UK: Investigating And Prosecuting Fraud & Corruption In The International Business Environment - Part 1

Last Updated: 7 April 2009

Article by Monty Raphael, Joint Head of the Fraud and Regulatory Department.

1. INTRODUCTION

In this new economic climate, white collar crime is no longer seen as victimless. It is seem as symptomatic of the failures of a global banking and regulatory system and countries are cracking down on perpetrators. The most important issue for the public in the UK, EU and international community is not, therefore, the naming and shaming of companies, the deterrent effect of investigation or the financial sanctions imposed on those who have committed such offences. What matters is whether fraudsters and perpetrators of corruption are prosecuted in a court of law.

Fraud and Corruption are global crimes. These are offences that cross borders, political regimes and legal jurisdictions. The developing world, in particular, is becoming a hot spot for the perpetration of white collar crime. Endemic corruption within the criminal justice and political systems mean that there is little interest to investigate and prosecute fraud cases.

Currently in the news are the internet scams originating in Nigeria and ending in Brighton (of which our Anti Corruption Champion and Justice Secretary, Jack Straw, recently found himself on the receiving end). There is also increased interest in unregulated hawala banking systems within certain communities that operate the transfer of money between the UK and any number of countries including Pakistan, Bangladesh and India. The question is, how does an international business community deal with the potential for financial crime and the countries in which financial crime is overlooked and ignored.

In the last two decades, states, the UK included, have built a huge edifice of interlocking agencies, instruments, treaties and pathways, all designed to confront, if not defeat, the ever mutating virus of fraud.

In Britain, fraud rates show no sign of abating. According to KPMG Forensic's Fraud Barometer1, more than £1.1billion of fraud came to UK courts in 2008, the highest level recorded since 1995 and the second highest in the twenty-one year history of the survey. Fraud by professional gangs remained at the extremely high levels seen in previous years (£800million in 2008), but there was a marked increase in fraud by individuals. Taken together, company managers, employees and customers were tried for some £300million of fraud last year, three times the value seen in 2007.

KPMG warns that the worst is yet to come. The bulk of the fraud committed since the credit crunch began in August 2007 is unlikely to come into the public courts in the near future. The Fraud Barometer's records show that in the last recession of the early nineties the full peak of fraud in the courts was not reached until 1995.

The corporate sector, in particular, suffered during 2008. There was a five-fold increase in fraud losses, up from £24million (45 cases) in 2007 to £125million (54 cases) in 2008. For corporates, the financial sector and public sector, the fraud threat grew both internally and externally. Managers accounted for £128million (£54million in 2007) and employees for £100million (£27million), while customers inflicted £65million (£25million).

Perpetrators of fraud in the corporate sector ranged across the spectrum of seniority. By way of example, Bernard Madoff has pled guilty to a ponzi scheme that is estimated to have lost $50billion. At the other end of the spectrum, a junior PA carried out frauds at three employers in a row, spending on company credit cards, cashing cheques and setting up personal direct debits from business accounts. Despite being sacked by her first two employers for committing fraud, she was still able to find work and carry out her scams again. She gained £200,000 before she was finally prosecuted.

To cope with the increasing volume of white collar crime, the international community has developed new investigative powers to assist countries and individuals to take action and recover lost funds. When criminal proceedings are brought against white collar criminals, information can be gathered through mutual legal assistance and various information exchanging treaties. When civil proceedings are instigated, there are various international orders that can be made to freeze assets and search premises.

There have a number of high profile cases recently uncovered by the United States Department of Justice. The two most news worthy examples are the cases against Bernard Madoff and Allen Stanford. The US DOJ is investigating the allegations against Stanford and has brought criminal proceedings against Madoff. The US operates a plea bargaining system in the hope that the accused will cooperate in which case they can avoid the expensive, costly and complex investigations to uncover the lost funds. Madoff refused the plea bargain offered to him and pled guilty which may raise concerns about how far the investigation can go and whether the stolen assets will be recovered and returned to those who have lost their savings?

In the UK, we are witnessing a changing of the tide towards the use of civil sanctions and investigative powers in cases of both corruption and fraud with the priority appearing to be the return of funds rather than the imprisonment of perpetrators. However, there is disparity between how the UK prosecutors bring proceedings for white collar offences such as fraud and prosecutions for corruption. Fraud is an offence under the Fraud Act 2006 whereas there is no conclusive anti bribery legislation in the UK. The Law Commission introduced its Draft Corruption Bill in November 2008 which is currently being considered by government. It is not yet known whether the UK will implement the Bill but under increased criticism from the OECD, Transparency International and various factions of the international community, it must show progress.

This paper will consider whether the international community is doing enough to confront fraud and corruption worldwide or even in their own back yards?

