Informed by U.S. Experience, U.K. Embarks on Major Anti-Fraud Law Initiatives
By Thomas E. Dwyer, Jr. 
Published: Newsletter of the ABA Criminal Justice Section's White Collar Crime Committee, August 2008
In a span of less than eight years the United Kingdom (UK) has completed, or come close to completing, the most significant overhaul of law, regulation and practice in the area of white collar criminal investigation and prosecution in its history. As discussed below, the entire United States anti-fraud statutory matrix, developed since the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO), has served as much of the basis for UK revisions in this short period of time. In further proof of this thesis, on June 10, 2008 the UK Attorney General released a compelling white paper it commissioned from former U.S. prosecutor Jessica deGrazia. DeGrazia completed a review of the UK Serious Fraud Office (SFO), a newly created office charged with responsibility for all major white collar investigations, and made recommendations on a variety of topics including investigatory tactics, disclosure, plea bargaining, sentencing, professionalism and training. Her conclusion, suggesting a revised UK investigation and prosecution model, was based in large measure on her comparison of two New York City prosecution offices and the SFO. Additionally, as recently as June 23, 2008, over 600 circuit judges in the UK expressed strong disapproval of the proposed implementation of US style sentencing guidelines in the UK. Without question we are — and for the foreseeable future will be — witnessing a wholesale export of US white collar criminal jurisprudence.
Aggressive New White Collar Crime Tactics
A. Revision of anti-fraud law
The most significant recent UK statutory changes undoubtedly relate to alleged fraudulent activity. Financial crime in the UK costs at least £13.9 billion annually, increasing to £20 billion when income tax and EU related fraud are taken into account. In 2002, after an exhaustive multi-year review, the UK Law Commission released its 105-page Fraud Report with the intent to encourage focus on an area of law reform that had long been debated by judges, prosecutors and defense counsel. The Commission’s report reflected “widespread concern that the current legislation [was] not fit for purpose in the 21st century.” Rather than a complex matrix of many fraud provisions, the Commission recommended one general fraud statute, writing that “[t]he offense of fraud would be committed where, with intent to make a gain or to cause loss or to expose another to the risk of loss, a person dishonestly . . . makes a false representation . . . willfully fails to disclose information, or . . . secretly abuses a position of trust.”
In November 2006, the new Fraud Act was approved, creating a legal definition and substantive offence of fraud. Section 12 of the Fraud Act clarifies the liability of company officers for offenses by the company, providing that if “persons who have a specified corporate role are party to the commission of an offence under the Act by their body corporate, they will be liable to be charged for the offense as well as the corporation.” Under the Act, while a defendant’s conduct must be dishonest and his intention must be to make a gain (or cause the risk of a loss to another), no gain or loss must actually be proven. Additionally, Section 13(1) of the Fraud Act minimizes the ability of UK company persons to rely on the privilege of self-incrimination, by providing that a person is not to be excused from “answering any questions put to him in proceedings relating to property, or . . . complying with any order made in proceedings relating to property, on the ground that doing so many incriminate him or his spouse or civil partner of an offence under this Act or a related offense.” However, the Act also provides that such statements are not admissible against the defendant.
Finally, adding to the complexity of current fraud law in the UK is the recent introduction of the Criminal Justice and Immigration Act of 2008 (CJIA). The CJIA allows the director of the SFO to approve the use of disclosure (discovery) powers where it appears that there may have been a corruption offense involving a foreign official. In turn, this will allow the SFO to compel British companies to provide evidence about alleged corruption abroad.
B. New and aggressive investigatory tools
A campaign to attack financial proceeds of alleged criminal activity began with the Proceeds of Crime Act of 2002 (PCA). Among the effects of the PCA were the creation of an Assets Recovery Agency; new provisions for the recovery of property obtained through unlawful conduct; provisions for search and seizure of cash suspected of having been obtained through unlawful conduct; and provisions for investigation and enforcement co-operation between the UK and overseas authorities. Perhaps the most noteworthy section of the PCA was Part 7, which created liability on the part of solicitors, accountants and insolvency practitioners who suspect their clients of tax evasion. Such practitioners are required to report their clients to the authorities without telling clients they have done so. Practitioners who do not comply with the Act are subject to a maximum penalty of 14 years in jail.
