On discovering large scale fraud within a business often the instinctive reaction is to pick up the phone and call the police. However, in certain circumstances, immediately reporting the discovery of fraud to a law enforcement body may not be the best course. While most companies want to conduct themselves in a socially responsible way, their primary responsibility (subject to any legal obligation to report the matter) is to their shareholders and investors, which means maximising recoveries, minimising reputational damage and deterring similar actions by others1. In some circumstances, civil law may provide the best route to achieving those aims.
The aim of this Commentary is to provide some guidance as to the options available to an organisation upon discovering that a substantial fraud has been perpetrated against it and the key considerations its officers should have in mind when responding to the situation. For these purposes, we have assumed that the organisation either does not have a legal obligation to report the fraud to a regulatory or other body2 or has complied with that duty.
Victims of fraud generally face three options: (1) contact law enforcement to commence a criminal investigation, (2) contact a commercial solicitor to pursue a civil action, or (3) contact both to pursue parallel investigations/actions.
OPTION 1–CRIMINAL PROCEEDINGS
There is a widely held perception that UK law enforcement is less effective than its US counterparts at the Securities and Exchange Commission, the US Attorney's Office or the Department of Justice when it comes to tackling economic crime. Historically that perception has been justified, although UK law enforcement bodies work to a wholly different set of rules to those at play in the US3 and there are signs that enforcement activity in the UK is becoming more aggressive, possibly in response to criticisms of weak enforcement following the global financial crisis4. Fresh legislation in the shape of the Bribery Act and more frequent use of civil recovery to deprive offenders of illicit funds are signals of an increased readiness to use all the means available to tackle financial wrongdoing. Broad structural changes are also planned and designed to deliver enhanced enforcement5.
The UK has a multiplicity of prosecuting authorities that are available to investigate and prosecute economic crimes:
Serious Fraud Office ("SFO"): The SFO has jurisdiction to both investigate and prosecute cases of complex/serious fraud, including corruption. The precise scope of its jurisdiction is examined in greater detail below. Crown Prosecution Service ("CPS"): The CPS prosecutes all crimes charged by the police and deals with the vast majority of criminal casework in the UK, including fraud. FSA: The FSA has a limited criminal jurisdiction over regulated and non-regulated entities that fail to meet FSA standards or are in breach of the Financial Services and Markets Act (2000). Department for Business, Innovation and Skills ("BIS"): BIS can commence criminal proceedings when a company or LLP incorporated in England and Wales is suspected of misconduct. The criminal jurisdiction of BIS arises primarily under companies legislation (i.e. the Companies Act 2006 or the Directors Disqualification Act 1986). Office of Fair Trading ("OFT"): The OFT currently has criminal jurisdiction to prosecute, for example, cartel offences under the Enterprise Act 20026. Her Majesty's Revenue and Customs ("HMRC"): HMRC investigates criminal fraud perpetrated against the tax and revenue system, although the prosecutions themselves tend to be conducted by the CPS. What Factors Influence Whether a Particular Case Is Pursued by the CPS or the SFO?
In relation to general corporate fraud, a defrauded organisation is in practice likely to be choosing between calling the police (who will, if necessary, liaise with the CPS) or the SFO. According to the SFO's implementing legislation, the SFO has jurisdiction over "any suspected offence which appears to [the Director of the SFO] on reasonable grounds to involve serious or complex fraud"7.
The SFO also has published case acceptance criteria8 that it will take into account in exercising its discretion to investigate suspected fraud offences:
Does the value of the alleged fraud exceed £1 million? Is there a significant international dimension? Is the case likely to be of widespread public concern? Does the case require highly specialised knowledge, e.g. of financial markets? Is there a need to use the SFO's special powers, such as Section 2 of the Criminal Justice Act9? These criteria are now quite old and do not accurately reflect the SFO's current practices. Indeed, most cases accepted for investigation by the SFO will involve losses far higher than £1m, and generally in excess of £10m.
Following the enactment of the Bribery Act 2010, the SFO has also become the lead agency in England and Wales for the investigation and prosecution of domestic and overseas corruption. The practical impact of this augmentation of the SFO's remit and powers is that the number of serious fraud cases that the SFO can accept for investigation is now even more limited. If, therefore, the fraud under consideration is of relatively low value, not particularly complex and was committed entirely within the UK, it is unlikely that the SFO will take the matter up for investigation10.
Where a fraud case does not meet the SFO's referral criteria, it should be reported to the police who, upon completion of an initial investigation, will pass the matter to the CPS. The CPS does not publish figures for the volume of frauds it prosecutes, but the figures below, provided by the Attorney General in response to a Parliamentary question, provide some indication of the relative size of the caseloads tackled by the SFO and the CPS11.
No. of cases prosecuted by the CPS
No. of cases concluded by the SFO
No figure provided
2011-12 (April-Jan 31)
Advantages of Pursuing a Criminal Response
A criminal prosecution offers the prospect of retributive justice. This is especially compelling when the offender is not financially able to repay what he has taken. Although it is highly unlikely that a criminal investigation will be a "no cost" option for a victim12, the cost to the company of a criminal investigation and prosecution will be significantly less than the cost of pursuing a civil investigation and recovery proceedings. Although the victim may not pursue civil recoveries itself, a criminal prosecution may nevertheless result in compensation. Both the SFO and the police are able to take steps to restrain criminally acquired property (by way of a civil restraining order) and to confiscate such property in the event of a conviction (by way of a confiscation order). The Court also has powers to award compensation to the victims of fraud from sums confiscated13. Law enforcement has wide powers to acquire information and documents. It can enter homes and offices to execute search warrants and can arrest suspects. Where there is sufficient evidence to charge the suspect, they can be...