2. INTERNATIONAL FRAMEWORK FOR WHITE COLLAR CRIME INVESTIGATION AND PROSECUTION

Anti-Corruption Codes And Protocols

There are a number of global and targeted codes and protocols to assist States in the fight against corruption as follows :

Global

  • United Nations Convention Against Corruption (UNCAC)

    Adopted:
    31 October 2003 by the UN General Assembly
    Signatories: 140 (as of 1 November 2007).
    Ratifications/Accessions: 125 (as of 29 September 2008)
    Entry into force: 14 December 2005
  • United Nations Convention Against Transnational Organized Crime (UNTOC)

    Adopted:
    15 November 2000 by the General Assembly of the United Nations
    Signatories: 147 (as of 7 October 2005) Opened for signature on 12 December 2000
    Parties: 146 (as of 29 September 2008)
    Entry into force: 29 September 2003
  • OECD Convention On The Bribery Of Foreign Public Officials In International Business Transactions (OECD Convention)

    Adopted:
    21 November 1997 by the Negotiating Conference
    Signatories: 37 (as of 1 November 2007)
    Ratifications: 37 (as of 1 November 2007)
    Entry into force: 15 February 1999
  • Revised Recommendation Of The Council Of The OECD On Combating Bribery In International Business Transactions

    The 1997 Revised Recommendation adds strength to the effects of the OECD Anti-Bribery Convention by focusing on areas the Convention does not cover in depth: accounting, auditing and public procurement; international co-operation; the non tax deductibility of bribes; and measures to deter, prevent and combat bribery.

Africa

  • African Union Convention on Preventing and Combating Corruption (AU Convention)

    Adopted:
    11 July 2003
    Signatories: 43 (as of 29 September 2008)
    Ratifications: 27 (29 September 2008)
    Entry into force: 5 August 2006
  • Southern African Development Community Protocol Against Corruption (SADC Protocol)

    Adopted:
    11 July 2003
    Signatories: 43 (as of 29 September 2008)
    Ratifications: 27 (29 September 2008)
    Entry into force: 5 August 2006
  • Economic Community Of West African States Protocol On The Fight against Corruption (ECOWAS Protocol)

    Adopted:
    21 December 2001
    Ratifications: 1
    Entry into force: Upon ratification by at least 9 signatory states

Americas

  • Inter-American Convention Against Corruption (OAS Convention)

    Adopted:
    29 March 1996
    Signatories: 34 (as of 1 October 2007)
    Parties: 33 (as of 1 October 2007)
    Entry into force: 3 June 1997

Asia And Pacific Region

  • ADB-OECD Action Plan For Asia-Pacific (Action Plan)

    Established:
    November 2001
    Endorsing Countries: 28 countries,17 initial endorsements and 11 subsequent endorsements (as of 1 November 2007)

Europe

  • Council Of Europe Criminal Law Convention

    Adopted
    : 4 November, 1998, by the Council of Ministers
    Opened for signature: Strasbourg, 27 January 1999
    Signatories: 49 (as of 1 November 2007) Consisting of 45 member states and 3 non-member states
    Ratifications and accessions: 41 (as of 29 September 2008)
    Entry into force: 1 July 2002

    Open to: All 46 member states of the Council of Europe and 5 non-member states (Belarus, Canada, Holy See, Japan, Mexico, USA). Also, EU and other states can be invited to join.
  • Council Of Europe Civil Law Convention

    Adopted
    : 4 November 1999
    Signatories: 42 (as of 1 November 2007)
    Ratifications: 33 (as of 29 September 2008). Including one non-member state: Belarus.
    Entry into force: 1 November 2003
    Open to: Council of Europe member states; non-member states which took part in drawing it up; other non-member states by invitation; and the European Community.
  • Resolution (99) 5 Of The Committee Of Ministers Of The Council Of Europe: Agreement Establishing The Group Of States Against Corruption
  • Resolution (97) 24 Of The Committee Of Ministers Of The Council Of Europe: Twenty Guiding Principles For The Fight against Corruption
  • European Union Convention On The Protection Of The Communities' Financial Interests And The Fight Against Corruption And Two Protocols
  • European Union Convention On The Fight Against Corruption Involving Officials Of The European Communities Or Officials Of Member States

The UK is a signatory of the following anti-corruption conventions:

  • The United Nations Convention Against Corruption (UNCAC)
  • The United Nations Convention against Transnational Organized Crime (UNTOC)
  • OECD Convention on Bribery of Foreign Public Officials in International Business Transactions
  • Council of Europe Criminal Law Convention on Corruption
  • Council of Europe Civil Law Convention on Corruption (Yet to ratify)
  • The EU Convention on the Protection of the Financial Interests of the communities and protocols
  • Convention on the Fight against Corruption involving Officials of the European Communities or Officials of Member States of the European Union

United Nations Convention Against Corruption

The United Nations Convention Against Corruption (UNCAC), the first global anti-corruption treaty, came into force on 14 December 2005. The Convention introduces a set of standards, measures and rules that all countries can apply in order to strengthen their legal and regulatory regimes in the fight against corruption. The Convention calls for preventive measures and the criminalization of the most common forms of corruption in both the public and private sectors. As well as this, the Convention makes a major breakthrough by requiring Member States to return assets obtained through corruption to the country from which they were stolen.

