust, or “cartel offenses.” Under Section 188 of the UK’s
Enterprise Act of 2002 (Enterprise Act), an individual or corporation is
guilty of a “cartel offense” where he or they dishonestly
agrees with another person to engage in one or more of the following: price
fixing, market sharing, limitation of production or supply, and bid
rigging.[xxii] Violation of the Enterprise Act is
punishable by up to five years in prison, however, it may be possible for
an individual who comes forward with information about anti-competitive
activity to receive immunity from prosecution in the form of a
‘no-action letter’ from the Office of Fair Trading (OFT).[xxiii] Recent attention has focused on extradition
in antitrust cases, with experts noting that extradition, or the threat of
extradition, will likely continue to become more common
internationally.
BAE and Norris
These developments in the UK are in
conjunction with a broader push by the European Commission to undertake a
revision of settlement packages in cartel cases. Two recent cases are on the forefront of
changing antitrust law enforcement.
The recent prosecution of leading global defense and aerospace
company British Aerospace (BAE) will test the cooperation of UK and US
authorities on antitrust investigations.
Commenced in 2003, the SFOs investigation was based on allegations
that the organization had a multimillion pound fund it used to bribe Saudi
Arabian officials in return for lucrative contracts. The SFO’s 2006 decision to halt the
inquiry has been sharply criticized, with observers citing pressure from Saudi Arabia
and an ongoing £20 billion deal for BAE-manufactured Typhoon jets as the
impetus behind the decision. In May
of 2008, the House of Lords ruled that the agency had acted unlawfully in
halting its investigation.[xxiv] The agency's appeal to the government's
findings is ongoing. The US
Department of Justice (DOJ) has also commenced an investigation against
BAE, and subpoenaed a number of high-ranking BAE executives this month.
In a second notable case, a
March 2008 decision by the UK’s
House of Lords made news when they unanimously ruled that Ian Norris, a UK national, could not be extradited to the US to face criminal price-fixing charges
since the alleged activity was not a criminal offence in the UK at the
time it occurred.[xxv] However, the House of Lords left open the
possibility that Norris could still be extradited on the grounds of alleged
obstruction of justice. The case began
when Norris, former head of a UK manufacturing company, was
charged by the DOJ with conspiracy to fix prices. Norris challenged the extradition order
in the UK High Court on the basis that the price fixing offense of which he
was accused was not a criminal offense in the United Kingdom until the
Enterprise Act made it so in 2002.
F. Securities
fraud
The Financial Services and
Markets Act of 2000 (FSMA) provides the statutory framework for the current
UK
market abuse enforcement regime. The
FSMA grants increased powers to the Financial Services Authority (FSA) to
punish unregulated market participants whose conduct may fall just short of
being considered a criminal offense.[xxvi] After two years of the FSMAs existence,
in December
2004 the OFT launched research into how FSMA had affected competition in
applicable markets, and found no indications that the FSMA had had a
significant negative impact on competition, and that where the legislation
addressed market failures it was in fact beneficial to competition.[xxvii]
G. Money
laundering
Rather than focusing on the
prevention of crime, the UK
anti-money laundering regime centers on preventing criminals from the use
of ill-gotten gains. The Money
Laundering Regulations of 2007 (“the Regulations”) set out the
administrative requirements, while Part 7 of the Proceeds of Crime Act of
2002 (PCA) outlined the regulatory offenses. The PCA provided for the consolidation
and reform of criminal law with regard to money laundering, including
increased powers for use in criminal confiscation, civil recovery, and
investigations. Recognizing that
“money laundering makes crime pay and funds further crime,”
Parliament imposed the Regulations with the intent of establishing “[e]ffective
systems that deter, detect and disrupt money laundering and the financing
of terrorism.”[xxviii] The Regulations outline the crime of
money laundering and impose fines and potential sentences of up to two
years. Further, they clarify that
“[a] person is not guilty of an offence under this regulation if he
took all reasonable steps and exercised all due diligence to avoid
committing the offence.”[xxix] An officer, as well as the corporate body
itself, may be found guilty of an offense where the offense is shown to have been committed “with
the consent or the connivance of an officer of the body corporate . . . or
to be attributable to any neglect on his part.”[xxx]
H. Tax
Section 144 of the 2000
Finance Act introduces a specific criminal offense aimed at tax fraud and
punishable by up to seven years in prison.[xxxi] The new offense is to be “knowingly
concerned in the fraudulent evasion of income tax.” The concept of “dishonesty”
remains at the core of the offense, which applies only to those who have
fraudulently evaded income tax since 2001.
Whether through a positive action of dishonesty, such as including
false information on a tax return, or through a passive act of concealing
or omitting information, dishonesty is a necessary factor of the offense of
tax fraud in the UK.
In a 2007 report, the HM
Revenue and Customs agency addressed the roles of its civil and criminal
investigatory powers, writing “[i]t is HMRC’s policy to deal
with fraud by use of the cost effective Civil Investigation of Fraud (CIF)
procedures, wherever appropriate.
