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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
Fraud, money laundering and embezzlement, often referred to as ‘economic crimes’, cost UK businesses an estimated £40bn a year, according to a new study endorsed by the Home Office. Research by BDO Stoy Hayward shows that the cost of fraud is certainly high and increasing: frauds worth more than £400m were registered in the first six months of this year, compared with just over £330m for the whole of 2003 (although the number of frauds remained constant).
Ministers are concerned, particularly because some of the most prominent fraud prosecutions have led to acquittals, and are planning to introduce new legislation (including, for the first time, a statutory definition of ‘fraud’) to make it easier to convict because of the impression that fraudsters are laughing all the way to their Swiss banks.
In many cases, criminal prosecutors use crimes that are easier to prove but which carry lower sentences (for example theft and deception). Further weapons in the prosecutors’ armoury are expected to be included in the Queen’s Speech next month, with the definition of ‘fraudulent trading’ being extended to individuals, and there will be a new offence of possessing equipment to commit frauds (such as possessing personal financial information belonging to others). Following pressure, the Government has also decided to retain the offence of ‘conspiracy to fraud’ – the second most frequent charge levied against fraudsters (after the offence of ‘fraudulent evasion of VAT’).
This impression is partly misleading, as the Serious Fraud Office (SFO) has a relatively good success rate for most frauds it prosecutes. Similarly, and without fanfare, the civil courts have created a hugely effective set of procedures that allow businesses in the UK to don the investigator’s mantle and seek speedy recovery and justice against fraudsters.
Civil fraud prosecutions are a growth area and judges are surprisingly supportive of businesses that make use of this avenue to thwart fraudsters.
The courts recognise that going to the police with this sort of crime is not always effective because of the hurdles faced by businesses. These include:
- Often the police are not that interested in prosecuting corporate fraud. With limited resources, not surprisingly most police officers will concentrate on the crimes where the victims are human and the effects of the crime personally devastating. Well-resourced businesses come near the bottom of the force’s priority list for police time. Only in the last couple of years has corporate fraud been recognised as one of the priorities for the SFO, and it will only become seriously involved in frauds of more than £5m.
- If the police do investigate, it will be highly disruptive, probably with many files and computers seized for forensic analysis. Also, the business will not see many of them back for months, whether the case requires them or not.
- It will take several years to recover the money (for instance, following the collapse of Versailles in 1999, victims have only this year been able to start proceedings to get a recovery from the directors).
By contrast, English civil law makes this country an excellent jurisdiction for bringing civil cases and also as the base for tracking and recovering assets internationally. The civil route allows victims (usually companies, but occasionally private individuals) to secure court orders that are almost draconian in their scope to seize assets and raid premises. Also, the English courts are prepared to open up suspects’ bank accounts to help the victim find their stolen money and recover it.
The English court orders are treated with a high degree of credibility in most overseas jurisdictions (which is inevitable, with the more complex frauds invariably having an international element), and the UK benefits from reciprocal enforcement treaties which allow it to enforce its orders in many of the offshore jurisdictions where crooks stash their loot.
In addition to allowing a fraudster’s assets to be frozen within days, often a civil judgment will be obtained within 12-15 months, with success more likely because of the lower burden of proof.
There will also be a punishment element, as the fraudster will have to pick up the costs if found guilty. Similarly, they will go to jail through contempt of court if they lie or destroy evidence, while the evidence can (with the judge’s permission) subsequently be passed to the police for a follow-up criminal case. One client was able to get back more than £6m of defrauded money within six weeks through the civil courts. The subsequent criminal case landed the fraudster a sentence of over four years.
The corollary of this encouragement of civil cases is that English judges are very tolerant of clients instructing investigators to seek evidence for the prosecutions. This has seen a corresponding growth in tertiary industries, including accounting and computing forensics, surveillance, private investigators undertaking covert investigations, telephones being tapped (in an employment context) and computer traffic being monitored.
However, there has to be some care with how the material is obtained, both from the legal and reputational viewpoints. For instance, courts do not particularly like people going to the extent of trampling over someone’s human rights and will be particularly upset if there is a failure to disclose to the judge any relevant investigative methods.
Whatever new legislation emerges from the Government to combat fraud, for most businesses the first avenue for the prosecution of fraud will continue to be the civil courts to, at the very least, maximise the recovery of assets and secure evidence. The criminal route should, for most cases, come second because of its inevitable slow pace.
The Government is concerned about the ability for the criminal authorities in the UK to secure convictions for fraud, and in its forthcoming Fraud Bill it is reported to be adding further weapons for prosecutors, with the definition of ‘fraudulent trading’ being widened as well as a new offence coming into being of possessing equipment to commit frauds (such as possessing personal financial information belonging to others).
This may help, as research by BDO Stoy Hayward shows that prosecutors currently frequently resort to charging fraudsters with easier to prove crimes carrying lower sentences (such as theft and deception).
BDO’s research into all criminal fraud cases reported since January 2003 also raises the question of whether sentences are sufficient, given both the severity of the crime and in order to have a deterrent effect. Certainly, it is the norm for a convicted fraudster to receive a custodial sentence.
However, few receive the seven years handed out earlier this year to former Goldman Sachs PA Joyti De-Laurey for stealing £4.4m from her bosses’ private accounts. As the attached chart shows, most fraudsters will escape such a sentence. Above average also are the sentences recently given to the main directors of Versailles, of six years each, for what judge Mr Justice Jackson described as “a massive fraud” and “a grand and evil scheme”, which cost its associated traders £23m and others many millions too. It is hard to see a US judge finding that a six-year sentence fitted such a large fraud. For example, in March tax specialist James Olis, a mid-ranking executive at Dynegy (Enron’s smaller rival), was jailed for 24 years over his part in a $300m (£162.4m) accounting fraud. (And in the US the sentence you get is typically the sentence you serve.)
Given that fraud, including software and branded goods counterfeiting, are areas increasingly being taken up by organised crime (partly to avoid the risks and sentences associated with the traditional areas of robbery and drugs), making it easier to prosecute fraudsters is unlikely to stem the rising problem of fraud unless the penalties do ensure that it is a crime that does not pay.
Certainly, the typical fraud at the moment continues to be centred around directors or senior employees stealing from their own businesses, with personal greed or domestic difficulties their driver.
However, sophisticated criminals realise that more money can be made by donning a suit and tie, rather than a balaclava. The signs of this trend towards a greater undertaking of economic crimes by organised criminals are already present. Given that a fraud can be at least as devastating to its victims as a robbery, sentencing policy needs to be seriously reviewed to ensure the penalties in this growth area are in line with other crimes of the same magnitude.