Furthermore, UNCAC offers a list of measures to effectively identify, trace, freeze and recover the proceeds of crime. These measures will assist in returning lost funds to their countries of origin and provide the evidence necessary to prosecute. The trans-border nature of the movement of assets requires that these measures are adopted equally by all state parties and for co-operative agreements to be in place.

In order to initiate investigations and prosecutions for corruption, law enforcement agencies need access to financial information; about influential persons, access to evidence from overseas witnesses and the banks to get the evidence for the court. This information is often protected by the banks who owe a duty to their customers, therefore, it falls to the State to ensure expeditious access to information.

In order to make provision for criminal trials, UNCAC offers the principle of universal mutual legal assistance1, a little idealist; this principle would enable the creation of an effective network of agreements across which information could be passed and prosecutions secured.

However, in practice, there are great difficulties to overcome in the creation of such agreements. States parties must be able to trust each other that when one state gives another information regarding funds that other state will not prosecute the defendant and retain the funds themselves. Even if this trust were gained, and such trans-border agreements were in place, there may not be provisions within the domestic law of the developing country to enforce the measures set out in UNCAC. Furthermore, domestic law is only affective if the country enjoys the rule of law. Sadly, examples of judicial corruption can be found whereby the courts prevent both the flow of information and the successful prosecution of perpetrators of corruption3.

The Recovery Of Assets

Modern banks are no longer microcosms in society, they are now a part of a global system whereby an asset can travel across jurisdictions and metamorphose into different types of financial product at great speed. Therefore, the tracking, investigation and recovery of an asset stemming from corruption is more difficult and expensive than ever before. Such a system requires global communication and assistance in order to track such an asset.

Chapter V of UNCAC begins: "The return of assets pursuant to this chapter is a fundamental principle of this Convention, and States Parties shall afford one another the widest measure of cooperation and assistance in this regard".

Unlike, e.g. the French legal system, the UK does not know the concept of "partie civile" where a person who has suffered an injury as a result of another's violation of the law, may claim civil compensation in criminal proceeding. In the UK, civil proceedings will must be commenced in parallel.

The first step in a civil asset recovery claim is to find out where the financial trail begins. For example, if a fraud claim is made in a jurisdiction that permits disclosure in personam, it must first be established that the Court has jurisdiction over the defendant and that he received assets or is likely to have assets within the jurisdiction of the Court. Then the Court will require him very rapidly (the standard English freezing order says "forthwith"), to disclose what has become of the proceeds of fraud and where his assets are. This will enable the claimant to know how and where to seize them and to ensure that third parties who hold those funds are aware of the English Court Order.

Jurisdiction

One of the most complex aspects of international asset tracing is the issue of jurisdiction. Generally the jurisdiction in criminal law is territorial and it is a well established principle that one state will not enforce their legal penalties on another state. Criminals use these principles to their advantage often spreading the crime over at least two jurisdictions and investing in a third.

The proceeds of crime may move from the western financial centers such as London to the developing world or from the developing world to London. According to a study by Global Financial Integrity, a US think tank, $900billion is lost by the world's poorest countries (nearly 10 times the global aid budget) through the flow of illicit capital4. The study found that the volume of capital flight from developing countries is increasing by 18 per cent each year5 whilst there is evidence of an increasing use of the UK financial system to launder criminal proceeds with an estimated £15billion laundered in the UK per year6.

There are two world wide systems of confiscation and forfeiture. One involves forfeiture of property rights on the basis that property represents the proceeds of crime (forfeiture) and the other involves a more complex calculation of the value of proceeds of crime and the making of an order against the defendant (confiscation).

International Forfeiture

As expounded above, forfeiture orders in the UK are often made post conviction where as in the United States, forfeiture can occur either administratively or judicially depending on the nature of the property, the claims of any third parties and whether the forfeiture is sought as a result of a conviction. The US asset forfeiture regime offers both criminal and civil forfeiture legislation. Criminal forfeitures are obtained under statue 18 USC 1963 as a result of a criminal conviction with the criminal indictment containing a separate count to forfeit the property and a special verdict of forfeiture given by the trial court. Civil forfeitures occur against property based on the legal fiction that the property itself is guilty. In most cases the US Government need only show 'probably cause' rather than the requirement of a criminal conviction7.