In response, in March 2004 the UK government released “One Step Ahead, a 21st Century Strategy to Defeat Organised Crime,” a white paper setting out plans for a new approach to tackling organized crime. The Serious Organised Crime and Police Act of 2005 (SOCPA) established the Serious Organised Crime Agency (SOCA), which came into being on April 1, 2006, and granted its members the power to compel individuals to co-operate with an investigation by producing documents and answering questions, noting “there are safeguards against self-incrimination and for the protection of legal privilege.” SOCA brought together the National Crime Squad, the National Criminal Intelligence Service, the investigative and intelligence branches of Her Majesty’s Customs and Excise on serious drug trafficking, and the Immigration Services responsibilities on organized immigration crime. Additionally, SOCA created “the mechanism by which a defendant can plead guilty and offer Queen’s Evidence in return for a discounted sentence on a statutory footing”; provided for the making of financial reporting orders; placed arrangements for providing protection for witnesses; and amended the Proceeds of Crime Act to “improve the effectiveness of the civil recovery scheme and ease the money laundering reporting requirements on the regulated sector.”
A further strategy introduced by the Serious Organised Crime and Police Act was the use of serious crime prevention orders, a new type of civil order, “capable of being imposed against individuals or organizations, covering a wide range of potential prohibitions or requirements…Breach of the order would be a criminal offense.” The Serious Crime Act of 2007 made official the existence of serious crime prevention orders, and clarified the Government’s position on inchoate liability for assisting and encouraging crime. Additionally, section 44 of the SCA created a new inchoate offense of “intentionally encouraging or assisting an offense.”
C. Corporate manslaughter
The law of corporate criminal liability has expanded throughout Europe in the last two decades, and has been the center of robust debate in the UK. One of the most controversial developments in UK corporate law has been the passage of the Corporate Manslaughter and Corporate Homicide Act of 2007 (CMCHA). Arising from a more general report on “Reforming the Law on Involuntary Manslaughter” released by the Home Office in 2000, the CMCHA is the result of almost a decade of discussion in the UK. Section Four of the Home Office report introduced the idea of “corporate killing,” as well as “enforcement action against a director or other company officer.” A draft of the Bill was introduced in 2005, and the CMCHA itself came into force in April of 2008.
Prior to the introduction of the CMCHA, the prosecution was required to identify a ‘directing mind’ at the senior level of a company’s management with whom the requisite intent could be found. The CMCHA “sets out a new offence for convicting an organization where a gross failure in the way activities were managed or organized results in a person’s death.” With the CMCHA, “rather than being contingent on the guilt of one or more individuals, liability for the new organization depends on a finding of gross negligence in the way in which the activities of the organization are run.” Gross negligence triggering liability is committed where “an organization owes a duty to take reasonable care for a person’s safety and the way in which activities of the organization have been managed or organized amounts to a gross breach of that duty and causes the person’s death. How the activities were managed or organized by senior management must be a substantial element of the gross breach.”
The so-called “management failure test” of gross negligence has been interpreted to mean that the failures of an organization cannot have occurred solely at a lower level but must be able to be properly described as “corporate.” Section 18 of the CMCHA expressly excludes individual or “secondary liability,” “the principle under which a person may be prosecuted for an offense if they have assisted or encouraged its commission.” The sanction is an unlimited fine, and the courts also have the power to impose a remedial order addressing the cause of the fatal injury. Some have argued that the bill will be unsuccessful in achieving its goals, as it merely imposes fines on organizations and doesn’t mete out punishment to individual corporate directors or members.
D. Environmental crime
Environmental crime in the UK has not been codified into a single act, but exists in various pieces of legislation including the Environmental Protection Act of 1990 and the Water Resources Act of 1991. A 2004 House of Commons report on “Environmental Crimes and the Court” refers to the complexity of corporate criminal prosecutions, writing that “the person most easily prosecuted – the individual posting up the cards or who allowed the oil spill – is not necessarily the only person who ought to be punished. It is very difficult to get behind the crime to the principle offender.” The report concluded that, even where liability can be determined, “the current sentencing system is just not flexible and imaginative enough adequately to punish corporate bodies or those in senior managerial positions with them” and recommended the Government adopt “a much tougher stance with businesses – regardless of their size and nationality.”
Additionally, a 2005 report on corporate environmental crime supported the “creation of a robust civil penalty regime as an alternative means with which to deal with environmental crime.” The report also supported the greater use of the Proceeds of Crime Act to prosecute company directors. The bill which may have had the most detrimental impact from a defense perspective, the Corporate Responsibility Bill of 2002, would have created liability for company directors for “any significant adverse environmental or social impacts of their operations.” However, after much debate, the bill was not passed. There remains much codification to be done in the field of corporate environmental crime — the recent inclusion of health and safety offenses in the Corporate Manslaughter and Corporate Homicide Act may be the increased definition and harsher sentencing the House of Commons foresaw in its recent reports.
