Fraud and white-collar crime: No place to hide
One of the key questions vexing the legal profession at present is just how the current downturn may impact on the incidence of white-collar crime. Some think that price fixing will increase during times of financial squeezing as businesses seek ways to ensure returns and stay afloat. At the same time, it is thought that the higher stakes involved in winning contracts may encourage other extreme tactics, such a bribery, to ensure success.
UK and international authorities are gearing up for a fight against a potential rise in white-collar crime as the global economy continues to struggle under the downturn. Alistair Graham and James Woolrich report
One of the key questions vexing the legal profession at present is just how the current downturn may impact on the incidence of white-collar crime.
Some think that price fixing will increase during times of financial squeezing as businesses seek ways to ensure returns and stay afloat. At the same time, it is thought that the higher stakes involved in winning contracts may encourage other extreme tactics, such a bribery, to ensure success.
The commission of such practices may also be assisted by a lack of will or resources to detect them when companies are more concerned with keeping their businesses viable than spending time and energy on rigorous anti-corruption systems and controls.
On the other hand, some may argue that white-collar crime is easier to commit and therefore more prevalent in boom times than in a bust: during the good times, there are more opportunities for ‘pick pockets’ with less of a chance to be found out, while the reverse is true when times are bad.
We can be confident that the discovery rate of white-collar crime will increase during a downturn in the economy. There are two main reasons for this. Firstly, as was recently seen with the Madoff case, in a strong economy more people may be taken in by get-rich-quick schemes. However, when the financial climate deteriorates and too many investors ask for their money back, as with Madoff, the scheme unravelled since the money was not actually there – older investors were paid with monies from newer ones. Secondly, the current economic slowdown has coincided with an increase in both the powers of UK regulators and statutory bodies to punish white-collar criminals, and their appetite to do so.
Margaret Cole, director of enforcement at the Financial Services Authority (FSA), has emphasised that “credible deterrence” lies at the heart of the FSA’s new approach to regulating the financial services market. In short this means the FSA must show that it is willing and able to process enough cases of the right kind to get the right outcome so that firms, companies and individuals fully understand the consequences they could suffer if they fail to improve standards of behaviour.
In that respect, the FSA has started 2009 with a bang: on 8 January, it published the final notice it had issued to Aon, fining it £5.25m for breach of principle three of the FSA’s Principles for Business.
The FSA had found that Aon failed properly to analyse risks associated with making payments to non FSA-authorised overseas firms and individuals who helped it win business from overseas clients. Aon also failed to implement effective controls to mitigate those risks. The resulting danger that Aon could become involved in potentially corrupt payments to win or retain business, combined with the prominence of Aon in the insurance and reinsurance market (including the fact that Aon’s practices set an example seen by other market practitioners) emphasised the seriousness of the breach.
A correspondingly weighty fine – discounted by 30% because Aon settled at an early stage of the FSA investigation – was levied.
It is noteworthy that the FSA has advised that the “proactive determination” of Aon’s senior management to identify past problems and to improve the firm’s systems and controls in this area was “a model of best practice that other firms may wish to adopt”.
To complement the FSA’s appetite for pursuing and punishing wrong-doers in the regulated sector, the Government has proposed that the FSA be granted new statutory powers, including the power to grant immunity to witnesses when investigating criminal cases like insider trading. Under the new proposals the FSA would be afforded the status of ‘specified prosecutor’ under the Serious Organised Crime and Police Act 2005 (SOCPA) and would be able to issue an immunity notice to an individual, subject to satisfying the requirements of that act.
White-collar crime affects regulated and non-regulated businesses alike. On the non-regulated side of the fence, the proposed reform to the law of bribery and the Serious Fraud Office’s (SFO’s) commitment to increase investigations into corruption, as well as the US’s continued scrutiny of UK businesses, are gaining more attention as market volatility continues.
Reform of bribery
Despite its ancient roots (the Magna Carta declares that ‘justice or right’ would be sold to no man), the current law on bribery in England and Wales is not held in high esteem internationally and has been heavily criticised by the Organisation for Economic Co-operation and Development for having little impact in policing bribery and corruption.
However, this is set to change. In its final report, published on 20 November, 2008, the Law Commission proposed to repeal the common law offence of bribery and many of the statutory provisions relating to bribery. In their place will stand two general offences concerned with the conduct of the payer or giver of an advantage to induce someone to behave improperly; and the conduct of the recipient who requests or accepts such an advantage either in exchange for acting improperly, or where the request/acceptance is itself improper.
There will also be a specific offence relating to bribing a foreign public official (FPO) where the intention is to influence that official in his or her capacity as an FPO in the obtaining or retaining of business advantages. Finally, there will be a new corporate offence of negligently failing to prevent bribes being given or offered on behalf of a company or limited liability partnership registered in England and Wales.
Directors or equivalent officers of a company that contravenes any of these three offences may find themselves held criminally liable as individuals. These new offences will apply to conduct anywhere in the world by a UK national, resident or company and will attract a maximum sentence of 10 years’ imprisonment for individuals and an unlimited fine for companies.
While it will be a defence for the organisation to show that there were adequate procedures in place designed to prevent employees or agents committing bribery, this defence will not apply if the person responsible for preventing the bribery was a director, manager or equivalent person within the organisation. All of this indicates that the Law Commission’s key concern is with organisations that do not put systems in place to ensure active bribery is not committed on their behalf.
Resolving an effective and fair modern law of bribery is an extremely challenging task, both technically and politically. It is not easy to capture the balance between avoiding formulating laws that impinge on local mores concerning acceptable profit taking and creating an anti-bribery regime that can combat overseas bribery. However, the Law Commission’s final report represents a significant step in simplifying and solidifying the current law.
That is not to say, however, that the US is likely to relax its scrutiny of UK business in this area. The Foreign Corrupt Practices Act (FCPA) gives US prosecutors very strong powers to pursue foreign nationals and impose large fines and custodial sentences. The Department of Justice brought more prosecutions under the FCPA in the last two years than in the preceding 20 years. Many of the cases resulted in severe penalties: 80% of individuals sentenced for FCPA violations receive jail sentences.
The Securities and Exchange Commission has also increased the number of probes it carries out. UK businesses must therefore be aware of their potential exposure to the long arm of the US law and, where necessary, seek advice from lawyers who understand both the US and UK regulatory approaches.
The action has been mirrored in the UK, where the SFO’s director, Richard Alderman, recently announced that the SFO will allocate more resources to combat overseas corruption, increasing the number of investigators it has on anti-corruption work from 65 to 100. This verbal commitment to combating fraud has quickly been followed by action: on 9 January, 2009 the SFO launched a formal investigation into London-based Madoff Securities International – the results of which are awaited with interest.
The combination of the current economic downturn and the increase in the power and appetite of the regulatory and prosecuting authorities to pursue white-collar criminals will ensure that white-collar crime is high on the agenda in 2009. International commerce may well be “red in tooth and claw” as Sir Christopher Staughton put it, perhaps especially so in tough times, but it is clear that the rules of the game must still be complied with. Those that break them or allow them to be broken by others in their organisations will face tough penalties.
Alistair Graham is head of the London commercial litigation practice and James Woolrich a commercial litigation associate at White & Case.
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