Digital Transformation » Systems & Software » CITY FRAUD – Shooting the sleaze

A decade after it was rejected, the idea of jury-free trials in fraud cases in the UK is again being considered and comes amidst mounting concerns both here and abroad about the increasing incidence of complex, multi-jurisdictional offences. The US Economic Crime Council has ranked financial institution fraud as the number one threat to that nation’s financial and economic stability while in Europe, an EU report states that financial fraud is increasing year on year, mainly as a result of organised crime.

In the east, within the states of the old Soviet empire, fraud and other criminal activity is said to account for over 50% of the GDP of the countries involved and directly affects the ability of the governments to collect the taxes upon which their survival as nation states depend. Even in Italy, Spain and Greece, the black economy accounts for an estimated 25% of GDP.

Fraud, according to a number of experts, is in danger of overwhelming emerging Third World economies and seriously damaging even those of advanced, industrialised nations.

In October last year, Lord Falconer of Thoroton, the Solicitor General, noted that just three cases being dealt with by the Serious Fraud Office (SFO) in 1994 involved sums of money far in excess of the total reported loss from burglary in England and Wales for that year. And while the aggregate value of frauds investigated or prosecuted by the SFO now stands at over #2bn, the true extent of the problem, according to Rowan Bosworth-Davies, a barrister and consultant on fraud containment with Unisys Ltd, accounts for over 7% of this country’s GDP.

“The overwhelming concern for governments,” said Bosworth-Davies, “is the extent to which they are unable to collect taxes. Despite all the rhetoric from chief constables, traditional forms of crime are no longer the primary issue and as we move towards the next millennium, tax evasion and fiscal defalcation have become the critical consideration.”

For the police, the SFO and other enforcement agencies, the investigation of allegations of fraudulent activity is expensive in terms of the time and effort required to bring the matter to court. At the most serious level, 80% of cases contain a foreign element and are likely, therefore, to involve enquiries across more than one jurisdiction with all the problems and delays inherent in this course of action. But in spite of the seriousness with which the government views fraudulent crime, no police officers are on the staff of the Serious Fraud Office and fraud does not, for the time being, appear on the Home Office list of the core responsibilities of the police.

In investigative terms, the problems do not end there. The activities of the City and the rules of behaviour by which it abides have long been a mystery to those on the outside. Conduct which might appear, at the very least, as sharp practice, is dismissed as falling within the normal standard of behaviour and wholly acceptable to those within the financial services industry. In 1840, the then Master of the Rolls, Lord Langdale, said in Gillett v Peppercorn: “It is said that this conduct is every day practice in the City. I certainly should be very sorry to have it proved that such sort of dealing is usual, for nothing can be more open to the commission of fraud than transactions of this nature.”

In this country, the demarcation between criminal behaviour and malpractice in the City is becoming ever more blurred. Within days of his appointment as the new Chancellor of the Exchequer in May 1997, Gordon Brown announced that the Securities and Investments Board would be given new powers to police the money market and that all self-regulation within the industry would be scrapped. Nine years earlier, the Financial Services Act had provided regulatory authorities (as opposed to the police and the DTI who already possessed the necessary authority) with the power to investigate insider dealing and this was followed, in 1989, by the ability of the Stock Exchange to take action, under the Companies Act, against insider abuse.

The narrowing gap between criminal and civil law within the context of City fraud, has, for some time, been a matter of concern. “There is a question,” says Rosalind Wright, recently appointed director of the SFO, “of where you draw the line between what is unacceptable conduct and what is such an abuse of the system that the criminal law should be invoked.

Suggestions are being made that market abuse cases which fall uneasily in the grey area between the unacceptable and the criminal could be dealt with by way of civil fines, imposed by a civil court at the behest of the Financial Services Authority … it must be recognised that many of the most blatant cases of market abuse are true frauds which have … been successfully prosecuted by the SFO. Nobody, I think, is seriously suggesting we should not continue to investigate and prosecute these sorts of case.”

Perhaps not, but the 85 cases currently under investigation by Wright’s team of 170 permanent staff – including 27 lawyers – deals only with the tip of the iceberg. In London, the once-joint Metropolitan and City Police Fraud Squad has now been split in two and, numerically at least, deal with the vast majority of fraud enquiries. But for reasons already indicated, fraud is not, at the moment, a policing priority and will not become one unless the Home Office can be persuaded to list it as one of the key objectives of the police service. It means that offences such as burglary and drug-related crime currently take precedence over fraud in the allocation of finite resources and the call by the director of the SFO for a permanent establishment of police officers on her staff, is likely, therefore, to go unheeded.