Criminal Investigation will be reserved for cases where HMRC needs
to send a strong deterrent message or where the conduct involved is such
that only a criminal sanction is appropriate.”[xxxii]
I. Bribery
In a 2007 press release, the Law
Commission (the independent body established by Parliament to review and
recommend reform of the law in England
and Wales) called the
current law of bribery in the UK “[f]ragmented and out
of date.”[xxxiii] The Commission noted that there was a
“general agreement that the law is in need of reform but little consensus
on how it can be best achieved.”[xxxiv] The Fraud Advisory Panel issued a
response to the Law Commission Consultation Paper No. 185 on Reforming
Bribery, concurring with the Commission’s recommendation to defer
specific consideration of corporate liability until a wider review is
undertaken. Nonetheless, the Panel
emphasized “that directors and managers of companies while not
necessarily directly involved in committed an offense of bribery, are
responsible and accountable for other areas of corporate governance and
have a duty to ensure that anti-bribery and anti-corruption policies and
processes are implemented for the guidance of their employees.”[xxxv]
In its 2008 annual presentation of upcoming law
reform, the Law Commission announced the publication of a final report on
bribery and a draft Bill in the autumn of 2008.[xxxvi] Further, the Commission noted that
“[o]ur
work in relation to bribery has confirmed our view that a general review of
the law of corporate criminal liability is essential. We intend to return to this topic and
public a consultation paper in autumn 2009.”[xxxvii] Meanwhile, however, the UK
government continues to receive criticism that it has fallen short of its
commitment to prosecuting bribery, particularly overseas corruption.[xxxviii] In a June 25, 2008 article in The
Guardian, anti-bribery groups cited as the root of the problem the lack of
a cohesive and comprehensive bribery law, along with the unwillingness of
the SFO to prosecute.[xxxix] After dropping its proposed 2003
Corruption Bill, the Home Secretary asked the Law Commission to undertake a
review of corruption legislation, a process expected to be completed within
the coming year.
Other
current criminal justice policy issues
A. Plea
bargains
Currently, the UK has no
formal system of plea bargaining within its criminal justice system. The recent Fraud Review Final Report
released by the SFO recommended the creation of a plea-negotiation
framework to facilitate early pleas.[xl] In her report, deGrazia expressed concern
that the criminal justice systems of England and Wales are unlikely to
“obtain the full benefit of an early plea-negotiation
framework” due to two factors: the higher rates of conviction in the
U.S. and the current system of disclosure in the U.K.[xli] DeGrazia noted that while the District
Attorney’s Office of New York, for instance, presents defendants with
only an eight in 100 chance of not being convicted, a defendant who is
prosecuted by the Serious Fraud Office in the last five years has almost a
4 in 10 chance of not being convicted.[xlii] Therefore, a defendant in the UK facing
prosecution for fraud would have less interest in making an early plea
deal. In response to
deGrazia’s report, SFO Director Richard Alderman agreed not only with
the reccomendation the SFO adopt US-style prosecution tactics but went
further to recommend revised plea negotiations in what an article called
the “American way.”[xliii]
Additionally, deGrazia
asserted that “the most important factor” in explaining the
disparity in the number of cases prosecuted, and the number of convictions
achieved, is the system of disclosure (discovery) in the UK. While the process of discovery in the US may take weeks or months, disclosure in
the UK
may routinely take years in complex fraud cases. Disclosure laws in the UK require prosecutors to give to the
defense any information that is “reasonably capable of undermining
the prosecution case or assisting the defense,” which deGrazia
determines to be consistent with US law regarding
“exculpatory evidence.”
Despite this similarity, however, deGrazia concludes that while the
law of the UK and US require prosecutors to disclose the same types of
information, the systems of delivery are divergent – while the US
proceeds along the lines of a “keys to the warehouse” approach,
allowing for defense attorneys to sort through materials to determine what
is relevant, the UK has more of a “stand guard at the warehouse
door” approach, denying the defense access to its investigative
information unless it determines that specific items undermine the prosecutions
case or might assist the defense.[xliv]
The Fraud Advisory Panel
itself has described the current disclosure regime as “unfit for
purpose” of prosecution of serious fraud cases.[xlv] The Panel wrote in its Final Report,
“We have looked at the position in the United States which had fully
developed plea bargaining systems in place.
It is illuminating to go into this model in some detail as in our
view it demonstrates that a plea bargaining system can incorporate the non
negotiable principles of fairness to defendants, judicial independence and
safeguarding the public interest by means of checks and balances.”
B. Sentencing
The recent proposal to
implement US-style sentencing guidelines in the UK has been quite
controversial. In a 2007 report,
Lord Carter proposed a new program to deal with the UK’s
increasing prison population, identifying a structured sentencing framework
as one approach. A working group was
established to investigate and drew up a consultation paper on the issue. During the paper’s development,
members of the group visited the US to study the country’s
sentencing guidelines. In response
to their report, the government in 2008 introduced plans for a
“US-style sentencing grid,” as part of the Victims and
Witnesses Bill.[xlvi] The Bill has already caused heated debate
and is scheduled for discussion in the upcoming 2008-09 session.[xlvii]
Conclusion
It
is hard to imagine how the UK
bench and bar have absorbed these monumental changes in their criminal
enforcement paradigm. These critical
steps cry out for a sustained effort by the US
defense bar to render assistance to their UK counterparts in terms of our
jurisprudence and our best practices.
Tally ho!
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