The Enterprise Act of 2002 introduced the first statutory leniency program in the UK for those charged with antitrust, or “cartel offenses.” Under Section 188 of the UK’s Enterprise Act of 2002 (Enterprise Act), an individual or corporation is guilty of a “cartel offense” where he or they dishonestly agrees with another person to engage in one or more of the following: price fixing, market sharing, limitation of production or supply, and bid rigging. Violation of the Enterprise Act is punishable by up to five years in prison, however, it may be possible for an individual who comes forward with information about anti-competitive activity to receive immunity from prosecution in the form of a ‘no-action letter’ from the Office of Fair Trading (OFT). Recent attention has focused on extradition in antitrust cases, with experts noting that extradition, or the threat of extradition, will likely continue to become more common internationally.
BAE and Norris
These developments in the UK are in conjunction with a broader push by the European Commission to undertake a revision of settlement packages in cartel cases. Two recent cases are on the forefront of changing antitrust law enforcement. The recent prosecution of leading global defense and aerospace company British Aerospace (BAE) will test the cooperation of UK and US authorities on antitrust investigations. Commenced in 2003, the SFOs investigation was based on allegations that the organization had a multimillion pound fund it used to bribe Saudi Arabian officials in return for lucrative contracts. The SFO’s 2006 decision to halt the inquiry has been sharply criticized, with observers citing pressure from Saudi Arabia and an ongoing £20 billion deal for BAE-manufactured Typhoon jets as the impetus behind the decision. In May of 2008, the House of Lords ruled that the agency had acted unlawfully in halting its investigation. The agency's appeal to the government's findings is ongoing. The US Department of Justice (DOJ) has also commenced an investigation against BAE, and subpoenaed a number of high-ranking BAE executives this month.
In a second notable case, a March 2008 decision by the UK’s House of Lords made news when they unanimously ruled that Ian Norris, a UK national, could not be extradited to the US to face criminal price-fixing charges since the alleged activity was not a criminal offence in the UK at the time it occurred. However, the House of Lords left open the possibility that Norris could still be extradited on the grounds of alleged obstruction of justice. The case began when Norris, former head of a UK manufacturing company, was charged by the DOJ with conspiracy to fix prices. Norris challenged the extradition order in the UK High Court on the basis that the price fixing offense of which he was accused was not a criminal offense in the United Kingdom until the Enterprise Act made it so in 2002.
F. Securities fraud
The Financial Services and Markets Act of 2000 (FSMA) provides the statutory framework for the current UK market abuse enforcement regime. The FSMA grants increased powers to the Financial Services Authority (FSA) to punish unregulated market participants whose conduct may fall just short of being considered a criminal offense. After two years of the FSMAs existence, in December 2004 the OFT launched research into how FSMA had affected competition in applicable markets, and found no indications that the FSMA had had a significant negative impact on competition, and that where the legislation addressed market failures it was in fact beneficial to competition.
G. Money laundering
Rather than focusing on the prevention of crime, the UK anti-money laundering regime centers on preventing criminals from the use of ill-gotten gains. The Money Laundering Regulations of 2007 (“the Regulations”) set out the administrative requirements, while Part 7 of the Proceeds of Crime Act of 2002 (PCA) outlined the regulatory offenses. The PCA provided for the consolidation and reform of criminal law with regard to money laundering, including increased powers for use in criminal confiscation, civil recovery, and investigations. Recognizing that “money laundering makes crime pay and funds further crime,” Parliament imposed the Regulations with the intent of establishing “[e]ffective systems that deter, detect and disrupt money laundering and the financing of terrorism.” The Regulations outline the crime of money laundering and impose fines and potential sentences of up to two years. Further, they clarify that “[a] person is not guilty of an offence under this regulation if he took all reasonable steps and exercised all due diligence to avoid committing the offence.” An officer, as well as the corporate body itself, may be found guilty of an offense where the offense is shown to have been committed “with the consent or the connivance of an officer of the body corporate . . . or to be attributable to any neglect on his part.”
Section 144 of the 2000 Finance Act introduces a specific criminal offense aimed at tax fraud and punishable by up to seven years in prison. The new offense is to be “knowingly concerned in the fraudulent evasion of income tax.” The concept of “dishonesty” remains at the core of the offense, which applies only to those who have fraudulently evaded income tax since 2001. Whether through a positive action of dishonesty, such as including false information on a tax return, or through a passive act of concealing or omitting information, dishonesty is a necessary factor of the offense of tax fraud in the UK.
In a 2007 report, the HM Revenue and Customs agency addressed the roles of its civil and criminal investigatory powers, writing “[i]t is HMRC’s policy to deal with fraud by use of the cost effective Civil Investigation of Fraud (CIF) procedures, wherever appropriate. Criminal Investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate.”
