White collar crime
Do not pass Go
17 December 2001
Regulatory risk: new SFO Director signals changes in how the agency will treat companies in the future
8 March 2013
1 July 2013
21 August 2013
4 October 2013
12 July 2013
If you thought that the dramatic conviction of Alfred Taubman, the former chairman of Sotheby's, in New York for colluding with apparent arch-rivals at Christie's to fix prices was one of those 'only in the US' moments, then maybe it is time to think again. Ministers have just published more details about new, sweeping powers to jail company directors who are caught stitching up markets in this country.
US commentators observed that Taubman, who is the largest shareholder in Sotheby's and reported to be worth £500m, is the biggest figure in the financial world to be convicted - he faces a maximum three-year jail sentence - since several of Wall Street's leading bankers were imprisoned for insider trading in the late 1980s.
Jeremy Cole, a partner in Lovells' international fraud and asset recovery department, draws a similar analogy in relation to the moves to criminalise cartels on this side of the Atlantic. Cole was involved in the Department of Trade and Industry (DTI)/ Guinness affair. "It was a shock to the system when people were pursued in criminal terms for insider trading, and it led to a dramatic change in culture," he recalls. "In that case it was about mergers and acquisitions, and now we're talking about price-fixing. This could mark the beginning of a new era depending upon how enthusiastically the authorities prosecute."
Government proposals were originally published under the guise of the Enterprise Bill four months ago, and at the end of last month the competition minister Melanie Johnson fleshed out the plans. She proposes that the new criminal offence of operating a cartel should carry a maximum custodial sentence of five years and fines may be proposed in addition, or as an alternative in less serious cases.
"The City of London is taking this very seriously indeed," says Monty Raphael, senior partner at Peters & Peters. He says that a number of major corporate firms are putting together referral teams of lawyers who might be able to deal with these problems as they arise. Such teams are multidisciplinary groups drawn from white collar crime specialists and competition law experts. "I don't anticipate a rush of work, but I can envisage one or two very high-profile prosecutions," he says.
There is considerable concern from business crime lawyers about the encroaching reach of criminal law into the corporate sphere. Adam Cowell, a partner in Irwin Mitchell's business crime unit and secretary of the International Criminal Law Association, says: "We're going too far down the road of regulating business by criminal sanctions. There are other ways of doing things through regulatory, disciplinary and civil proceedings with a stigma attached to each of them without having to send people to prison."
Russell Jones & Walker partner Rod Fletcher views the new powers in the context of other developments in criminal law, such as new sweeping powers to address money-laundering under the Proceeds of Crime Bill, and corporate killing legislation. He believes that it represents a further "tightening of the screw". He says: "It's a different legal environment to the one that existed a few years ago and the changes all appear to be in the one direction - an increase in legislation and direct Government involvement in the criminal process."
There was considerable consternation when the Enterprise Bill was first published, as ministers seemed to be offering guilty directors no option other than prison. According to Fletcher, such a proposal would have been "absolutely draconian". He says: "I would have been absolutely staggered if that was what was intended. There's no other offence apart from murder which has a mandatory sentence."
But Robert Goldspink, senior litigation partner at Morgan Lewis & Bockius and a fraud specialist, believes that the five-year sentence is somewhat arbitrary. He argues that it is "out of kilter" with the penalties for fraud, where an offender can land up to 10 years inside if deception is involved.
Goldspink believes that such inconsistency could lead to odd outcomes. "If I defraud you of your pen I can get up to 10 years," he says. "But if I defraud the whole marketplace, which means that you have lost the opportunity to buy that pen on proper terms and conditions, I get five years."
Competition lawyers are also bemused by the new powers coming only 18 months into a new regime of civil penalties provided for by the Competition Act 1998.
Allen & Overy competition partner John Wotton says that the development marks a new era of enforcement. "It will change fundamentally the whole nature of the relationship between the Office of Fair Trading [OFT] and companies and their executives," he says, although as the Minister for Competition, Consumers and Markets Melanie Johnson pointed out last month, it will be the Serious Fraud Office (SFO) and not the OFT that will be the lead prosecutor.
Nonetheless, Wotton believes that inevitably, there will be a change in culture. He compares OFT officials to the police and believes that the degree of voluntary information that would be expected would be much less.
Wotton also sees a potential conflict arising as a result of criminal prosecutions against individuals. "Although a company will be concerned about defending its position from any claim of breach of the company law, the directors will be protecting their own position in relation to criminal liability," he says. He believes that the new criminal sanctions are "perhaps premature", given the relative novelty of the Competition Act.
So far, there have been only two fines under that legislation - a whopping £3.21m against Napp Pharmaceuticals, and later in the year a £1.33m fine against Aberdeen Journals. The OFT has signalled that it will be tougher on companies breaching competition law and it can impose fines of up to 10 per cent of UK turnover for up to three years.
The DTI provided examples of the kind of behaviour that it wants to rid the market of - such as the 10 bus operators in the North West who ran price-fixing and market-sharing agreements to keep fares up. Another example was the price-fixing agreement to push up the prices of animal feed Lysine that was stopped as a result of an order by the Restrictive Practices Court. In the US, the parent companies and some of their executives were fined a total of more than $120m (£83.96m) by the Department of Justice in the Lysine scandal. Three executives were fined up to $350,000 (£244,892) and served prison sentences of up to three years.
The issue of proving dishonesty in the conduct of directors is one that causes some unease to practitioners. Goldspink argues that the concept of dishonesty is "sometimes shifting sands" to fraud lawyers. "You could say it's the proverbial elephant on the doorstep," he says. "It's very difficult to define, but easy enough to spot when it's before you, but that is not necessarily the case."
Goldspink has compiled a list of six scenarios offering a sliding scale of ambiguity. Borderline examples include the chairman who receives a document sent to him spelling out the nature of a cartel that he is aware of but does nothing about. Another concerns the director of human resources who traditionally leaves all matters to the marketing director and chief executive, but is aware of some kind of agreement.
Cowell expresses relieved surprise that a finding of dishonesty is at least present in the proposals. He points to the Law Commission's report on fraud, which he believes attacks the concept, and points to the criminal negligence test in the Proceeds of Crime Bill. He says: "The concept of dishonesty is in there now - but will it be there in 10 to 15 years time, once the offence is on the statute books?"
Johnson says: "The offence will be tightly defined, ensuring that the majority of honest businesses will have nothing to fear." But one lawyer says: "It's a bit of a shame about that minority of honest businesses."
Raphael expects the SFO to be targeting high-profile companies because, as he puts it, the machinery of investigation is so expensive to deploy. As a consequence, the logic of prosecutions will have to be compelling not only to the competition authorities, but to the voting public as well.
"If the competition authorities think that compliance is lax and they want to send out a message, this is the most effective way of sending one. But these measures, however desirable, will be still-born unless someone is successfully prosecuted. Otherwise it will just be tokenism," he says.