International Confiscation

Confiscation is the requirement to pay a sum of money to the State based on the assessment of the value of the proceeds of crime. It is an order against a person in personam rather than the property in rem. The state gains a financial claim against the person against whom the order is made. This order is then enforced by a fine or civil court order. This system does not require the tracing of assets and can operate where the accused has had the benefit of the illicit proceeds but then has disposed of or dissipated them8.

Foreign Requests For Information

There are three categories of requests for information made to foreign countries: requests for preliminary inquiries, for evidence gathering for criminal prosecution and for confiscation hearings.

Preliminary information is often obtained on an informal basis of investigator to investigator and may lead to evidence necessary to prosecute. Evidence gathering is usually done through formal letters of request made to banks and law enforcement agencies. The letters send through the mutual legal assistance arrangement or the treaty in force between the two countries are sent to the appropriate authority in the county, in the UK that is the Central Authority of the Home Office.

In the case of evidence being sought for confiscation, restrain and the realisation of assets, orders are made by the Ancillary High Court in the UK. Orders made under the Drug Trafficking Act 1994 or the Criminal Justice Act 1988 are world wide in effect because they recognise assets held abroad. The enforcement of such orders requires international cooperation making the assistance of foreign jurisdictions invaluable.

3. INDEPENDENT INITIATIVES

Stolen Asset Recovery Initiative

As a result of such problems as countries failing to implement UNCAC and the lack of rule of law in a number of jurisdictions, the World Bank Group, in partnership with the United Nations Office of Drugs and Crime, launched the Stolen Asset Recovery (StAR) initiative in 2007.

StAR's aim is:

  • to enhance cooperation between developed and developing countries and persuade all countries to ratify and implement UNCAC;
  • to build partnerships in order to enhance the legislative, investigative, judicial, and enforcement capacity in developing countries so that they are able to successfully recover the stock of stolen assets kept either in their home country or abroad, while deterring the new flow of stolen assets and;
  • to help concerned developing countries

International Chamber Of Commerce

The International Chamber of Commerce (ICC) is a self regulating body that drives for an efficient, functioning global economy characterized by free and fair competition. The ICC recognizes that when business transactions are affected by the payment of bribes, they are not transparent and, therefore, disrupt a sound competitive global economy. Therefore, the ICC's main objective is to encourage self-regulation by business when confronting issues of corruption and to provide business input into international initiatives to fight against corruption.

The ICC introduced its own rules of conduct and recommendations in 1977 which were revised in 2005. The rules outline the basic measures companies should take to prevent corruption and are considered good commercial practice.

International Centre For Asset Recovery

The International Centre for Asset Recovery (ICAR) is based at the Basel Institute on Governance. ICAR's aim is to provide training, policy advice and strategic case advice to law enforcement authorities and other relevant public and private bodies on asset tracing, mutual legal assistance and asset recovery.

To do this, ICAR have created an online expert knowledge centre complete with individual country profiles, case studies and practical techniques to advance investigations all contributed to experts in the field.

Transparency International

Transparency International is an organisation that aims to create a global coalition against corruption and to raise awareness worldwide. Transparency International is essentially a network including more than 90 locally established national chapters and chapters-in-formation. These chapters work against corruption nationally by bringing together relevant people from government, civil society, business and the media to promote transparency in elections, in public administration, in procurement and in business.

The organisation also uses advocacy campaigns to lobby governments to implement anti-corruption reforms.

The Corner House

The Corner House was founded in 1997, it's aim is to support democratic and community movements for environmental and social justice. The Corner House focuses on everything from locally-based struggles for land and water rights, better health care to campaigning against destructive mining, dam or forestry projects.

The Corner House and Campaign Against Arms Trade (CAAT) brought the legal challenge to the decision to drop the investigation into bribery allegations involving BAE Systems.

Global Witness

Global Witness investigates and lobbies against corruption. It aims to expose the corrupt exploitation of natural resources and international trade systems and to drive campaigns that end impunity, resource-linked conflict, and human rights and environmental abuses.

Global Witness' investigations have had direct and major impacts, such as the IMF withdrawal from Cambodia in 1996 over corruption in the logging industry, the imposition of timber sanctions on Charles Taylor's Liberia in 2003, and the precedent-setting arrest  of  timber baron Gus Kouwenhoven, in the Netherlands in 2005.

4. MUTUAL LEGAL ASSISTANCE

Mutual assistance in criminal matters is a well-established principle in international judicial cooperation. A number of agreements have been adopted by international organisations such as the 1959 Council of Europe Convention and its 1978 Protocol on Mutual Assistance in Criminal Matters, the Benelux Treaty of 1962 and the 1990 Schengen implementation Convention.

On 29 May 2000, the EU Council of Ministers adopted the Convention on Mutual Assistance in Criminal Matters. This convention aims to encourage and modernise cooperation between judicial, police and customs authorities within the Union by supplementing provisions in existing legal instruments and facilitating their application. The State receiving a request must in principle comply with the formalities and procedures indicated by the requesting State. When a punishment falls within the competence of the receiving authority, a spontaneous exchange of information (i.e. without prior request) may take place between Member States regarding criminal offences and administrative infringements.

