Having looked back at the enforcement action taken by the Serious Fraud Office (SFO) against Corporates and Individuals in 2020, here we consider what we can expect from the SFO in 2021, particularly in the context of the unique challenges presented by Brexit and COVID-19.
The SFO has a poor record when it comes to securing convictions of individuals in trials that follow corporate Deferred Prosecution Agreements (DPAs). It will therefore be anxious to secure convictions of the five individuals accused of fraud offences resulting from the Serco and G4S C&J investigations, as these would be the first convictions of linked individuals following the entry into a DPA. The trials of the Serco and G4S executives commence in February 2021 and January 2022 respectively.
With the SFO seemingly keen to make greater use DPAs (see below), obtaining these convictions will be vital. Courts may be reluctant to approve future DPAs if the SFO cannot demonstrate a willingness to prosecute individuals (as in the Rolls Royce investigation) or, where charges are brought, an ability to prosecute them successfully.
Although available since 2014, the SFO entered into three of its nine DPAs last year, its highest number in a year so far. We can expect more this year, as supported by the publication of detailed guidance in October 2020 on its approach to negotiating and entering into DPAs in an attempt to increase transparency and establish a best practice tool kit. Our blog on this guidance can be found here. It has been reported that the SFO are in DPA talks with Rio Tinto. They also continue to investigate Bombardier, Chemring, Amex Foster Wheeler and ENRC, some of which could conclude with a 2021 DPA.
The Director of the SFO, Lisa Osofsky, has previously stated she is a "big believer" in DPAs and this is borne out of the fact that under her leadership, the SFO has recovered significantly more from penalties and settlements than under previous Directors. The positive net contribution to the Treasury tripled to nearly £1.3bn from 2016/17 to 2019/20, although of course the majority, if not all of those cases, began under the leadership of her predecessors.
Greater priority afforded to fraud
Although the SFO's focus has traditionally been on bribery and corruption investigations, in 2020 two-thirds of the live criminal proceedings against individuals involved allegations of fraud and/or false accounting. Speaking at the Royal United Services Institute in October 2020, Lisa Osofsky stated that there was a "renewed focus on tackling fraud" with economic crime moving higher up the political agenda in recent times.
This is a trend which we can expect to continue in 2021, particularly with COVID-19 related frauds likely to be a focus for the SFO (see below).
However, with a number of cases having been dropped in 2019/2020, including investigations into ABB Ltd, De La Rue Plc, the LIBOR manipulation, Rolls-Royce and GlaxoSmithKline, it appears the SFO is, at least ostensibly, diverting its limited resources away from historic cases and towards opening and progressing new investigations. It will be interesting to see whether this translates into a higher number of new cases being opened in the coming year.
Discontinuing further historic investigations?
A feature of Lisa Osfosky's tenure to date has been that she has dropped a number of historic investigations which started prior to her taking on the role as SFO Director. This trend looks set to continue into 2021, with the SFO starting the year by discontinuing its investigation into British American Tobacco, its subsidiaries and related individuals. This investigation was opened in 2017.
Clarification of the extraterritorial reach of the s2 powers
A notable trend of increased transnational enforcement action has already emerged over the past year, as two of the 2020 SFO DPAs involved collaboration with overseas prosecutors to assist with the investigations. The SFO will be keenly watching for the long awaited outcome of the case of KBR, which is expected in 2021, following the appeal to the Supreme Court in October 2020. The judgment is expected to clarify whether the SFO's powers under section 2 of the Criminal Justice Act 1987 can compel evidence to be provided to them where a company is located overseas. This may go some way to mitigating the effects of Brexit (discussed below).
It has been predicted that Brexit will result in increased delays to financial crime investigations, as a result of: (1) the impact on mutual legal assistance channels; and (2) increased costs for law enforcement as more staff are needed to deal with the additional work.
On 24 December 2020, the United Kingdom and European Union entered into the Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community of the One Part and the United Kingdom of Great Britain and Northern Ireland (the "Trade Agreement").
Part 3 of the Trade Agreement sets out the framework under which law enforcement cooperation is to continue including the exchange of DNA, PNR and fingerprint data and information sharing upon request. The UK will cease to be a member of Europol and Eurojust, as a result of Titles V and VI respectively, although UK liaison officers will remain at both headquarters to facilitate cross-border cooperation and the quick and effective exchange of data. These have been replaced by a new "streamlined" system of mutual legal assistance and information exchange, but the Trade Agreement is extremely light on the details of what this "streamlined" system will involve.
The UK have re-stated their commitment to maintaining a comprehensive anti-money laundering and counter terrorism financing framework in the Trade Agreement. However, Brexit will almost certainly increase the risk of UK companies being drawn into money laundering investigations as, (1) UK companies will seek to trade with countries outside the EU and in the developing world, some of which may carry greater risk; and (2) money launderers themselves may look to exploit any loopholes/uncertainty arising from the chaos in the short term and any reduction in cooperation with EU authorities.
The impact of COVID-19 on the SFO will linger well into 2021 and beyond, both in terms of disruption caused to existing cases and also in respect of the conduct and pace of new cases arising out of the pandemic.
