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M&A Weekly Update: fraud, bribery and money laundering sentencing guidelines; limited liability partners as workers; and more
2 June 2014
The conviction of former WorldCom boss Bernie Ebbers provided yet another high-profile scalp for the US enforcement agencies. It should serve as a further wake-up call for any director of a multinational company, particularly if their company is listed in the US. It sends out a clear message that corporate crime will not be tolerated. But how does this affect the UK?
The Financial Services Authority (FSA) has already shown that it is not afraid to take enforcement action and impose heavy penalties on UK companies. However, despite its apparent keenness to flex its regulatory muscles, there has nevertheless been a reticence to bring criminal proceedings itself. This may be because the FSA has encouraged the recruitment of those with civil, rather than white collar, crime experience. There is a huge difference between the FSA taking regulatory enforcement action and imposing fines on companies, which in real terms may have very little impact on the financial balance sheet, as opposed to instigating criminal proceedings where there is an increased standard of proof and the personal ramifications for those controlling the companies could even result in their imprisonment.
In the UK, a fraud of the magnitude of WorldCom would, of course, be investigated by the Serious Fraud Office (SFO). The SFO, in its 2004 Annual Report, provided indicators as to some problems in the investigation and prosecution of fraud. In 2004 the SFO reported a 63 per cent conviction rate. It is clear that the cost and time of investigating and prosecuting fraud cases is significant. There are a number of examples to illustrate this, and one only need look at the SFO's unsuccessful prosecution of executives of Wickes to provide an indicator of the problems. Following two trials, the first of which lasted over 11 months, none of the five defendants was convicted. The financial costs involved in investigating and prosecuting such a case ran into the millions, and in addition to this the Government had to pay the defendants' costs.
In the WorldCom case, criminal charges were filed in August 2003 in Oklahoma against Ebbers and others. Federal criminal charges followed in March 2004. Despite being one of the most high-profile white collar crime prosecutions in the last decade, the Ebbers trial itself, which took place before a jury, took six weeks to reach a verdict. In contrast, in the UK the SFO Annual Report 2004 stated that the current average period of investigation is 19.5 months and the trial phase averages out at 17 months.
Although a Fraud Bill is now on the political agenda to create a single statutory offence of fraud, it is still unlikely to reduce the time it takes to investigate and prosecute allegations of fraud. The SFO will no doubt be encouraging the Government to retain the current common law of conspiracy to defraud. This has statistically been the preferred choice of charge since the creation of the office. The argument for retention is to provide flexibility in dealing with a wide variety of frauds, but in real terms it only creates a platform for confusion and will not bring about savings in either time or cost.
Sentencing regimes in the UK and US differ significantly, not least because in the UK plea and cooperation agreements are not allowed. In WorldCom, Ebbers is facing up to a total of 85 years in prison and potentially huge fines when he is sentenced on 13 June. In the UK, the sentence likely to be imposed for a comparable offence of conspiracy to defraud of the magnitude of the WorldCom case would be around 10 years following a trial.
It is hoped that the UK government will not be influenced by this conviction to introduce radical changes to white collar crime legislation for the sake of appeasing public perception. Directors should not be fooled that it is only the US regulators that are actively investigating significant frauds.
Gerallt Owen, head of fraud and financial crime, Eversheds