Forget Nadir – the SFO does not have the resources to fight fraud

ALTHOUGH the jury is still out on nine of the charges in the Asil Nadir case, the Serious Fraud Office’s (SFO) successful conviction of Nadir on three charges is a nice win following a two-decade long pursuit of the tycoon. Sadly, this success is not indicative of the SFO’s recent experience.

The Nadir case needs to be seen in the right context: the case is 20 years old. So, while the win for the SFO lays to rest some old ghosts, it doesn’t really tell us much about the agency today.

To understand today’s SFO, we need to move from Asil Nadir to the SFO’s own nadir: the breakdown of the Tchenguiz case this summer.

The SFO’s pursuit of property entrepreneur Vincent Tchenguiz encapsulates the organisation’s problems. The Tchenguiz investigation showed us an organisation beset by a lack of funding, a lack of regulatory tools, and a lack of confidence.

The lack of funding is the most important of all the SFO’s problems. In 2011-12, the SFO budget was £36.8m, nearly 30 per cent lower than the budget in 2008-9. The budget is projected to fall even further by the end of this parliament to just over £30m.

This huge cut has two key consequences. Firstly, it leaves the budget of the SFO dwarfed by the budgets of organisations that it might consider itself up against. Secondly, this squeeze comes at a time when the risk of financial crime may be greater than ever before.

Combine these factors with rival international financial hubs, like New York, being keen to capitalise on questions about the state of UK regulation, and the importance of a properly and fairly funded SFO becomes obvious.

With a reduced budget, the SFO is left with little choice but to either take on an increased workload and risk making mistakes with under-resourced investigations – as it did with the Tchenguiz case – or be more selective with the cases it pursues, allowing many cases of serious fraud to go virtually unexamined.

Either way, the reduced budget risks seriously undermining UK Plc and the SFO’s reputation. Why be afraid of an organisation that is seen as having a low prosecution rate?

The consequences of a shrinking budget also appear to have drawn the SFO into a crisis of confidence.

Confidence never used to be an issue for the SFO, for all the criticism directed its way. Between 2007 and 2010, the agency conducted between roughly 40 and 60 property searches every year in support of its investigations; in the first three months of 2011 there were 16 raids. And then, in March 2011, the Tchenguiz investigation began. Between the beginning of that investigation and this summer the SFO reported no applications for search warrants at all. Zero.

Budget cuts, embarrassment, and resignations of key staff in the wake of the Tchenguiz case; all have combined to leave the SFO looking for a sense of direction.

But it’s not necessarily all doom and gloom for the SFO, as one or two factors could put a brighter complexion on the agency’s future.

Firstly, the government is starting to introduce new regulatory tools that might make its job easier. For instance, Deferred Prosecution Agreements (DPA) – essentially plea-bargains that would help corporates admit wrongdoing in the UK in return for escaping criminal proceedings – are likely to arrive in the UK next year.

DPAs, while not perfect, would help improve corporate culture in the UK by encouraging corporates to root out bad behaviour.

Still, this added soft power needs added hard power to go with it. Incentives to self-report work best when the alternative – criminal proceedings by an enforcement agency – is too much of a risk. Unfortunately for the SFO, that’s not currently the case.

Secondly, the SFO’s new boss, David Green QC, has taken over the SFO and has good plans for improvement. Green has got off to a good start and the recent recruitment of the respected retired judge Geoffrey Rivlin QC is widely regarded as a coup.

But Green needs added investment in time and resources to beef up the SFO’s firepower.

If the government wants to show that it’s serious about combating corporate fraud, and restoring the reputation of the City, then it needs to give the SFO some serious support.

For an organisation so central to protecting the reputation of UK Plc, proper funding is the least the SFO deserves.

Barry Vitou is partner at Pinsent Masons.