In a 2007 press release, the Law Commission (the independent body established by Parliament to review and recommend reform of the law in England and Wales) called the current law of bribery in the UK “[f]ragmented and out of date.” The Commission noted that there was a “general agreement that the law is in need of reform but little consensus on how it can be best achieved.” The Fraud Advisory Panel issued a response to the Law Commission Consultation Paper No. 185 on Reforming Bribery, concurring with the Commission’s recommendation to defer specific consideration of corporate liability until a wider review is undertaken. Nonetheless, the Panel emphasized “that directors and managers of companies while not necessarily directly involved in committed an offense of bribery, are responsible and accountable for other areas of corporate governance and have a duty to ensure that anti-bribery and anti-corruption policies and processes are implemented for the guidance of their employees.”
In its 2008 annual presentation of upcoming law reform, the Law Commission announced the publication of a final report on bribery and a draft Bill in the autumn of 2008. Further, the Commission noted that “[o]ur work in relation to bribery has confirmed our view that a general review of the law of corporate criminal liability is essential. We intend to return to this topic and public a consultation paper in autumn 2009.” Meanwhile, however, the UK government continues to receive criticism that it has fallen short of its commitment to prosecuting bribery, particularly overseas corruption. In a June 25, 2008 article in The Guardian, anti-bribery groups cited as the root of the problem the lack of a cohesive and comprehensive bribery law, along with the unwillingness of the SFO to prosecute. After dropping its proposed 2003 Corruption Bill, the Home Secretary asked the Law Commission to undertake a review of corruption legislation, a process expected to be completed within the coming year.
Other Current Criminal Justice Policy Issues
A. Plea bargains
Currently, the UK has no formal system of plea bargaining within its criminal justice system. The recent Fraud Review Final Report released by the SFO recommended the creation of a plea-negotiation framework to facilitate early pleas. In her report, deGrazia expressed concern that the criminal justice systems of England and Wales are unlikely to “obtain the full benefit of an early plea-negotiation framework” due to two factors: the higher rates of conviction in the U.S. and the current system of disclosure in the U.K. DeGrazia noted that while the District Attorney’s Office of New York, for instance, presents defendants with only an eight in 100 chance of not being convicted, a defendant who is prosecuted by the Serious Fraud Office in the last five years has almost a 4 in 10 chance of not being convicted. Therefore, a defendant in the UK facing prosecution for fraud would have less interest in making an early plea deal. In response to deGrazia’s report, SFO Director Richard Alderman agreed not only with the recommendation the SFO adopt US-style prosecution tactics but went further to recommend revised plea negotiations in what an article called the “American way.”
Additionally, deGrazia asserted that “the most important factor” in explaining the disparity in the number of cases prosecuted, and the number of convictions achieved, is the system of disclosure (discovery) in the UK. While the process of discovery in the US may take weeks or months, disclosure in the UK may routinely take years in complex fraud cases. Disclosure laws in the UK require prosecutors to give to the defense any information that is “reasonably capable of undermining the prosecution case or assisting the defense,” which deGrazia determines to be consistent with US law regarding “exculpatory evidence.” Despite this similarity, however, deGrazia concludes that while the law of the UK and US require prosecutors to disclose the same types of information, the systems of delivery are divergent – while the US proceeds along the lines of a “keys to the warehouse” approach, allowing for defense attorneys to sort through materials to determine what is relevant, the UK has more of a “stand guard at the warehouse door” approach, denying the defense access to its investigative information unless it determines that specific items undermine the prosecutions case or might assist the defense.
The Fraud Advisory Panel itself has described the current disclosure regime as “unfit for purpose” of prosecution of serious fraud cases. The Panel wrote in its Final Report, “We have looked at the position in the United States which had fully developed plea bargaining systems in place. It is illuminating to go into this model in some detail as in our view it demonstrates that a plea bargaining system can incorporate the non negotiable principles of fairness to defendants, judicial independence and safeguarding the public interest by means of checks and balances.”
The recent proposal to implement US-style sentencing guidelines in the UK has been quite controversial. In a 2007 report, Lord Carter proposed a new program to deal with the UK’s increasing prison population, identifying a structured sentencing framework as one approach. A working group was established to investigate and drew up a consultation paper on the issue. During the paper’s development, members of the group visited the US to study the country’s sentencing guidelines. In response to their report, the government in 2008 introduced plans for a “US-style sentencing grid,” as part of the Victims and Witnesses Bill. The Bill has already caused heated debate and is scheduled for discussion in the upcoming 2008-09 session.
It is hard to imagine how the UK bench and bar have absorbed these monumental changes in their criminal enforcement paradigm. These critical steps cry out for a sustained effort by the US defense bar to render assistance to their UK counterparts in terms of our jurisprudence and our best practices. Tally ho!
 Dwyer & Collora LLP, Boston, MA. Assistance from Sarah J. Schendel, Summer Associate, is gratefully acknowledged.
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