Delays to ongoing investigations and proceedings
In common with all organisations, the SFO has adapted its working practices and its priorities to ensure the safety of its employees and third parties.
According to its Annual Report, 99% of SFO staff are now working from home. There is no doubt that the pandemic caused delays to ongoing investigations and proceedings. Social distancing meant that for large parts of 2020 interviews and searches had to be stopped, hearings were adjourned and the SFO's focus shifted to reviewing documentary evidence.
The travel restrictions associated with COVID-19 also mean that a number of the international investigations will continue to be hampered by the fact that interviews with overseas witnesses may be delayed (unless the SFO adapt to regular interviewing by video link as others have done).
Finally, the pandemic has further increased the already significant backlog of cases being heard in the Crown Court and will lead to further disruption and delay for the SFO in bringing proceedings to court. As it is, the SFO is already largely carrying an aged caseload.
Possible new investigations
While crime reports as a whole in the UK have decreased during the pandemic, there has been an increase in fraud as some have sought to exploit the current climate. Speaking to the Cambridge Symposium on Economic Crime, Lisa Osofsky said that the pandemic has created new opportunities for criminals and that "law enforcement are working across Government to assess and respond to the new threat". While the SFO is yet to announce any investigations into COVID-19 related crimes, it anticipates that these will come its way. "If people have been harmed in the wake of this pandemic and there are cases for us in that, I will be very, very keen to take them on."
By way of example:
- A recent National Audit Office (NAO) report into £18 billion spent by the UK Government on the procurement of COVID-19 supplies has expressed concerns of Fraud Act and Bribery Act offences. Our blog post on this report can be found here.
- Recent data suggests that 27,000 suspicious loan requests under the Bounce Back Loan Scheme have been blocked by banks and up to 55% of all new applications for business accounts are fraudulent. Our blog post on Bounce Back Loan Fraud can be found here.
- Jim Harra, the Chief Executive of HMRC, told the Public Accounts Committee in September that the UK Government may paid out up to £3.5 billion in fraudulent or erroneous claims under the Coronavirus Job Retention Scheme; a figure equivalent to 10% of all distributions made under the scheme. Our blog post on Furlough Fraud can be found here.
- Speaking at Royal United Services Institute on 8 October 2020, Lisa Osofsky has stated that she expects an increase in Investment Fraud as the difficult investment climate may prompt people to consider placing their pensions and savings into high risk (and potentially fraudulent) schemes.
- In addition she expects a rise in bribery and corruption offences, with many businesses and individuals under stress; there may be a greater temptation to win contracts by any means necessary or to take such offers.
With the cases flowing from the 2008 financial crisis taking over 10 years to resolve (largely unsuccessfully) and the G4S and Serco cases taking over seven years to get to trial following the publication of the NAO report into both entities which identified the alleged frauds, the SFO will be keen to ensure prosecutions for COVID-19 frauds are dealt with more expediently.
The SFO continues to have budgeting issues with a 1.7% reduction in 2020/21 in its Resource Departmental Expenditure Limit (DEL) to £53,377,000 from 2019/20. This represents an 11.8% decrease on the department's DEL for 2018/19.
The entirety of the Airbus fine went to the exchequer and none was reserved for the use of the SFO. Lisa Osofsky has said that rather than take some of these funds for the SFO, she would rather be given "the laws I need in the areas where it would be more helpful." This is likely to be a reference to her desire for reform of the current model of corporate criminal liability (see below). Notwithstanding her comment, the net reduction in funding since 2018/19 will undeniably impact the SFO's ability to investigate financial crimes and secure its desired outcomes.
Criticisms of the SFO
In July 2020, it was revealed that Lisa Osofsky had exchanged messages with David Tinsley, a US-based private detective who had encouraged suspects in the SFO's Unaoil investigation to admit to their involvement. This revelation led to judicial criticism of Ms Osofsky and the SFO announced that an investigation into the matter would be conducted. This has already caused some embarrassment. That internal investigation, coupled with the litigation brought by ENRC against the SFO and the company's former lawyers which is due for hearing in the summer, means the SFO's investigation methods will come under the spotlight in 2021.
Reform of corporate criminal liability
Although a change in the law is unlikely to take place in 2021, the SFO will be keen for the publication of the Law Commission's proposed Options Paper which is expected this year. Lisa Osofsky, like David Green before her, has been a vocal advocate for reform to the law on corporate criminal liability describing it as top of her "wish list for the SFO". Legislation relation to bribery and tax evasion has come into force in the past decade so that companies can be held liable merely for a 'failure to prevent' bribery or tax evasion in their organisations. Ms Osofsky said "give that to me in the fraud cases and I believe I can deliver even better results." Our blog on the Law Commission review can be found here.
On 13 January 2021, a cross-party group of MPs proposed an amendment to the Financial Services Bill to allow businesses to be held criminally liable for failing to prevent economic crime. Although Parliament declined to vote on the amendments, we can expect these MPs to maintain the pressure on the Government to commit to a timetable for the reform of corporate criminal liability in one form or another this year.