UK: The Director Of The SFO Criticises Corporations Which Commission Internal Investigations Before Self-Reporting

Last Updated: 6 September 2014
Article by Adam Greaves

Following an article published in Legal Week in August authored by Ben Morgan, the joint head of bribery and corruption at the SFO entitled "Coming Clean – the argument for cooperating with the SFO on corporate crime", we commented on this in a blog dated 18 August 2014 setting out some of the issues which corporate clients have to consider when deciding whether or not to self-report possible criminal issues to the SFO.  We offered the view that: 

  • the SFO's position as stated by Mr Morgan had perhaps been oversimplified; 
  • that a number of corporations and their lawyers were struggling with these issues and debating them privately with the SFO; and 
  • that the issues would benefit from a public debate. 

We concluded that blog by saying that these issues, when considered in depth, and if aired publicly, may reinforce the SFO's arguments for self-reporting, rather than undermine them, so a public debate should be beneficial all round in order to dispel corporate anxieties and misunderstandings. 

On 27 August 2014 The Times newspaper published an article in its business section "Fraud Office attacks fraud crime reports" in which the director of the SFO, David Green CB QC, was quoted as saying that he is "against businesses commissioning their own reports into allegations of serious misbehaviour that often "cleared" the subject of any illicit activity".  He complained that the SFO was often handed privately paid for investigations by expensive external lawyers that contained an "inherent conflict"...  The report itself may tend to minimise the problem one way or another.  Later claims of legal privilege on witness statements taken by the external lawyers can be questionable.  And, of course, the crime scene can be churned up by the investigation.  The SFO will never take such a report at face value and will drill down into its evidence and conclusions". 

There is no suggestion in The Times article that Mr Green is currently pushing for a change in the law in order to address his stated concerns. 

The Times article then goes on to cite a couple of apparent examples, one in the United States and one in the United Kingdom, of large professional service firms having produced reports following internal investigations which, the article intends the reader to infer, were not entirely candid in their conclusions, or had adopted too narrow a remit at the onset.  We make no comment on the fairness or accuracy of these cited examples. 

The article concludes that although more than 100 SFO staff are working full time on SFO investigations into LIBOR rigging and foreign exchange market ("FOREX") manipulation, Mr Green warned that "...it was likely that the SFO was a long way from getting to the bottom of much of the criminality in the City..."  The size of the white collar criminal legal sector servicing the City of London suggests there is a lot more work out there that the SFO could be doing..." 

While one has some initial sympathy for the Director's comments, when considered in further detail, a number of other issues come to mind: 

  • Encouraging corporations not to hire external solicitors to advise them on whether they have potential criminal issues within the company could lead to:
  • Corporations inadvertently (or otherwise) covering up their own wrong doings, having not had the benefit of objective, experienced external advice; 
  • Alternatively, because most corporations do not employ in-house lawyers with white collar defence experience, corporations failing to recognise at all that conduct within the organisation was criminal or should be reported to the SFO; 
  • And/or, in the absence of objective external advice, corporations (or at least individuals within the corporations) will themselves "contaminate the crime scene" (to use the Director's phrase) and/or to destroy evidence such as deleting electronic data or destroying hard copy documents.  The external advisers would not be able to watch and ensure evidence is properly preserved. 
  • Many corporations would not even recognise or accept that self-reporting to the SFO was something that they should even consider, let alone act upon. 
  • Experience tells us (by which I mean white collar lawyers generally) that self-reporting by corporation is almost always done on the strong advice of reputable external law firms rather than from a corporation's innate desire to "come clean" and confess to an investigating/prosecuting agency.  Corporations are already fearful that by self-reporting they will bring a huge amount of adverse publicity and incur significant costs, and therefore by discouraging corporations from taking external legal advice, we think that corporations are far less likely to self-report, not having any guidance as to the potential outcome, rather than more likely.  People (including legal persons) are far more likely to bury their head in the sand if they do not receive expert advice. 
  • Further, it should be remembered that the SFO's nominal budget has been reduced drastically under the current coalition government, due to cutbacks in all government departments.  Although this has been addressed/reversed to some degree by so-called "blockbuster funding" from the Treasury in relation to specific investigations, the SFO is still seriously underfunded.  The current practice of corporations carrying out extensive internal investigations and handing over their report to the SFO is actually helping the SFO because a lot of the leg-work has been done by the company itself and this is very costly work.  Of course, every corporation accepts that the SFO will want to drill down further into the evidence later.  The suggestion that the SFO itself has the resources to undertake dozens (or perhaps a great deal more) of the initial investigations itself is unlikely to ever be supported by government funding as the SFO's annual budget would need to double or treble.  The current system offloads huge costs on to the corporations. 
  • Further, given the slow pace of the SFO's current investigations, which may take several years before charges are laid against any defendants and even longer before they conclude with a trial, this will make the process of justice even slower not faster, which is bad for justice and bad for business. See for example an article in the Financial Times of 28th August 2014 entitled "Regulatory Revenge Risks Scaring Investors Away".
  • Although The Times article of 27 August 2014 cites a couple of examples where reports carried out by external advisers are thought to be flawed (in fact the American example is the only one of which there seems to be explicit criticism that the professional services firm is alleged to have "toned down some of its criticism"), no credit has been given by the article or by the SFO for the (probably) scores of cases of self-reporting that go on every year to the SFO that has been conducted in a perfectly acceptable and honest manner.  Perhaps there should be more clarity (albeit anonymised) of these statistics? 
  • Even if the SFO were much better funded, and let's say its budget were trebled, that would still not be justification for saying that corporations should not able to take legal advice on activities that have been conducted within the organisation or by the organisation with third parties.  It remains a fundamental principle of our constitution that people and legal entities should be able to take legal advice and that that legal advice should remain legally privileged i.e. confidential to the client, unless the client waives his right to privilege.  If you had a client who had/may have committed some other type of crime, you would not send him off to the police to make a confession on their own, would you?  You would want to understand your client's own story first. 

The engagement of external lawyers by corporations is still the safest and best option as those external law firms not only have their own firm's professional brand reputation to protect in giving full honest and fair reports, but the lawyers who form those organisations all owe personal duties to the court not to mislead it. Their report would have been prepared in the knowledge that, if disclosed to the SFO as part of a self-reporting procedure, it could end up being scrutinised by the court.  

Whilst there is a "crime scene" it is mostly consisting of paper and electronic documents, and witness evidence, and not the forensic DNA evidence seen on television dramas.  "Contamination" will therefore be different, but the deletion or alteration of documents mostly itself leaves an evidential trail, so it is not clear whether there is really a serious problem here.  We would have been interested to have seen some examples cited in The Times article as to Mr Green's specific concerns.  Further discussion is required, publicly, if this suggestion is to be considered seriously. 

Perhaps the Director's real gripe concerns an inequality of arms i.e. that large corporations are usually much better funded than the SFO itself.  That may be true, but that is a question for the government to address in terms of how serious it is in pursuing serious economic crime in the UK.  Removing corporation's rights to take external legal advice on any perceived problems within the corporation would be throwing the baby out with the bath water.  The Government should perhaps allow the SFO to keep more of the money it recovers through civil settlements, criminal fines levied by the Court as a result of the SFO's prosecutions and monies disgorged by defendants under the Proceeds of Crime Act.

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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