The Council, on 29th June 1998, adopted a Joint Action on the creation of a European Judicial Network. This was the first practical structured mechanism of judicial cooperation in the EU to become fully operational. Its aim is to identify and promote people in every Member State who play a fundamental role in practice in the area of judicial cooperation in criminal matters, with the purpose of creating a network of experts to ensure the proper execution of mutual legal assistance requests. Established by the Council in February 2002, the Eurojust also enables the fast and correct information exchange between Member States especially when they are dealing with serious cross-border crime to enhance the effectiveness of the competent authorities.

In December of 2004, the International Monetary Fund produced a Report, welcomed by the Luxembourg Authorities, entitled, 'Luxembourg: Report on the observance of Standards and Codes— FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism.' It was stated that,

'Given the amount of assets managed or deposited in Luxembourg by non-residents, the number of requests for mutual legal assistance is very important for Luxembourg. The overload of foreign requests and the previously existing procedures often resulted in the past in undue delays and Luxembourg was sometimes criticized by neighboring countries for its low and slow response to their requests. The law of August 08, 2000, has provided for a simpler procedural framework and is praised for its efficiency. The adoption of a law on extradition on June 20, 2001 has completed Luxembourg's now comprehensive framework for international cooperation. Luxembourg is a party to all the main instruments designed to enhance judicial cooperation in criminal matters, apart from the Palermo convention.

Making A Request Of The UK For Mutual Legal Assistance

The Fourth edition of the Mutual Legal Assistance Guidelines were published in November 2006 by the UK Central Authority, the Home Office.

The UK is able to provide a full range of legal assistance in criminal matters under Part I of the Crime (International Co-operation) Act 2003 (CICA 2003) and sections 5 & 6 of the Criminal Justice (International Cooperation) Act 1990 (CRIJICA) and other relevant domestic legislation. CICA 2003 is the UK's principal mutual legal assistance legislation.

The Mutual Legal Assistance guidelines:

  • give details of the assistance that can be provided under the Acts;
  • give details regarding the procedures to follow when requesting assistance;
  • explain the role of the Central Authorities in the execution of requests for legal assistance in criminal matters; and
  • describe how the Central Authorities work in close co-operation with the UK National Central Bureau of Interpol in dealing with international requests for assistance.

The United Kingdom is able to provide a full range of legal assistance to judicial and prosecuting authorities in other countries and territories for the purposes of criminal investigations and criminal proceedings. The UK can also provide assistance in clemency proceedings and administrative investigations and prosecutions. The legal assistance that can be provided includes:

  • service of summonses, judgements and other procedural documents;
  • obtaining witness statements on oath and authenticated documentary evidence, including banking evidence;
  • use of the investigation powers of the Serious Fraud Office in London and the Crown Office in Edinburgh in cases of serious or complex fraud;
  • exercise of search and seizure powers;
  • restraint and confiscation of proceeds of crime;
  • evidence via video-conferencing;
  • temporary transfer of prisoners, with their consent, to assist with criminal investigations and proceedings.

The UK can assist any country or territory in the world, whether or not that country is able to assist the UK. The UK can provide most forms of legal assistance without bilateral or international agreements - but assistance in the restraint and confiscation of proceeds of crime is dependent upon a bilateral agreement or other international agreement.

The UK has ratified:

  • the 1959 European Convention on Mutual Assistance in Criminal Matters and its Additional Protocol of 1978;
  • the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention);
  • the 1990 European Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime;
  • the Convention implementing the Schengen Agreement;
  • the Convention on Mutual Assistance in Criminal Matters between Member States of the European Union 2000;
  • The United Nations Convention against Transnational Organised Crime 2000;
  • The United Nations Convention against Corruption 2003.

The UK has also adopted the Commonwealth Scheme Relating to Mutual Assistance in Criminal Matters and has concluded a number of bilateral treaties. (N.B. EU/Schengen States that will accept direct transmission of letters of request include the UK and Luxembourg)

Requests for legal assistance in criminal matters may be made by any competent court or tribunal, judicial or prosecuting authority. Requests may also be made by any other competent authority that the Central Authorities consider has the function of making requests for the purposes of criminal proceedings or criminal investigations. Such authorities include Attorneys General, investigating judges, examining magistrates, public prosecutors and Ministries or Departments of Justice having responsibilities for criminal matters.

