UK: Fraud Update

David McCluskey's reviews anti-corruption guidance, the FSA's crackdown on insider dealing, SFO successes and money laundering.

"This article first appeared in Solicitors Journal. For more information visit"

One of the less surprising announcements in the wake of the formation of the coalition government in May was that George Osborne would press ahead with plans to consolidate individual prosecuting agencies such as the FSA and the Serious Fraud Office into a 'super agency' reporting to the Attorney General, via an expanded Law Officers Department. However, the necessary legislation was not announced in the first Queen's speech, amid reports that the costs of setting up the agency were seen as prohibitive. Now that the political agenda is dominated by cost saving, it remains to be seen whether or when this initiative will return to the headlines.

Anti – Corruption legislation

Probably the most significant event of the last six months for fraud lawyers has been the publication of the government's long-awaited consultation on guidance to commercial organisations for preventing bribery, under section 9 of the Bribery Act 2010.

The consultation provides draft guidance on procedures that relevant commercial organisations can put in place to "prevent" bribery. The guidance is aimed at the much discussed "adequate procedures" defence to section 7 of the Bribery Act, under which commercial organisations can be convicted of failing to prevent bribery from taking place.

Predictably, this has been accompanied by an outpouring of paper on what constitutes adequate procedures (See Transparency International's paper, published in July 2010).

The consultation itself is brief and commendably realistic about what it attempts to achieve, which is to set out statements of general practice. It is "not intended to be prescriptive or standard setting, or impose any direct obligation on business." Risk managers and money laundering reporting officers will recognise in the guidance that old chestnut, "the risk- based approach". It will be for each organisation, large or small, to decide how each of the six principles for bribery prevention are to be implemented.

The draft guidance candidly acknowledges that many of these principles, particularly those related to monitoring and review and policies and procedures can be covered by current corporate governance control with minimal amendment.

Of particular interest in the guidance (and required reading for all who manage risk in this area) is the section entitled 'Further information about the Act' which provides a summary of the main offences and provides further guidance on specific issues such as local law, hospitality and facilitation payments. Finally, a number of illustrative scenarios are provided with examples of how the six principles would be expected to have been implemented.

The guidance (and the Act) is a classic example of how to shift the burden of proof to the defence without actually doing so; it is left entirely up to each commercial organisation to decide how and to what extent they implement the guidance principles. The only certainty is that there is no 'do nothing' option. The consultation closed on 8 November.

SFO Prosecutions

Amid some notable successes, the, the SFO secured a massive compensation order against Virendra Rastogi, the former chairman of RBG Resources. Rastogi, who is currently serving nine and a half years for his part in the multi-million pound RBG Resources/Allied Deals fraud, was ordered to pay £30m. The judge had calculated his benefit at over £1bn.

In R –v- Dougall [2010] EWCA Crim 1048, the SFO's policy of trying to reach US- style plea bargain agreements with defendants was subject to further scrutiny, following the critical remarks of Lord Justice Thomas in R –v- Innospec Limited.

Dougall had reached an agreement with the SFO under section 73 of the Serious Organised Crime and Police Act 2005, and had then pleaded guilty to conspiracy to corrupt. He appealed against his sentence of 12 months' imprisonment on the basis that it was excessive and that a suspended sentence should have been imposed.

The section 73 agreement between the defendant and the SFO, concluded before the judgment in Innospec was delivered, contained a submission by the director of the SFO that a suspended sentence "would be wholly consistent with the considerations of public policy attaching to this case, as outlined in this document". The court described those submissions as "advocacy" and said that they did "not simply and objectively draw the attention of the court to matters of potential mitigation."

The court had already said: "In this jurisdiction a plea agreement or bargain between the prosecution and the defence in which they agree what the sentence should be, or present what is in effect an agreed package for the court's acquiescence is contrary to principle. That applies to cases of this kind, as it does to others."

It is fair to point out that the SFO had by this point accepted that the plea agreement had gone further than it should have, given the comments in Innospec. Nonetheless, the court struggled with what had plainly been an expectation created in the defendant's mind that his co-operation would lead to a suspended sentence and after much consideration did indeed suspend Dougall's sentence, while making clear that its decision to do so "has nothing to do with any sentencing agreement between the prosecution and the defence."

