A Christmas note on the SFO - what will 2019 bring?

21 December 2018

The Serious Fraud Office (SFO) has had a mixed year. Of particular note, on 28 August 2018, Lisa Osofsky began her five-year term as Director.

Lisa is a very approachable individual and is keen to work with companies to resolve issues. Her American prosecutorial background and keenness to use tools such as artificial intelligence will no doubt have an impact on what cases are brought.

Nevertheless, two recent failures stand out. On 26 October 2018 the High Court ruled against the SFO and confirmed that charges brought by it against two corporates – Barclays PLC and Barclays Bank PLC – in connection with a capital-raising and loan with Qatar in 2008 could not be reinstated, having already been dismissed in the Crown Court on 21 May 2018.

More recently, on 6 December 2018, the SFO’s case against two former executives of Tesco was thrown out of court as it was found that the defendants had no case to answer and that "in certain crucial areas the prosecution case was so weak it should not be left for a jury’s consideration". As with the Barclays proceedings the SFO had unsuccessfully appealed the original decision.

These setbacks also came in the context of the 2016 collapse of the SFO’s case against five brokers in connection with the Libor rigging scandal. Indeed, it was only in 2017 that the governing party went into a general election on a manifesto promise to abolish the organisation and roll it into the National Crime Agency.

However, it has not all been bad news. On 30 November the SFO was able to proudly announce the successful conclusion of its first Deferred Prosecution Agreement (DPA), entered into with Standard Bank PLC. This was no small matter. Standard Bank PLC had to pay nearly $26m in fines and disgorged profits and $6m of compensation to the Government of Tanzania and then be subject to close monitoring by the SFO for the next three years. The SFO has agreed four DPAs since their introduction in 2014, netting the UK Treasury more than £670m in financial penalties.

Moreover, on 19 December it was revealed (after reporting restrictions were lifted) that the SFO had secured five convictions of a mixture of executives and a subsidiary company of the French engineering firm Alstom. This was a significant victory, coming after a retrial was called because a jury was not able to reach a verdict against one defendant in 2017. However, this case did not represent all good news for the SFO because alongside the five convictions there were six acquittals, leading the counsel of one acquitted defendant to observe: "The Alstom trials have produced a mixed set of results for the SFO… the acquittal of a number of senior executives calls into question the SFO’s approach to the prosecution of corporate crime".

The SFO is likely to have drawn a very simple conclusion from this recent run of form: prosecutions against companies or individuals are difficult and costly (it was reported that the SFO spent more than £10m bringing their failed case against the former Tesco executives and it took more than nine years to obtain the Alstom convictions) but the threat of such prosecutions might still be used to great effect if it can be leveraged to encourage companies to pay large fines and undertake comprehensive reforms of their businesses under DPAs.

In a reflection of the SFO’s current focus, senior SFO staff have been making the rounds in the City giving speeches on ways companies can improve their chances of agreeing a DPA. This is further evidence that in the future the SFO is going to consciously shift its focus more in this direction. In particular:

  • On 8 November, Lisa Osofsky gave a speech to the Trace European Forum where she encouraged companies to "[t]ell us something we don’t know" and be as forthcoming as possible with information in order to improve their chances of agreeing a DPA. Osofsky also took this opportunity to flag that there would also be an increasing focus on compliance in the SFO’s investigations in the future. This is likely to result in the SFO hiring some compliance specialists and providing dedicated training to prosecutors to better understand this aspect of businesses.
  • On the same day the joint head of fraud at the SFO, Hannah von Dadelszen, gave a speech in which she gave companies the stark advice (also aimed at encouraging companies to be as transparent as possible): "engage now or hide behind smoke and mirrors at your peril".
  • More recently on 6 December Matthew Wagstaff – joint head of bribery and corruption at the SFO – urged companies seeking a DPA to waive privilege over factual accounts saying: "the refusal to do so may well be incompatible with an assertion of a desire to cooperate".

The SFO therefore appears to be making a concerted push in this direction and an attempt to shift a great deal of the burden of work on to companies. In many ways this is not new – Sir Brian Leveson’s comments on the 2017 DPA with Rolls Royce heavily emphasised how important cooperation and transparency were for companies seeking to agree them – but it is interesting to see this so clearly form part of a new strategy of engagement and an attempt to "nudge" companies.

As 2018 comes to an end and we look back at the changing enforcement landscape in the UK it is therefore easy to discern a trend towards encouraging more firms to self-report and an increasing reliance on DPAs for the SFO to actually achieve some results and extract some sort of punishment or value out of companies.