Requests for legal assistance in criminal matters may always be sent to the UK Central Authority, who will transfer the request to the relevant executing authority. However it may be quicker, if it is known that the evidence is located in Scotland, or Northern Ireland, or is a matter for which HM Revenue & Customs are competent to execute, to be sent directly to those authorities. If a request covers more than one jurisdiction, there are two options:

  1. The request can be sent to one of the Central Authorities, which will then copy and remit the relevant investigations to the other central authorities.
  2. The same request can be sent to each central authority involved with a clear reference that the other central authorities have been contacted directly.

Diplomatic channels, such as Embassies or High Commissions in London, may be used where required by the law and practice of the requesting country. But direct communication with the Central Authorities is preferred as this can help speed up the execution of requests.

Mutual Legal Assistance Between The European Union And The United States Of America

With Decision 2003/516/EC, the European Union Council authorised the signature of two agreements with the U.S. on extradition and mutual legal assistance. The controversial agreements between the EU and the USA, designed to help simplify the extradition process, and promote better prosecutorial cooperation, were signed by both sides in Washington at the EU-US Summit on 25 June 2003.

It is important to note that the EU-US Agreements are not intended to substitute existing bilateral arrangements between the US and Member States but to supplement them. All 15 Member States have bilateral extradition treaties in place with the US while 11 had, at the time when negotiations began, concluded mutual legal assistance treaties with the US. Nor, as the Home Office pointed out in its Explanatory Memorandum dated 13 May 2003, do the Agreements preclude the conclusion of more favourable bilateral arrangements in the future9.

The Mutual Legal Assistance Agreement10:

  • gives EU law enforcement authorities access to bank accounts throughout the US (and vice versa) in the context of investigations into serious crimes11;
  • allows for the creation of Joint Investigative Teams12 and the possibility of videoconferencing13;
  • improves practical co-operation by reducing delays in mutual legal assistance14;
  • allows EU Member States to continue to apply their grounds for refusal under the bilateral mutual legal assistance treaties or legal principles of domestic law;
  • allows EU Member States that at present do not have a mutual legal assistance treaty with the U.S. to refer to their ordre public in order to refuse to communicate information in certain cases15;
  • contains extensive provisions in relation to data protection and the provision of evidence and information16.

5. FRAUD IN AN INTERNATIONAL BUSINESS COMMUNITY

International:

There have been a number of high profile investigations, particularly by the US Department of Justice and the US Securities and Exchanges Commission, into international frauds. Although it may reassure the average investor to know that law enforcement agencies brought indictments against the key players, these schemes were only discovered once they had collapsed which says little about the agencies' ability to uncover frauds.

Bernard Madoff

Bernard L. Madoff, the founder of Bernard L. Madoff Investment Securities LLC, a registered investment adviser, and former Chairman of the NASDAQ Stock Market, was arrested on 11 December 2008 and charged with one count of securities fraud.

According to two senior employees of the Firm, Madoff had conducted certain investment advisory business for clients that were separate from the firm's proprietary trading and market making activities. Madoff's separate investment adviser business was run from a separate floor in the New York City offices and according to a Senior Employee, Madoff kept the financial statements for the firm under lock and key.

On Dec. 10, 2008, Madoff informed the Senior Employees (his two sons) that his investment advisory business was a fraud and that it was "basically, a giant Ponzi scheme". Madoff further said that the business was insolvent, and that it had been for years. The estimated losses from this fraud are approximately $50 billion.

The securities fraud charge in the complaint carries a maximum penalty of 20 years in prison and a maximum fine of $5,000,000.

The attorney for the Southern District of New York, Mr. Dassin, praised the investigative work of the FBI and thanked the SEC for its assistance.

Allan Stanford

The FBI is investigating an alleged $9.2 billion (£6.5 billion) fraud at Mr Stanford's American investment business. The former chief investment officer, Laura Pendergest-Host, was also indicated in court papers after she failed to reveal how much she knew about Stanford International Bank.

US regulators had hoped Ms Pendergest-Host would lead them to the heart of what they believed to be one of the biggest frauds in the world, and was charged with obstruction.

In an affidavit the FBI said that she repeatedly misrepresented how much she knew about the whereabouts of the bulk of the assets of the bank and failed to mention that her boss had borrowed $1.6 billion from the company. She is also accused of failing to tell regulators that she was a member of the investment committee of the bank.

Ms Pendergest-Holt had originally agreed to assist investigators and help the receiver to sift through the assets of Mr Stanford. Her decision to help was interpreted by US criminal lawyers as a sign that Ms Pendergest-Holt was lining herself up to negotiate with US authorities for a plea bargain.

Satyam

The Satyam scandal is being called India's Enron. It was the biggest-ever corporate fraud in the country and brought into question the levels of corporate governance in the country.

B. Ramalinga Raju, chairman of one of India's largest IT outsourcers resigned after confessing to a £1 billion fraud. Mr Raju said that he had wildly inflated the company's profitability for years. The deception, which went undetected until he revealed it, resulted in the presence of 70 billion rupees (£950 million) of "nonexistent" cash on the group's books. Mr Raju said:

"It was like riding a tiger, not knowing when to get off without being eaten"

Mr Raju had admitted to the fraud by sending a letter to the stock exchange confessing his wrongdoing and admitting that he had effectively cooked the books of his firm for the last several years.

