A New Era of Enforcement, Contributed by Natalie Roberts, Lawrence Graham LLP
By Natalie Roberts, Lawrence Graham LLP
The Bribery Act 2010 has been hailed as the biggest overhaul of Britain’s bribery laws in more than a century and brings the UK’s anti-corruption laws into line with North America and Europe. Big businesses with multiple offices and international operations are most at risk in areas such as the new corporate offence of failing to prevent bribery, facilitation payments and director liability.
Individuals can be sentenced to a maximum of 10 years for paying or receiving a bribe and companies can face fines and possibly also a permanent ban from tendering for government contracts across the EU. The Bribery Act has now been in force for two months, but a QBE survey shows that half of businesses have taken no action at all.
Is it likely that the enforcement agencies will take a tough stance on such businesses or, in this new era of consolidation and regulatory reform, are they spending more time trying to save themselves?
The Enforcement Bodies
The Financial Services Authority (FSA) and Serious Fraud Office (SFO) have been tasked with policing the Bribery Act. The SFO must prove bribery to a criminal standard, but the FSA need only show that companies do not have tight enough procedures and that bribery could have taken place. The FSA and SFO are eager to bring at least one or two successful prosecutions or enforcement actions in the next 12 to 18 months, if not sooner. No doubt they have already identified some promising cases and are actively gathering intelligence.
However, after a series of u-turns, policy changes and Whitehall infighting, these financial crime-fighting bodies have been seriously weakened. Some critics have questioned whether they now have the necessary resources to effectively police the Act and other anti-corruption laws.
With the aim of “fixing” the financial system, the coalition Government last year announced a consolidation of the economic crime enforcers and a shake-up of the financial regulators. The plan outlined a new Economic Crime Agency (ECA) which would be created from parts of the Office of Fair Trading, the enforcement division of the FSA and all of the SFO, while financial regulation would no longer be shared between the FSA, Bank of England (BoE) and the Treasury, but would be centralised under the control of the BoE.
A year on and the Home Office is now tasked with leading the reforms and is in charge of creating a new body called the National Crime Agency (NCA).1 This new Agency will be a specialist police force replacing the Serious Organised Crime Agency, the Child Exploitation and Online Protection Centre and the National Policing Improvement Agency by 2013. It is intended that the NCA will co-ordinate the agencies that tackle economic crime and will be tasked with fighting organised crime, cybercrime, fraud and illegal immigration. The NCA will co-ordinate information across all police forces and borders and NCA officers will have police, customs and immigration powers.
The Home Office has also taken over the project of creating the ECA from the Treasury. The ECA may be incorporated into the NCA. It is unclear how these two bodies will interact, but the Home Office has made it clear that the NCA is to take the lead on organised crime.
The Home Office was considering plans for a transfer of the SFO’s responsibility for the investigation of complex fraud cases to the NCA and responsibility for taking cases to court to the Crown Prosecution Service. The proposals were heavily criticised and after much lobbying by senior politicians and the SFO director, Richard Alderman, the Home Office and Government appear to have changed their plans. The Home Secretary, Theresa May, confirmed in a recent press interview that the SFO would not be forming part of the new body. The SFO is seeking clarification of its status following this u-turn. Ms May said that she would review in due course what the appropriate relationship is with the SFO and the NCA. The FSA’s enforcement and financial crime division as well as the OFT will similarly not form part of the NCA.
As a result of the organisation’s uncertain future, the SFO has faced a spate of high-level departures, including Vivian Robinson, the SFO’s general counsel and Charlie Monteith, the regulator’s head of policy and the man who led the agency’s work on the Bribery Act. Additionally, a selection of senior investigators have left, and the agency is now looking to fill approximately 50 vacancies.
The SFO is notoriously overstretched, its budget having been cut from £53 million in 2008 to £34 million this year. It has ring-fenced just £2 million against enforcement actions and is currently working on over 80 cases according to its website.
The Future of the SFO
The Home Secretary has confirmed that the SFO will not be put on a 12 month probationary period, although she has not said what the future holds for the organisation. Alderman is now lobbying for greater legal powers making it easier to secure convictions and funding in order to rebuild the SFO. The Attorney General is looking into allowing the SFO to enter into deferred prosecution agreements, and to use tools such as plea bargaining with defendants as well as financial penalties to try avoiding costly and time-consuming trials. The SFO also plans to push for the Government to review the current judicial review system, under which defendants or third parties can go to court to challenge its investigations, leading to lengthy delays. However, one of Alderman’s first priorities must be to recruit up to 50 investigators and lawyers to replace all those who have recently left. A difficult task when the SFO has little resources to offer competitive salaries compared with those paid in private practice.
As with the SFO, the FSA’s future is also uncertain. Chancellor George Osborne launched a consultation “A New Approach to Financial Regulation: Building a Stronger System”2 in February 2011 which provided details on the Government’s proposals to abolish the FSA and transfer financial regulation back to the BoE and three new focused bodies: the Financial Policy Committee (FPC) responsible for macro-prudential supervision, the Prudential Regulation Authority (PRA) covering regulation of financial services firms and the Financial Conduct Authority (FCA) responsible for the regulation of more than 24,000 firms. The consultation document outlined that the FCA is due to take over the FSA’s financial crime remit in early 2013 as part of a reorganisation of financial services regulation.
The FPC has been heralded as the innovation that will fill the gaps revealed by the financial crisis. It will ensure financial stability by monitoring broader risks in financial markets and identifying excesses and vulnerabilities, while the PRA will focus on the largest institutions and will interact regularly with them and challenge them. The idea is to shift away from rule based, box-ticking to judgement based regulation.
