Change of tack may yield results at SFO

A landmark ruling last year ushered in a new era in asset recovery and a push
for corporate self-reporting in fraud and corruption cases in the UK, but will
it succeed?

New powers bestowed on the SFO and other UK authorities that allow the
prosecutor to pursue proceeds of crime through the civil courts mark a
much-needed turning point in the SFO’s history.

The anti-fraud office has, for years, been suffering from a negative image
because of its failure to secure convictions in high profile criminal cases.
Last year’s outcry when the SFO dropped the investigation into BAE Systems’ arms
deals with Saudi Arabia destroyed any residual goodwill it had. Prosecutors had
to urgently rebuild the SFO’s image.

To do so the SFO, now led by straight-talking barrister Richard Alderman,
looked to its transatlantic neighbour to duplicate its tactics in civil
prosecutions, instituting methods such as plea bargaining and deferred
prosecutions.

Whether this approach has deterred fraudsters or sent them further
underground is unclear. Regular surveys into fraud levels still show increases.
However, civil prosecutions have proved that prosecutors mean business and will
levy hefty fines and other penalties.

Nic Carrington, forensic accountant at Deloitte, says: ‘The whole approach is
for the SFO to make everyone aware that they are interested. There may have been
a perception in the past that they weren’t. There’s a new rigour now.’

In the US, evidence proves civil prosecutions have speeded up the
prosecutions process and Alderman is determined to achieve the same results in
the UK. For corporates, the threat of reputational damage, fines, investigations
and time lost is a heavy one to bear and one it is hoped will encourage tighter
controls.

A further incentive for businesses to report incidents of fraud is that, in
civil prosecutions, exact allegations tend not to be made public, therefore
reducing negative impact on a company.

Alderman points out that criminal prosecutions remain the SFO’s preferred
approach, but the civil route provides an additional tool to speed up the
process and reduce costs.

Indeed, the SFO’s prosecution rate has increased from 61% to 80% since
Alderman became the SFO director in April 2008. ‘He is adding to the armoury of
the SFO. The criminal thrust remains at the heart of the SFO,’ says Jeremy
Outen, forensic partner at KPMG.

Although supportive of the new approach, some accountants are ambivalent
about the changes and question how much success the SFO will have using the
civil route. Since the SFO used its new powers last April in the first case
against Balfour Beatty, there have been no other high profile civil
prosecutions.

Carrington, says: ‘The challenge they have is that you can’t rewrite history
and corporates will have a view of how the SFO was in the past and question
whether things have changed. Balfour Beatty showed something new and different,
but boards will want to see that it wasn’t an isolated incident.’

Indeed, the decision to self-report, which is what the SFO wants, is not one
that company boards will take lightly without varied and clear precedents.
Although accountants and lawyers have a legal obligation to report suspicious
activities, it’s unlikely advisers will unilaterally approach the SFO as
whistleblowers without consulting their clients first.

‘Companies are waiting to see if it will work. It requires a great deal of
trust on corporates’ behalf to come forward to a law enforcement agency and put
themselves into an untested process,’ says Outen.

With the threat of lengthy, costly, investigations and the prospect of a
conviction, however, self-reporting holds several benefits for businesses. If a
company proactively approaches about a fraud and the SFO decides to deal with
the matter through the civil route, then it will allow management to carry out
their own inquiries using independent forensic accountants, skirting intrusive
involvement from government investigators.

How the SFO deals with the next civil prosecutions will determine how the new
approach is viewed.

‘It depends on what fines we see and that it actually works as a punishment.
If it’s identified and dealt with quickly, but the fine isn’t seen to be
proportionate, then there will be question marks. The proof will be in the
pudding of what comes out and if it deters fraudsters,’ says Steve Cornmell,
forensic partner at Grant Thornton.

If the US experience is to be replicated here, UK plc can expect significant
fines and consequences. In some cases US prosecutors excluded corporates from
all lucrative, future government contracts. A penalty like that here would
certainly be effective.

‘Time will tell how this evolves, but clearly change is in the air.
[Alderman] is trying to shift the emphasis so that the whole justice system gets
more bang for its buck by leveraging the resources,’ says Will Kenyon, forensic
accountant at PricewaterhouseCoopers.

‘The question is, can the new SFO deliver on what it’s promising? A lot of
noise is being made which is telling industry “you need to get your act
together”. But will prosecutions follow on from that?’ asks Carrington.