UK: Tug-o-War: Extradition And The Risks Faced By U.K. Executives Caught Up In The Fallout From The Subprime Crisis

Article by Michael O'Kane, Head of Fraud and Regulatory Department, Peters & Peters

• With the U.S. epicentre of the crisis and the involvement of U.S. institutions, U.K. executives face the real possibility of extradition to the U.S. to address allegations of fraud.
• The Extradition Act of 2003 significantly altered the evidential burden of the requesting state.
• The number of high profile extraditions in recent memory have set the tone for the legal arguments in these cases.

The fallout from the subprime crisis will be a double cause of concern for U.K.-based company directors and executives especially if they were employed by any of the major international financial institutions currently under the spotlight. As well as their concerns for their employment and financial prospects, there will also be concerns about potential criminal and/or regulatory enforcement action, primarily from the U.S.

In the U.K., the Financial Services Authority (FSA) has, in particular, stated that it is looking critically at such institutions.¹ In the 2007/2008 Annual review, the FSA stated that the reduction of financial crime was one of its statutory objectives and "maintaining the integrity of financial markets is essential to achieving efficient and fair outcomes for, and sustaining the confidence of, market participants and consumers, and ensuring the U.K. financial industry's good reputation and international standing". Indeed, the FSA has never been under more pressure to protect the reputation of the City, with the Financial Times reporting in September 2008 that this pressure was being exerted by bank chief executives and traditional investors, as well as politicians and the popular media.² Although the FSA has prosecutorial powers, these are very rarely exercised, so any such investigations are more likely to give rise to regulatory action against the institutions or the individuals considered responsible.

But what of the Serious Fraud Office (SFO) at this time of national crisis? In respect of high-level fraud, potentially undermining the confidence of the U.K. economy, one would expect the SFO to play a lead investigative and prosecutorial role. However, the new director of the SFO, Richard Alderman, has expressed his determination that the SFO should focus on the prevention of fraud and seems less interested in prosecutions that are lengthy, high-cost and high-risk.³ Corporations and individuals investigated in connection with the subprime crisis are likely to be stabled in this category. Given that the crisis appears to emanate from the U.S. and involve institutions on both sides of the Atlantic, there must be a real risk that U.K. and/or EU executives will be caught up. This is particularly so when one considers that the FBI announced investigations into Lehman Brothers, Fannie Mae, Freddie Mac and AIG, which are quite possibly the tip of the iceberg with many statewide investigations also being conducted.⁴

A key issue therefore for company directors and executives caught up in the subprime crisis is possible extradition to the U.S. for fraud-related conduct.

What might be alleged? Traditionally, banks financed mortgage lending by deposits from their customers and mitigated the risk of bad debt with thorough income checks and home valuations. Over time, this model has evolved with the rise in the secondary mortgage markets. They have managed to increase their ability to finance mortgages by selling the mortgages on to the bond markets. The positive aspect of this model was to allow banks to offer mortgages to people who traditionally would not be granted a mortgage (i.e. subprime) and therefore increasing home ownership. The downside was two-fold: first, the subprime mortgages often had high interest rates to make allowance for increased risk of bad debt (which in turn led to bad debt) and second, the mortgage bond market reduced the incentive for banks to properly check the mortgages that they were offering.

The financial crisis was very much inspired by the high-risk decisions made by banks, and the FBI investigations will be focusing on whether major financial institutions put pressure on ratings agencies to award top ratings to securities issued and, in the extreme, whether they actively misled investors about the health of their assets.⁵ The agencies are considered, in many camps, to have failed debt holders by attributing the top ratings to securities that were highly risky and therefore lost billions of dollars that belonged to investors.⁶ In English law it is an offence to knowingly or recklessly provide information to an investor that is misleading under section 177(4) of the Financial Services and Markets Act 2000.

