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The Americanisation of the SFO is not the way to stamp out UK fraud

THIS year began with an announcement by the Serious Fraud Office (SFO) that it was investigating potential UK criminality arising out of the Bernard Madoff Ponzi scheme scandal. Richard Alderman, the SFO&rsquo;s director, hailed the investigation as an example of the &ldquo;new, faster approach to tackling fraud&rdquo;. So as the year draws to a close, has that statement held good, and what else might this new approach mean?<br /><br />A common theme of Alderman&rsquo;s regime has been his desire to demonstrate a more American approach to prosecutions. In particular, he wants the SFO to adopt a new and proactive style rather than simply reacting to crimes once they have been committed. So far, this approach has been most obviously seen in the corporate sector.<br /><br />In October 2008, the SFO concluded its first ever civil recovery order, with Balfour Beatty, relating to payments connected to the construction of the Bibliotheca Alexandrina, a library and cultural centre in Egypt. The settlement meant that no individual or corporate entity was prosecuted, but the company paid a civil penalty and appointed an external monitor to oversee its governance policies going forward.<br /><br /><strong>PAYMENT IRREGULARITIES</strong><br />An almost identical agreement was concluded earlier this year when the SFO agreed not to prosecute engineer AMEC with regard to payment irregularities connected to the building of a bridge in Korea. In many ways these settlements were analogous to deferred prosecution agreements (DPA) frequently deployed by the US Department of Justice (DOJ) and Securities and Exchange Commission (SEC).<br /><br />US companies regularly self report issues of potential concern to the DOJ and SEC. In such circumstances the DOJ may consider a DPA in place of a prosecution. Conditions attaching to a DPA are likely to include the payment of a civil penalty, restitution of any improperly obtained advantage and the imposition of a period of external compliance monitoring.<br /><br />Balfour Beatty and AMEC self reported and voluntarily appointed an external monitor. Both these factors were clearly significant in persuading the SFO not to pursue criminal prosecutions. The AMEC settlement does however differ from the Balfour Beatty one in an important respect. Whereas the SFO stated that it was not appropriate to prosecute any individual in connection with the Balfour Beatty investigation, no such indication has been given in respect to AMEC and individual prosecutions may yet follow.<br /><br />This too is a feature commonly seen in the US, and corporate America has long been used to the offering of a &ldquo;sacrificial lamb&rdquo; for the supposed greater good of the company. Whether in fact sacrificing senior executives or managers is in the long-term interests of a company may be open to question. If company morale is weakened, does that help profitability?<br /><br />Immunity from prosecution is also plucked from the US tool-box and enthusiastically embraced by the SFO. This enables it to offer a range of inducements to people to come forward with information, such as immunity, or credit following a guilty plea.<br /><br />However, questions remain as to the desirability of a US-style approach. Opponents of the system claim that it represents an outsourcing of the prosecution function. This, it is felt, can lead to lazy prosecuting with investigators not looking beyond what is presented to them. For all of the supposed benefits of the US model, the SEC appears to have been asleep at the wheel throughout the Madoff fraud.<br /><br />Furthermore, the DPA was in many ways created by US defence counsel as a benefit to their corporate clients. That thinking seems to have gone full circle, with lawyers and their clients now regarding the requirement to submit to external monitoring as an expensive millstone that prevents normal business from being conducted. As the UK looks to use the system, the US may be turning away from it.<br /><br />But the US model works because it doesn&rsquo;t just rely on the carrot of leniency following a self report, but also the stick of many successful prosecutions backed up by stiff prison sentences. Notably, since Alderman took over, the SFO has yet to secure a high profile corporate conviction following trial. While that&rsquo;s the case, questions continue to be asked as to whether the agency has the resources or the inclination to take on corporate defendants in the court room.<br /><br />There is also debate as to whether the SFO will be merged into an overarching national agency that will seek to emulate the DOJ. While that debate continues, and the SFO remains without a successful corporate prosecution, the public may be more eager for reassurance that Britain is able effectively to prosecute fraud rather than just copy a US model.<br /><br />Jeremy Summers is a partner at Russell Jones &amp; Walker