Serious Fraud Office or Seriously Flawed Office: Why the SFO is suing without success

June 8, 2020

3 min read

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What's going on here?

The SFO is failing to prosecute big companies for fraud due to the legal requirement to identify executives as the “directing mind and will” of the company.

What does this mean?

Recently, three Barclays bankers on trial for fraud were acquitted following a seven-year case. This has called into question the SFO’s ability to prosecute large corporations under  UK fraud legislation. Under the Fraud Act 2006, the SFO must meet two difficult conditions to prosecute companies. Firstly, a person having its “directing mind” must be identified. Secondly, this person must be proved to be involved in the fraud. The first condition, or “identification principle”, is hard to meet because decisions in big corporations are usually taken by mid-level managers, who are unlikely to be the “directing mind”. In fact, the threshold is so high that even very senior board members may not meet it. The second condition, which requires evidence of criminal conduct, also needs to be met. However, in the Barclays case, the SFO decided to sue on the basis of pretty weak criminal evidence. Both the law, and the SFO’s decision-making, therefore, can be blamed.

What's the big picture effect?

The SFO wants to reform the “identification principle” to make prosecutions easier. In 2017, the UK government began a consultation which invited views on whether this principle hinders criminal enforcement against big companies. It also explored options for reform, which fell broadly under two possibilities. The first possibility is to retain the existing law but make more people in the company open to charges. The law can do this by either broadening the scope of the “directing mind”’ category, or simply making the company responsible for all its employees’ actions. The second possibility is to create a new offence of “failing to prevent economic crime”. This is the SFO’s preferred option. It would also mirror how the law criminalises bribery and tax evasion, where failure to prevent the activity is also criminalised.

There are several advantages to a new “failure to prevent economic crime” offence. Firstly, the consultation promulgated that it will be readily applicable to offending by large and small organisations. It will remove the hurdle of having to prove people are the company’s “directing mind”. Secondly, it is likely to encourage companies to put in place measures to prevent fraud in their corporate governance. It can do this by creating a defence to the crime. For example, section 7 of the Bribery Act 2010 acquits a company of bribery where it had adequate procedures to stop people committing bribery. The fact that these procedures were not followed doesn’t really matter. If it had them in place, it has a full defence. Similarly, a new offence coupled with a defence would encourage companies to have checks in place to prevent fraud.

This new offence may also increase the likelihood of out-of-court settlements. This can be a cost-effective way of ensuring that companies follow good governance. The SFO, as a public body, relies on Treasury funding, and the costs of litigation can be very high – over £10m in the Barclays case. Instead of choosing to prosecute a company, the SFO can arrange a Deferred Prosecution Agreement (DPA). Under a DPA, instead of being prosecuted, the company agrees to overhaul its compliance and pay a fine. DPAs have a good track record in securing compliance in both the “failure to prevent” bribery and tax evasion offences. In 2014, the SFO agreed a DPA with Standard Bank, and in 2017, with an anonymous company labelled XYZ Ltd. The use of DPAs may be similarly effective alongside a new offence for fraud cases.

The effectiveness of the SFO in prosecuting fraudulent corporate activity is clearly under the spotlight. The failed Barclays case shows how its decisions to prosecute can be criticised. However, the SFO is tied to the law. Reforming the “identification principle” is likely to be the key to improving the SFO’s successful prosecution rate as well as ameliorating corporate behaviour generally.

Report written by Arun Allen

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