Over the last decade, the U.S. Department of Justice and the Securities and Exchange Commission have increasingly looked to enforce beyond the U.S. shores in cases of corruption, financial crime and cartels. Some reasons for this are the growth in multinational corporations, technological advances, an increase in the use of offshore financial centers and new scrutiny of the international flow of finance in the post-Enron era. The current, almost unprecedented crisis only adds to this and U.S. prosecutors will be turning to the large number of international agreements, treaties and conventions, to give effect to their aims.

Extradition

The U.S. has not been shy in requesting the extradition of U.K. nationals in order to charge them with criminal offences in the U.S.: Ian Norris, the former chief executive of Morgan Crucible who has not yet been extradited, and the Natwest Three who were extradited to the U.S. to face criminal charges due to the parts they played in international corporations. The three defendants known as the Natwest Three were U.K. nationals working for a U.K.-based company and around 95% of their work was conducted in the U.K. compared to 5% in the U.S. The loss resulting from their alleged misconduct was suffered by a U.K. bank. The district judge in Texas was unconcerned by these facts and highlighted that the alleged offence occurred in the U.S. and therefore there was a sufficient nexus to the U.S. The English court found that, under section 137(2)(a) of the Extradition Act 2003, although conduct constitutes an extradition offence in relation to the category 2 territory if the conduct occurs in the category 2 territory, it does not require that all of the behaviour occur in the category 2 territory. The FSA made disclosure to the SEC on the basis that the U.S. authorities were the most appropriate to investigate the matter and the Serious Fraud Office decided against a prosecution.

How serious is the threat of extradition to an executive of the U.K. branch of an international corporation? If the FBI investigation reveals anything that causes the Department of Justice or state prosecutor (Attorney General) to suspect criminal conduct, then an extradition request can be made under the U.K.-U.S. Extradition Treaty 2003.

The U.K.–U.S. Extradition Treaty was in turn implemented into U.K. law by the Extradition Act 2003, Part 2 of which expounds the extradition procedures between the two countries. Aside from the technical requirements in terms of a request, the requesting party must satisfy a number of conditions. The main condition is that the offence suspected to have been committed must satisfy 'dual criminality.' This means that the conduct must constitute an offence in both the requesting and requested state and be punishable in both states by a minimum custodial sentence of one year. By way of example, fraud is a federal offence in the U.S. and an offence under the Fraud Act 2006 in the U.K. In both countries, it is punishable by lengthy periods of imprisonment.

Part 2 of the Extradition Act 2003 is considered controversial because of the evidential burden the Act places on the requesting state. In order to make a request for extradition, the U.S. need not provide prima facie evidence that an offence has been committed. In short, the allegations of the U.S. government will alone be sufficient to secure the extradition of a U.K. national to the U.S. This is a dramatic change to the old extradition law, under which the requesting state had to provide evidence that was "sufficient according to the law of the requested Party to justify the committal for trial."⁷ Under the new law, the requesting state need only provide "a statement of the facts of the offence(s)."⁸ This makes it much easier for the U.S. to request the extradition of a U.K. national who has been employed by one of the international corporations under investigation unless there is a relevant bar to their extradition.

There are a number of bars to extradition of a U.K. national to the U.S. under the Extradition Act 2003 such as double jeopardy, passage of time passed between the alleged offence and the request for extradition or extraneous conditions such that the person would, if extradited, be prosecuted or prejudiced against on the grounds of race, religion or nationality.

The double jeopardy bar is activated if: "it appears that he would be entitled to be discharged under any rule of law relating to previous acquittal or conviction if he were charged with the extradition offence in the part of the United Kingdom where the judge exercises his jurisdiction."⁹ In other words, if a U.K. executive of an international corporation were either acquitted or convicted of fraud X in England, he could not be extradited to the U.S. in order to be charged and prosecuted for fraud X in the U.S.

As well as the double jeopardy bar which applies to persons on trial, acquitted or convicted for the same or equivalent offence as the extradition offence, there is also a temporary bar to extradition to the U.S. if the person is in the process of being prosecuted for any other offence in the U.K.. In such a case, the judge must adjourn the extradition hearing until the charge is disposed of, withdrawn or proceedings are discontinued. If the person is sentenced to a term of imprisonment for that offence then the judge may adjourn the extradition hearing until the sentence has been served.