Depressingly, no jurisdiction has had, according to Professor Barry Rider, director of the Institute of Advanced Legal Studies at London University, a great deal of success in utilising the criminal law to combat sophisticated, abusive, activity within its capital markets. The standards and procedures of the traditional criminal justice system which are necessary to ensure civil liberties, present almost insuperable barriers to the effective prosecution of fraudsters. In, for instance, the 17 years since insider dealing became a criminal offence, there have been less than 10 successful prosecutions in spite of the very real powers provided by Section 2 of the Criminal Justice Act 1988 to question suspects and others.

The difficulties lie at both the investigation and trial stages. The high percentage of serious fraud cases which involve an international dimension is no freak of statistics. Modern communications make the process of money laundering and money transfer so simple that any competent fraudster will, almost always, ensure that his operation spans at least one territorial border. Governments around the world have tried, with some success, to get round the problem through a number of bi-lateral agreements – generically known as Mutual Legal Assistance Treaties (MLATs) – which enable enquiries about a broad range of criminal offences to be conducted by the suspect’s home state on behalf of the UK.

What is missing is the certainty of extradition. Although matters have improved in recent years, a number of countries still refuse to extradite their own nationals and while some will offer to prosecute the case on behalf of the UK, it is not a course which Wright finds acceptable. “We consider extraterritorial prosecutions are inappropriate to fraud cases.” she says. “It is impractical to try these cases in another jurisdiction (and) leads to safe havens for fraudsters.”

At the trial stage, the volume of evidence and its sheer complexity is frequently overwhelming to the point where Judges have held it to be unfair on juries. In the Blue Arrow case the jury sat for over a year considering a case against 11 defendants, five of whom were eventually convicted.

Overturning the verdict, the Appeal Court held that the volume of material was so great that it had been unfair on the jury. The view that it is simply unrealistic to expect people with no experience in or exposure to the highly-complex financial services market, to grasp the arguments for and against particular courses of action and reach a verdict, appears to be gaining ground.

At a conference in London in November 1997, Helen Liddell, the economic secretary to the Treasury, outlined a number of proposals that were being looked at by the government, including the question of jury trials in fraud cases. “I believe the time has come,” she says, “when we need to look at that very small group of complex fraud cases where the jury system appears to be most under strain.”

A forthcoming discussion document will propose that serious and complex fraud cases be dealt with by an expert panel, probably chaired by a judge, sitting without a jury. The system, already in use by the disciplinary tribunals of the present regulatory authorities and the Financial Services Tribunal is apparently working well. “A criminal tribunal … would have much to recommend it,” says Wright.

Yet these measures would not, on their own, be enough and the Treasury has made it clear that it intends to pursue additional ideas. These include the removal of some of the constraints on the free flow of information between agencies, raising the policing priority for fraud investigation, creating a specific criminal offence of fraud to replace the various offences under the Theft Act and other legislation and giving far more clout to the Financial Services Authority. Professional and wilful blindness by advisors will, if the Treasury gets its way, become the criminal offence of ‘should have been suspicious’ if they are shown not to have asked sufficient questions.

“Organised crime has,” says Helen Liddell, “discovered that there are private bankers, brokers, accountants and other financial advisors who are comfortable providing services which help obscure the relationship between the money and the man. But only if it is presented as ‘just a little problem with tax’. They do not put their advisors in an awkward position by declaring the nature of their trade.”

Patrick Hook is a freelance journalist.

Fraud Advisory Panel: Tackling the problem head on

For those who feel they are sinking into the abyss without a helping hand in sight, some comfort may be on its way in the form of a new organisation launched, in early February, by the Audit Faculty of the Institute of Chartered Accountants of England and Wales. The Fraud Advisory Panel under the chairmanship of ex-SFO director George Staple QC has, as its primary purpose, the raising of awareness of the whole problem of fraud within the business community and the production of the means of combating the threat. Perhaps unsurprisingly, the first task of the new Panel is to try and understand the nature and extent of the problem and, while that may be easier said than done, the exercise will, almost certainly, throw up some “best practice” within the business sector.

Under the leadership of Mike Hoare, himself a former senior detective and now a visiting fellow at Cranfield University, a working party will be establishing methods of prevention and detection, investigating how training can be improved and what information is needed by organisations at risk and should lead to a useful pool of practical advice for executive and non-executive directors.

But for those who would rather not wait, the Metropolitan Police Fraud Squad has appointed the country’s first fraud prevention officer. It was an appointment that the Met felt that they could delay no longer. “We have to change the way in which we investigate frauds,” said Detective Superintendent James Perry, operational head of the Metropolitan Police Fraud Squad.

“We have to look at alternative strategies and not imagine that (the criminal justice system) is the only way to deal with fraud. Civil redress and the use of regulatory bodies are alternative ways of dealing with fraudsters which can and do achieve the desired objective of reducing market abuse. We do not have the resources to deal with these issues by ourselves and we must work closely with the civil authorities and private sector to develop an overall enforcement and prevention strategy that takes into account the most efficient means of dealing with fraud and its victims.”