PricewaterhouseCoopers are under scrutiny for their role as Satyam's auditor since 2001, when the group listed on the New York Stock Exchange. Two PricewaterhouseCoopers (PwC) partners were arrested on 24 January 2009, in relation to the fraud and were refused bail in early February. Both partners worked as auditors to Satyam, and have been suspended from PwC.

UK :

The amount of money lost to a variety of frauds is likely to increase due to the current credit crunch and ongoing recession. Credit is difficult to come by and debt is at an all time high. In the last recession in 1992-4, KPMG's Fraud Barometer recorded a rise in corporate fraud cases worth over £100,000 resulting in over £1billion losses in 1993. From January to June 2008, known fraud against British business roles 74% and fraud in the finance and insurance sector increased 15 fold costing £636million in only six months.

Areas particularly affected are mortgage fraud17 (as it becomes increasingly difficult to obtain a mortgage), fraudulent loan and credit card applications18, travel insurance frauds19, as well as ID fraud, carousel fraud et cetera.

It is not just the UK that will suffer such an increase in fraud, the Securities and Exchange Commission (SEC) said that it had brought a record number of insider-trading cases in the last 12 months. SEC announced that insider-trading and market manipulation cases rose by over 25% and 45% respectively from last year20.

The government has said it wants to do more to tackle fraud, publishing a Fraud Review in 2006 which acknowledged the scant public resources devoted to the crime. The Review proposed specialist courts and judges, a national strategy and reporting system together with a better organised and resourced police effort. Whilst the Fraud Advisory Panel (FAP) has estimated that the UK could double the number of police devoted to fraud at a cost of about £14.5m a year, the government's response has been half-hearted. The glamorous and headline-grabbing initiatives are those that are against terrorism, so much so that at the meeting of G6 nations, the then Home Secretary, John Reid, for the first time drew an explicit link between fundraising by terrorist groups and the European-wide "carousel" VAT fraud worth an estimated €50bn (£33m) a year. The author has found no published evidence for this link.

It would appear that as fraud mutates into an ever more sophisticated delinquency, the prosecution of fraud is becoming increasingly difficult and costly. The new director of the SFO, Richard Alderman's aim is not to prosecute the large frauds but to raise public awareness and encourage companies to 'turn themselves in' in return for fines instead of prosecutions.

By way of example, on 5 October 2008, the High Court approved a settlement between the SFO and Balfour Beatty: the first instance when the SFO has used powers made available since April to mount civil proceedings under the terms of the Proceeds of Crime Act 2002. These provisions do not require a specific offence to be established, they only require that the proceeds result from "unlawful conduct".

Balfour Beatty admitted that it had acted unlawfully to the SFO 3 years ago and could have faced a criminal prosecution but the new legislation enabled the SFO to treat the case as a civil breach of the rules and fine them.

Balfour Beatty agreed to pay £2.25m after admitting "payment irregularities" linked to a $130m (£75m) joint venture project nearly eight years ago to build a prestige library in Alexandria, Egypt.

This month, Richard Alderman announced that the SFO is planning to clamp down on fraudulent activity before cases reach the courts. Alderman highlighted that the SFO must educate businesses on detecting and preventing fraud because it will become more difficult to prosecute in the future. His ambition, he said, was to create a body powerful enough to deter fraudsters and when cases do go to court, he wants the SFO to use the new legislative powers to increase conviction rates.

David Kirk, director of the Fraud Prosecution Service urged the SFO to use the opinion of independent counsel on the likelihood of a case succeeding. He predicted that the fallout from the current economic problems would be "more of a regulatory issue than a criminal issue".

A further reaction to the cost of prosecuting frauds was the suggestion of the Fraud Review to introduce a plea negotiation system for fraud cases.

National Fraud Strategic Authority

The NFSA was established on 1st October 2008 as a new agency of the Attorney General's Office.

The Authority was established to increase protection for the UK economy from the harms caused by fraud by creating a more hostile environment for fraudsters in the UK and abroad.

Attorney General, Baroness Scotland, said "Through the establishment of this Authority, we are determined fraud is no longer seen as a 'victimless crime' – and fraudsters not just seen as 'opportunists', but as parasites and a burden to the economy that can no longer be tolerated."

The OFT welcomed the development of a strategic approach to tackling fraud and proposals to ensure anti-fraud measures are targeted, proportionate and taken by the most appropriate body. However, it was deemed important that the NFSA recognises the autonomy of stakeholder organisations to set their own strategy and allocate resources according to priorities. The NFSA's functions should therefore not extend to directing stakeholder organisations to take action in particular cases.