The impact of this on a person employed by an international corporation is arbitrary. It depends on whether criminal proceedings are brought in the U.K. for either a sister offence or one entirely unrelated. By way of example, if an executive was prosecuted for insider trading by the FSA, a request for extradition to the U.S. to be charged with procurement fraud would be adjourned.

Considering prosecution in this area is most likely to be sought in the U.S., the double jeopardy bar and temporary bar from ongoing U.K. prosecutions are less likely to prevent the extradition of a U.K. national to the U.S.

The most commonly considered legal argument in opposition to a request for extradition is whether the human rights of the individual would be infringed upon by accession to the extradition request. Section 87(1) of the 2003 Act requires the extradition judge to decide whether a person's extradition would be incompatible with his convention rights in relation to the Human Rights Act 1998. The two articles often cited are Article 6, the right to a fair trial, and Article 8, the right to a private and family life.

Article 6(3) confers "minimum rights" on criminal defendants that include the right to adequate time and facilities to prepare the defence, legal assistance (free if necessary), and the right to require the attendance and examination of witnesses. An Article 6 argument was raised in the case of the Natwest Three.¹⁰ The defendants argued that they would not have a fair trial in Texas in that they would be denied bail, and the conditions in which they would be held on remand would be inimical to their capacity to prepare their defence. In addition, there would be a long delay before trial and they would have to pay for legal representation which there would be no possibility of recovering if they were acquitted. The Court found that there was a right to legal representation, to apply for bail, and to seek a change of venue in Texas and the process of extradition is 'necessary in a democratic society' and proportionate. The defendants were subsequently extradited.

Article 8 allows that "there shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society." In the case of the Natwest Three,¹¹ the court held that there was no doubt that the extradition was "in accordance with the law" and was sought in pursuit of a legitimate aim, namely "the prevention of... crime." The only issue remaining was whether it would be a proportionate interference. The court held that extradition could only be refused under Article 8 if there were exceptional circumstances and in this case, there were none.

The same result was found in the case of Norris,¹² where the House of Lords found no circumstances to satisfy the appropriate test of high exceptionality to render his extradition disproportionate.

In conclusion, if the FBI investigations into any of the international corporations suspected of being the architects of fraud in relation to the subprime crisis result in U.S. indictments, then legal arguments against extradition to the U.S. will be scarce in light of recent extradition and human rights cases. In the reverse, U.S. executives can be less concerned by a threat of extradition to the U.K. as there is little interest and less success¹³ being shown by U.K. prosecuting agencies to seek prosecutions for fraudulent behaviour.¹⁴

Footnotes

1. Brokers Fined and banned in FSA Crackdown, The Independent, 13 July 2008.

2. Political Heat Turned up on Watchdogs, The Financial Times, September 19 2008.

3. Richard Alderman, Serious Fraud Office Annual Report, 5 April 2007 to

4 April 2008.

4. FBI investigates Fannie Mae and Lehman Brothers, The Times, 24 September 2008.

5. FBI investigates Fannie Mae, Freddie Mac, AIG and Lehman Brothers, The Times, 25 September 2008.

6. Securities and Exchange Commission Press Release: SEC Charges Two Wall Street Brokers in $1Billion Subprime – Related Auction Rate Securities Fraud, 3 September 2008.

7. 1972 U.K. – U.S. Extradition Treaty.

8. Article 8, paragraph 2(b).

9. Section 80, Extradition Act 2003.

10. Bermingham v Government of the United States of America [2006] EWCA 2006.

11. Bermingham v Government of the United States of America [2006] EWCA 2006.

12. House of Lords in Norris v Government of the United States of America and others [2008] UKHL 1.

13. Review of the Serious Fraud Office, Final Report, Jessica de Grazia, June 2008.

14. Who's Who Legal, Recent development in the investigation and prosecution of serious fraud in the U.K., 1 July 2008.

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