It is difficult to see where the SFO goes from here. US prosecutors, who frequently participate in and take advantage of many multi- jurisdictional investigations (as they did in Dougall), have a much freer hand when it comes to reaching plea bargains with defendants over ranges of sentences in exchange for co-operation. The fact that the SFO is now in effect expressly forbidden from giving an indication of the kind of sentence it sees as appropriate will not stop defendants asking – as they always do – what their benefit will be from co-operation. Only two options spring to mind: charging for a lesser offence, or not prosecuting at all – neither of which are in line with public policy, CPS Guidance or the SFO's own stated position.

Financial Services Enforcement

Elsewhere, the FSA continues its crusade against insider dealing, notching up a number of further arrests and the conviction and sentencing of Anjam Saeed Ahmed, an ex-hedge fund trader who became the first person to enter an agreement with the FSA under section 73 of SOCPA. Following a guilty plea to conspiracy to commit insider dealing, he was sentenced to ten months' imprisonment, suspended for two years, with 300 hours of unpaid community work and a £50,000 fine. A confiscation order was also made against him for £106,280.

In a linked case, settled by the FSA under its regulatory procedures, a cash equities broker, Fabio Massimo De Biase, was fined some £250,000 and banned from working in financial services on the basis of lack of integrity. De Biase (separately from the insider dealing conduct described above) had agreed with Ahmed to charge a higher level of commission to Ahmed's employer and to share the profits between them.

The FSA also suffered its most high profile setback when Andrew King and Michael McFall were acquitted of insider dealing charges. There are, however, 11 others awaiting trial, of whom seven are to go on trial in May 2011.

Money Laundering

In R –v- Geary, Lord Justice Moore-Bick delivered a judgment which has potentially far-reaching consequences for the prosecution of money laundering under the Proceeds of Crime Act 2002.

Geary had pleaded guilty to receiving some £123,000 from a friend, of which he returned some £118,000 to him, largely in cash. Geary had accepted the money believing that his friend wished to hide his assets to reduce any payout in some forthcoming divorce proceedings. In reality the funds were the proceeds of a fraud committed by a third person. It was common ground that the money was criminal property but the only question was whether Geary had the necessary mens rea to render him guilty.

The court found that to be guilty of an offence under section 328(1) of the Proceeds of Crime Act, a defendant must know or suspect that the property to which the arrangement relates is criminal property; that is, property that has been obtained as a result of, or in connection with, crime.

The court held that this was not satisfied in the instant case because at no time did the appellant believe that the money he received was the result of criminal activity: "The object of the arrangement, as understood by the appellant, may have been unlawful, but the arrangement was to use lawfully acquired money in an unlawful way; it was not to deal with money that had been acquired unlawfully."

The court continued: "In our view the natural and ordinary meaning of section 328(1) is that the arrangement to which it refers must be one which relates to property which is criminal property at the time when the arrangement begins to operate on it. To say that it extends to property which was originally legitimate but became criminal only as a result of carrying out the arrangement is to stretch the language of the section beyond its proper limits." (emphasis added).

Helpfully, for such a far-reaching decision, the court went on to consider all the current authority in this area (though not, significantly, R v Anwoir, see below). The court nonetheless concluded, in relation to section 327, 328 and 329 that: "In each case the natural meaning of the statutory language is that in each case the property in question must have become criminal property as a result of some conduct which occurred prior to the act which is alleged to constitute the offence."

There are two important implications of this case: first, money laundering reporting officers and others who are compelled to make reports, whether under section 327, 328, 329 or 330, will have to undertake a careful and somewhat artificial exercise to ensure that what they wish to report is in fact a money laundering offence and not part of the original offence that turns the funds into criminal property.

The reason for this is that a report made about money which is not criminal property does not protect the discloser from an allegation of breach of confidence. As the long-running case of HSBC –v- Shah shows, the consequence of a report made about a client or customer may be lengthy and complex litigation and possibly worse where a duty of confidence or privilege is otherwise owed.

Second, prosecutions for money laundering will have to be more tightly examined and there may be scope for acquittals where it is not possible to be clear whether or when money became criminal property. How this will mesh with the line of authority starting with R v Anwoir, according to which a jury may infer property is criminal property merely by looking at the circumstances in which the money is handled, remains to be seen.

In October the government announced that there is to be a review of the UK's extradition law. The review panel is to be headed by Lord Justice Scott Baker, who will be assisted by David Perry QC of 6 King's Bench Walk and Anand Doobay of Peters & Peters Solicitors LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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