The Fraud Advisory Panel supported the establishment of a measurement unit within a National Fraud Strategic Authority (NFSA), however they noted that the requirement for the unit to undertake measurement exercises in its first year of operation may be too ambitious.

The British Banking Association (BBA) considered that the NFSA was the most important recommendation in the Fraud Review, crucial to achieving any long term impact on levels of fraud. The Response of the BBA stated that implementation of the NFSA should have a positive impact on the banking sector. As the banking industry would wish to be a key stakeholder/ partner of the NFSA, input from the financial services sector at the blue print stage was deemed important to provide assurance and to support the recommendations surrounding the NFSA's implementation of the national strategy. The BBA suggested that this be done through direct consultation with banks and also through industry bodies such as the BBA and APACS.

The Fraud Act 2006

The Fraud Act 2006 came into force on the 15 January 2007. It is based on the recommendations of the Law Commission report "Fraud" published in 2002. The Act applies in England, Wales and Northern Ireland.

The Act repeals all the deception offences in the Theft Acts of 1968 and 1978 and replaces them with a single offence of fraud (Section 1) which can be committed in three different ways by:

  • false representation (Section 2);
  • failure to disclose information when there is a legal duty to do so (Section 3);
  • abuse of position (Section 4).

The Act also creates new offences of possession (Section 6) and making or supplying articles for use in frauds (Section7).

The offence of fraudulent trading (Section 458 of the Companies Act 1985) will apply to sole traders (Section 9).

Obtaining services by deception is replaced by a new offence of obtaining services dishonestly (Section 11).

There are also other minor provisions.

The act does not apply retrospectively which means that it only applies to conduct that has occurred since 15 January 2007. This makes it fairly difficult to assess what sort of impact the act has had.

The maximum sentence has risen under the new act from 7 to 10 years and was welcomed by prosecutorial agencies. The new law is being used routinely in the Magistrates' and Crown courts although has not yet led to many major trials. Unofficial figures from the Crown Prosecution Service indicate a 40% increase in fraud related prosecutions and a 10% increase in conviction rates as well as more guilty pleas in small scale but repeated offending.

Serious Crime Prevention Orders

Serious Crime Prevention Orders (SCPO) were introduced by the Serious Crime Act 2007 which commenced on 6 April 2008. This legislation allows the High Court and in some cases the Crown Court to be able to impose an SCPO on a person involved in serious crime including fraud. They are effectively civil orders, similar to injunctions, which restrain serious and serial offenders business and commercial activities. They can be used for convictions under sections 1,6,7,9 and 11 of the Fraud Act 2006 as well as for conspiracy to defrau. The first orders served were in Northern Ireland on 22 April 2008 on four people subject to a HM Revenue and Customs prosecution for revenue evasion in relation to fuel fraud.

A breach of a SCPO constitutes a criminal offence punishable by up to five years' imprisonment and can be made where a High Court Judge is satisfied that "a person has been involved in serious crime", and there are "reasonable grounds to believe that the order would protect the public by preventing, restricting or disrupting involvement by the person in serious crime". 

Although the requirement that "a person has been involved in serious crime" suggests that a person must have been convicted of a serious criminal offence before a SCPO can be made, this is not the case. The legislation provides that "a person has been involved in serious crime" where he has committed a serious offence, or where he has facilitated the commission by another of a serious offence, or where he "has conducted himself in a way that was likely to facilitate the commission by himself or another person of a serious offence ... (whether or not such an offence was committed)".

Footnotes

1. Fraud nears record levels in 2008 – and worst to come, says KPMG, 2nd February 2009.

2. Article 46, UNCAC

3. Transparency International, Global Corruption Report 2007, Corruption in Judicial Systems.

4. Global Financial Integrity, Illicit Financial Flows from Developing Countries: 2002-2006,

Dev Kar and Devon Cartwright Smith

5. Ibid

6. 'Britain among the world's 50 main money laundering countries, says US', The Guardian Newspaper, 22 March 2008, Sam Jones

7. Mitchell Taylor & Talbot on Confiscation and the Proceeds of Crime, Street & Maxwell, 2007, chapter 11

8. Ibid

9. House of Lords' Select Committee on the European Union, 38th Report

10. The following information is derived from the Agreement on mutual legal assistance between the EU and the USA and paraphrases the following: General Secretariat of the Council of the European Union, "Fact Sheet: Extradition and Mutual Legal Assistance." 25 June 2003.

11. Article 4

12. Article 5

13. Article 6

14. Article 7

15. Article 13

16. Articles 9 and 10

17. ibid

18, Credit Crunch 'fuels fraud cases', BBC news, 30 April 2008

19. Travel insurance fraud rise, Times Online, 6 September 2008

20. SEC has record year chasing insider traders, Times Online, 23 October 2008

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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