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Corporate Fraud Roundtable, Neil Swift, November 2015, Financier Worldwide

Partner Neil Swift’s comments have been isolated below. To read the article in full please click on the link.

Corporate fraud
November 2015 | ROUNDTABLE | FRAUD & CORRUPTION Financier Worldwide Magazine November 2015 Issue

Corporate fraud – be it insider trading, money laundering or the embezzlement and misappropriation of corporate assets – continues to be prevalent within organisations, with the internet now the platform of choice for those bent on committing serious fraud. Alongside the aggressive enforcement tactics currently being adopted by regulatory authorities, the requirement to implement robust policies and procedures to mitigate the risk of fraud is now top of the agenda for corporates.

Swift: The past year has seen a number of high-profile developments in the investigation and enforcement of corporate fraud and misconduct. In February 2014, the Deferred Prosecution Agreement (DPA) was introduced in the UK. Although a DPA has yet to be concluded, the Serious Fraud Office (SFO), through its director David Green CB QC, indicated in September 2015 that it anticipates at least two DPAs being completed this year. The past year has also seen the first jury trial for a LIBOR rigging case – the case against Tom Hayes – and subsequent to his conviction, the longest sentence ever to be imposed for financial fraud, 14 years imprisonment in total. According to the SFO, a further 11 defendants await trial in connection with LIBOR rigging, and more charges are likely in autumn 2015. In the past year, there have also been the first convictions under the Bribery Act 2010 in the Sustainable AgroEnergy trial, and the first conviction after trial of a corporate for foreign briber, when Smith and Ouzman Ltd was convicted of paying bribes to win contracts to print ballot papers for elections in Kenya and Mauritania. The SFO has also continued to investigate several large and well-known corporate organisations, including Tesco and Barclays. We can expect a number of high-profile cases to dominate the headlines and provide a warning bell to corporates in the coming months and years.

Swift: The introduction of DPAs has been a significant development. DPAs have been used in the US for years. They are an agreement between the company and the prosecuting authority that generally involve financial and other sanctions, but fall short of a criminal conviction. Corporates should expect to see the use of DPAs in the UK going forward, and therefore should be aware of common issues faced when negotiating DPAs with US regulators, as these may also become relevant in the UK.

Swift: One of the most high-profile cases in recent months has been the conviction, and sentence, of Tom Hayes for LIBOR manipulation. Mr Hayes received, in total, a sentence of 14 years imprisonment, which is the longest sentence ever imposed in the UK for financial fraud. In paragraph 12 of his sentencing remarks, the judge told Mr Hayes: “The conduct involved here must be marked out as dishonest and wrong and a message sent to the world of banking accordingly. The reputation of LIBOR is important to the City as a financial centre and of the banking industry in this country. Probity and honesty are essential, as is trust which is based upon it. The LIBOR activities, in which you played a leading part, put all that in jeopardy”. It does not, of course, necessarily follow that all LIBOR sentences will be as long as that imposed on Mr Hayes; each case must turn on its own facts.

Swift: Whilst any well-run company will want to ensure it takes steps to reduce fraud within its organisation, the introduction of offences imposing a duty – albeit indirectly – on companies to do so will make it all the more essential that a corporation has adequate procedures in place to tackle any misconduct. Section 7 of the Bribery Act 2010 provides that a company is guilty of an offence if a person ‘associated’ with it, which includes an employee, bribes another person, intending to gain an advantage for the company. The company does have a defence if it can show that ‘adequate’ procedures were in place to prevent that.

Swift: Fraud and corruption thrive on opportunity. Systems and controls can provide an effective deterrent, where properly implemented and monitored. Generally speaking, larger organisations tend to have in place more developed and sophisticated systems. That said, one need only take a casual and occasional glimpse at the press to see where such systems fail. It is worth remembering that the costs of putting systems and controls in place are minor when compared to those associated with an investigation into allegations of fraud and corruption, particularly where the organisation faces potential liability itself.