In its July 2010 consultation paper, the Treasury had said that it would consider transferring responsibility for prosecuting offences such as insider dealing to the ECA.3 In February, an article written by Margaret Cole, interim managing director at the FSA’s conduct business unit, talked about the FSA’s criminal enforcement powers and how they would be transferred to the FCA.4 However, documents leaked to the press in May revealed that the Home Office is proposing to transfer responsibility for enforcement cases such as insider dealing to the NCA. The split proposed by the Home Office may be in order to separate out investigation of regulatory breaches from criminal cases. Critics have said that enforcement should stay with the regulator especially given the progress that the FSA has made on pursuing insider dealing cases under Cole’s leadership. They are wary that the NCA will focus more on high-profile cases such as counter-terrorism and drug rings with financial crime enforcers struggling for resources.
Tracey McDermott, the FSA’s acting director of enforcement and financial crime, has said that the new agency would pursue the same key financial crime objectives as the FSA has done. These are: “1) to keep crooks out of finance; 2) to encourage industry to strengthen its defences; and 3) to educate and warn consumers about the dangers they may face.”5
McDermott announced the FSA’s review of banks’ controls over higher-risk business relationships and situations.6 She sent a clear message to private banks that the FSA and, in turn, the FCA will not accept banks’ financial crime controls that are weak and failing to meet the requirements. Banks were criticised for failing to 1) take allegations of corruption made by credible sources seriously and 2) spot serious allegations of corruption found by simple Google searches. The report’s findings concluded that some banks appeared unwilling to turn away, or exit, very profitable business relationships despite there being an unacceptable risk of handling the proceeds of crime. The report concludes that banks continue to ignore or circumvent the legal and regulatory framework in order to pursue lucrative clients and that a number of the weaknesses identified are the same as, or similar to, those identified in the FSA’s report in March 2001.
The FSA, in contrast with the SFO, has remained relatively intact despite the recent Government u-turns. It has an enforcement budget of £68 million. It secured its first boiler room fraud conviction in June this year7 and it has recently started bringing criminal insider-dealing cases and in 2010/11 achieved five criminal convictions. It also levied 15 penalties for market abuse in 2010/11 and with its marked effort to bring more prosecutions, has 13 cases set for trial before April 2012. The FSA is determined that the UK banking system should be clean and not a place where criminals can launder money and has said that it may undertake a follow-up thematic review of the banks’ systems and controls. The FSA warns that as a result of its review, it has already referred two cases to its enforcement division and will not waste any time referring more companies found to be failing for enforcement action.
A Realistic Approach
In some aspects, the Bribery Act goes much further than other anti-corruption laws. For example, facilitation payments, which are payments made to foreign officials in order to secure basic, non-discretionary services and which are permitted under the U.S. Foreign Corrupt Practices Act of 1977, are illegal. The SFO has recognised that these payments are a global problem that cannot be solved overnight and that the process of eradicating such payments may take a few years to fully implement. Alderman has said that the SFO’s aspiration is that companies generally should move towards zero tolerance over a period of time, and the Government guidance states that while facilitation payments remain illegal, payments not considered “serious” may not attract prosecution.
Despite its internal turmoil, the SFO is pooling its resources and maintaining a strong public image. Along with allowing itself a grace period in which to bring enforcement actions against businesses paying facilitation payments, it is encouraging companies to whistle-blow on their foreign competitors which beat them by paying bribes. Through these and other measures, the SFO is delegating a great deal of its remit and working with the UK and foreign governments to try to stamp out official corruption. Ministry of Justice officials have pledged to encourage local embassies to assist in the crackdown of extortion. Diplomatic complaints, visa bans for corrupt officials and aid cuts could be used as a means to stop bribery and corruption.
Alderman has said that any businesses facing demands for bribes should ask the Government for help. He is encouraging businesses to work with others in their sectors to stop the demand for bribes and to co-operate with the authorities. The SFO will allow a grace period for compliance as long as companies adopt an open policy with the agency. It has said that it is less likely to open an investigation if the company has communicated to the SFO that it is committed to zero tolerance in due course. In the event bribery is discovered, the SFO is also encouraging firms to self-report, in which case, they may only be subject to civil penalties if they can persuade the SFO that they are committed to reform and that senior people were not personally culpable. The SFO has also said that it will be working closely with the FSA and that it could pass on relevant information to the regulator. FSA-regulated firms should therefore consider whether to approach the FSA before passing through the SFO’s doors.
Forces to be Reckoned With
In an age where there is a lot of momentum to prosecute white collar crime and to prosecute those found guilty of paying and receiving bribes, businesses would be foolish to ignore the recent reforms and the Bribery Act. Despite the recent political turmoil, with the coming into force of the Bribery Act, the FSA and the SFO have maintained their strong public image. Now, armed with the tools to combat economic crime, they are still a force to be reckoned with.
Lastly, we expect that it will soon be very common for major banks, governments and international institutions to insist on anti-bribery procedures being in place before investing, lending or doing other business with counterparties. These procedures are very quickly becoming the norm, rather than the exception, and those without them in 12 months time may find themselves both vulnerable and rather lonely.
Natalie Roberts is an associate in Lawrence Graham LLP’s Dispute Resolution practice and a member of its anti-corruption group. Telephone: +44 (0) 20 7759 6673; E-mail: firstname.lastname@example.org.
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