However, if more and more prosecutions fail to get off the ground will the threat from the SFO remain big enough to incentivise companies to pursue DPAs, given the enhanced cooperation that entails?

More powers, please

The House of Lords Bribery Act 2010 Committee was appointed on 17 May 2018 and is currently receiving oral evidence on the effectiveness (or not) of the legislation. The Bribery Act 2010, and in particular the Section 7 offence of failure to prevent bribery, is a common starting point for a DPA. Section 7 offences were included in the DPAs for both Standard Bank and Rolls Royce, for example. Section 7, along with the recently introduced failure to prevent tax evasion offence in the Criminal Finances Act 2017, represents the recent, gradual trend towards "strict liability" offences in the UK’s attempts to expand corporate criminal liability.

Instead, UK law primarily relies on the "identification principle" – the idea that the acts and state of mind of those who represent the directing mind and will of a company can be imputed to that company. In other words – a company can commit a crime where its directors (its "mind") cause it to commit one.

The case of Tesco Supermarkets Ltd v Nattrass [1972] AC 153 helped bring clarity to this principle. It restricted its application to the actions of the Board of Directors (including the Managing Director) and, in some cases, other superior officers who carry out functions of management and speak and act as the company.

It appears that Lisa Osofsky and the SFO consider that this legal state of affairs is not good enough. The law around corporate liability is complicated and does not give them the tools they need to successfully prosecute companies, a conclusion borne out somewhat by recent results, and prosecutors in the UK can be "hamstrung" when prosecuting corporate entities. An obvious part of the problem is that the SFO tends to pursue larger (often public) companies, but as companies grow in size it becomes increasingly difficult to pin any kind of "controlling mind" to them – responsibilities are simply too diffuse across too many individuals and offices.

Addressing this issue, Osofsky appeared in front of Bribery Act 2010 Committee in November and called for an expansion of "failure to prevent" offences to cover business crime more widely in the UK. In an ideal world, it appears that Osofsky would like the SFO to be able prosecute on a vicarious liability basis, which would bring the UK much more in line with America, but she seems to accept the UK legal system would only stretch to "failure to prevent" offences, at most.

Osofsky has also recently appeared in front of the Commons Justice Committee, where she again called for expanded corporate criminal liability offences, and she also explicitly set out her hope to adopt a more American approach to cases, trying to "flip" insiders at companies and persuade them to co-operate with the SFO’s investigations. With this approach the SFO hopes to significantly reduce the amount of time it currently takes to conclude investigations. However, the "plea bargain" approach requires a level of prosecutorial freedom that is not really a feature of the UK legal environment and – as considered above – there may not be enough of a threat of successful prosecution against individuals to give this approach any teeth.

2019 therefore holds many more interesting developments in store that will continue to shape the future of SFO prosecutions in the UK:

  • We wait with anticipation to see how the trial of four Barclays executives progresses. This is due to be heard in Southwark Crown Court in January 2019.
  • The SFO is currently weighing its options in respect of a third former Tesco executive. Having had the case against two others dismissed so pithily it will be interesting to see whether the authority’s appetite for the prosecution is diminished. It will also raise the question of which outcome would be more damaging to the SFO’s image, dropping the case entirely or (potentially) having it dismissed out of hand in the courts.
  • The second DPA agreed by the SFO, with the anonymous XYZ Ltd, may come to an end and be successfully concluded. This was agreed on 8 July 2016 and was intended to remain in place for a minimum of two and a half years, at which point it will be assessed whether XYZ Ltd has fulfilled its obligations and the proceedings discontinued, much like Standard Bank managed to achieve this year.
  • There is also an ominous silence around executives from Rolls Royce. The company agreed an astonishing fine of over £497m in January 2017 and yet criminal proceedings against the relevant individuals have not properly started. 2019 might be the year that these finally get underway in earnest, but it remains to be seen whether this will break the SFO’s run of poor form when it comes to the prosecution of individuals.
  • The SFO suffered another setback in its case against ENRC in September this year, when it lost many of its points about access to privileged documents on appeal. It also still has to make a decision publicly about whether it will actually bring charges against the company itself or any of the individuals within it.

It seems that the future of prosecuting individuals and firms remains murky. However, firms should be conscious of this renewed vigour of the SFO in two key, interlinked areas: (1) pushing more companies towards agreeing DPAs (a process that it explicitly aims to speed up) and (2) attempting to strengthen the law of corporate liability and subtly shift prosecutors’ powers to be more like those in America.

The SFO remains some way off from enjoying the discretion and power afforded to its American counterparts, but that may not prevent it from seeking to adopt some of their tactics.