“One of the most high-profile cases in recent months has been the conviction, and sentence, of Tom Hayes for LIBOR manipulation.”
— Neil Swift

Swift: It is important for organisations to consider which measures are most suitable for them, based on their size and structure. The Ministry of Justice’s Guidance as to section 7 of the Bribery Act 2010 provides some help when it comes to considering the sort of measures that may be appropriate. Firstly, appointing a compliance officer to oversee the risk framework and sufficiently empowering him or her to effect change. Secondly, undertaking a thorough risk assessment, particularly in light of the requirements placed on companies by section 7 of the Bribery Act 2010, and the proposed new offence of failing to prevent tax evasion. Thirdly, ensuring that all staff members are aware of the company’s zero tolerance approach to corporate crime, and are educated about the relevant legal framework. Fourthly, ensuring that due diligence processes of all ‘associated persons’ – employees and agents, for example – are sufficiently detailed. Fifthly, developing investigative and whistleblowing mechanisms – many organisations have implemented confidential ethics hotlines, so that criminal activities can be safely and confidentially reported. Finally, organisations should ensure they are continually monitoring and updating their practices, to ensure that those are in line with legal developments.

Swift: It is important to ensure that employees are aware of their obligations to mitigate the risk of fraud and misconduct. One of the key principles for bribery reduction set out in the 2011 Ministry of Justice Guideline is communication, including training, as set out at Principle 5, paragraph 5.1: “communication and training deters bribery by associated persons by enhancing awareness and understanding of a commercial organisation’s procedures and to the organisation’s commitment to their proper application”. This is likely to be less effective if delivered in the form of a ‘one size fits all’ approach, or in an ad hoc manner. Therefore, it is important that a comprehensive training and communications plan is implemented into the general risk framework.

Swift: Any well-run company, with proper standards of corporate governance, will want to investigate whistleblower reports, as they would any other credible intelligence, revealing matters of concern. By encouraging individuals to come forward, robust mechanisms for protecting whistleblowers provide substantial benefits to the organisation concerned. Research this year by the law firm Slater & Gordon has indicated that a third of employees would not speak out, even if they observed illegal activity. However, over two-thirds of employees would do so if they could complain anonymously. One method of reducing risk and encouraging individuals to come forward should they observe wrongdoing, then, is the introduction of confidential ethics hotlines within the organisation. Another method could be the appointment of a designated compliance officer, and ensuring that employees know they can approach that person should they have a concern.

Swift: Any commercial relationship with a third party carries risk of one sort or another. Oversight of procurement is essential to prevent the organisation falling victim to fraud and corruption, either by staff being corruptly induced to enter into disadvantageous contracts or as a result of innocently falling prey to deliberate fraud by third parties. Such risks can be mitigated by relatively simple systems and controls, including appropriate due diligence, but require a clear message and culture of compliance. Of greater potential significance to an organisation is the possibility of enforcement action where individuals associated with an organisation engage in criminal behaviour in the erroneously perceived furtherance of the corporate’s goals. Alongside the introduction of the Bribery Act 2010, the UK has upped its enforcement of overseas corruption. This year saw the first conviction after trial of a corporate for foreign bribery, relating to Smith and Ouzman’s security printing business in Africa.

Swift: An early evaluation of risk is essential. In most companies this is likely to require immediate assistance from external counsel, but within the organisation there has to be a senior and independent individual or group of individuals to manage and take responsibility for the process and form the ‘client group’ for the purposes of ensuring the protection of privilege. The intelligence which gives rise to the suspicion will be the starting point, but the company must determine and then continually review the scope of the investigation. All relevant data, both electronic and hard copy, should be locked down to prevent interference or destruction. The position of employees embroiled in the matter under investigation has to be considered very carefully. Once documents have been gathered and analysed, it may be desirable to interview relevant employees. If a self-report is contemplated, law enforcement may have a view on interviews, particularly of the principal suspects. The organisation will need to consider whether to make a self-report, and if so, to whom. In order to make this decision the organisation needs to evaluate in which jurisdictions it has potential liability. Timing is always an issue – reporting too soon carries the risk of doing so erroneously, without sufficient knowledge of the facts, while a company that reports too late may be criticised and find the range of possible resolutions narrowed.

Swift: The UK government has recently performed a u-turn on reform of the law on corporate criminal responsibility. We have for some time been expecting legislative change to make it easier to prosecute companies for offences committed by employees. As it stands, aside from the as yet untested offence of failure to prevent bribery, prosecutors face an uphill struggle finding evidence which implicates someone of sufficient seniority within an organisation, so that the identification principle can be applied to convict a company of serious economic crime.

Neil Swift is a partner in the Business Crime Department of Peters & Peters Solicitors LLP. He specialises in advising corporate and individual clients in corruption investigations, criminal cartel matters, mutual legal assistance requests, FCA inquiries and tax delinquency. Much of Mr Swift’s work involves him advising as part of multijurisdictional and multidisciplinary teams of legal, forensic accounting and tax professionals. He can be contacted on +44 (0)20 7822 7763 or by email:
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