Enforcer of Laws or Raiser of Revenue: What is the SFO raison d'être?

Lisa Osofsky says the UK’s much criticised fraud regulator is delivering a positive return on investment, so does she only see regulation as a way to raise money?


Director of the Serious Fraud Office (SFO) Lisa Osofsky poses for a photograph in London, Britain, March 28, 2019. - REUTERS / Alamy Stock Photo
Director of the Serious Fraud Office (SFO) Lisa Osofsky poses for a photograph in London, Britain, March 28, 2019. - REUTERS / Alamy Stock Photo

LONDON (WithinTheLaw) - Like many things, the Cambridge Symposium on Economic Crime has inevitably fallen victim to the pandemic. However, many of the speakers have released the speeches they would have given online. One of them is Lisa Osofsky the head of the SFO.

Osofsky has been having a rocky time of things over the past year. She was publicly admonished in court when it was revealed she had been sending ‘flattering’ text messages to a private eye representing defendants in a high-profile global bribery trial.

The Unaoil case was branded a success by the SFO when two former executives, Stephen Whitely and Ziad Akle were jailed for three years and five years respectively for using bribes to secure a

$55million contract to support offshore mooring buoys.

However, during the case it emerged that she had been in contact with David Tinsley, a private investigator hired by the defendants when the investigation was announced. In a series of ‘flattering’ text exchanges he was shown to have been urging her to take a more lenient stance on his clients while she appeared to be pushing them to plead guilty, which he did without the knowledge of their legal teams.

The defendants had attempted to have their charges dismissed on the grounds that Osofsky’s conduct meant that they could not receive a fair trial. The claim was dismissed, but judge Beddoe openly rebuked Osofsky for her conduct.

“DT was not hesitant in flattering Ms Osofsky and talking up her talents,” the judge said, adding: “And unfortunately Ms Osofsky made herself vulnerable to them.”

The SFO is currently launching an internal investigation into its own conduct and that of its head. Her conduct and the organisation as a whole are now part of an internal review from the SFO.

More generally, the UK’s regulator has come under fire for the number of failed cases, delays and the lack of any large scale fraud or bribery cases.

Osofsky’s speech, then served as something of a defence of her record, but some of it raised more questions than it answered.

Net gen technology

First, there was the organisation’s use of technology. “Law enforcement and successful prosecution is predicated on the intelligent use of data,” she said. “We can’t fight crime effectively without state- of-the-art technology to ingest, interrogate and analyse it.”

RegTech is a booming industry with a predicted growth rate of 20% year on year. The rise of big data creates both opportunities and new challenges as fraud becomes increasingly complex in the digital era.

She pointed to the SFO’s investment in a state-of-the-art eDiscovery platform and big data. Their focus, she said, is now on “unlocking its benefits by harnessing big data and implementing high performance computing tools that will allow us to process and analyse this data.”

Technology can help to identify insights which humans might miss, it can process vast quantities of data and it can take care of mundane and routine tasks freeing up humans for more important and complex duties.

This, she said, had helped them reach a much faster resolution in the Rolls Royce case. The investigation focused on bribery and corruption to win business in Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia. Although there is no prosecution of individuals within the company, they did reach a £497.25million deferred prosecution agreement. Without using the optimum technology, she believes the case could have taken many more years to resolve.

Deferred prosecution

Deferred prosecution was a concept which cropped up quite a lot during her speech. DPAs are a relatively new phenomenon in the UK. Under these agreements, a company can avoid prosecution by promising to implement changes and paying a fine.

Critics see this as allowing companies to minimise the impact of wrongdoing, but for Osofsky these are her finest achievements so far. These, she believes, gives them unique leverage to encourage better corporate citizenship and ‘in effect make better companies’.

“DPAs are not only a way of incentivising cooperating companies and avoiding collateral damage to employees, suppliers, investors and customers – although they are very much that,” she said. “But they are also a way also of ensuring companies admit their fraud and corruption and turn their attention to cleaning house.”

She pointed to the example of the recent agreement with security firm G4S as being an example of a ‘DPA with teeth’ which would ensure that ‘a major government supplier will be the subject of close scrutiny over the upcoming years to ensure its house stays in order and that UK taxpayers get the value they should from these very substantial contracts.’

G4S, along with another private contractor Serco, were found to have overcharged the government for the electric tagging of offenders. G4S was admitted to three counts of fraud and that they had dishonestly misled the government over the continued tracking of prisoners who had been returned to prison, moved abroad, or had died.

They had previously agreed to compensate the government in 2014 in a settlement worth £121 million, but the SFO investigation had been ongoing. That investigation came to an end this year when the provider agreed to pay a £38.5 million penalty and £5.9million to cover the SFO’s costs. Serco, meanwhile, was fined £22.9 million for its role in the scandal last year.

 

Successful cases

Responding to claims about the lack of large cases, she pointed to the launch of an investigation into Glencore on suspicions of bribery.

“You tell me that Glencore isn’t one of the biggest commodities houses and power brokers in the world,” she challenged, speaking from her London office. “We are keen to take on big cases when there is the potential to have a viable prosecution, which you don’t know when you start an investigation.”

The SFO has also launched investigations into the collapsed mini bond firm London Capital & Finance which took £236 million of investor cash. The investigation, which Osofsky has described as ‘a huge case’ also includes a probe into the FCA’s authorisation of the firm.

They are also investigating Patisserie Valerie, the restaurant chain that overstated its assets by £94 million.

 

Revenue raiser

Osofsky also made the point that over the past year the SFO has delivered what she called a ‘substantial return on investment’ with big fines to the likes of Airbus sending considerable sums back to the Treasury.

“I can’t pretend not to be pleased that such resolutions have meant the SFO making a significant return on investment,” she said. “Airbus alone was just under 1bn euros to the Treasury and, over the past four years, we have contributed over one and a half billion pounds.” She told the FT.

This, though, is where she appears to be approaching the issue from the opposite direction of her critics. For Osofsky the revenue raising of the SFO should be hailed as a success, and a key justification of her tenure.

Others, though, will point out that the regulators are not, in theory, there to extract money for the government. They are there to enforce the rules and, when they are not followed, set a penalty which offers a very real and lasting deterrent to the companies involved.

The fines involved may seem big but given the scale of the companies involved, they represent a mere drop in the ocean. Rather than acting as a deterrent, they simply become seen as a cost of doing business, something which may even be factored into to ongoing accounts. Talk of ‘lessons learned’ feels hollow if companies avoid the full punishment for transgressions.

Likewise, regulators will be encouraged to move towards fast, light touch, settlements which deliver money quickly into the coffers but do little to encourage a more positive corporate environment.

Critics also argue that cases such as London Capital & Finance are not the massive, defining cases the regulator should be taking on at the moment.

 

Limited scope

The reality of the situation, though, is that Osofsky faces a different climate to her native US. There white-collar crime is seen as a top priority and regulators are given the power, support, and status they need to deliver real enforcement.

Here in Britain, it is a vastly different story. Understaffed and under resourced, the SFO often finds itself outgunned in court.  

The almost inevitable result is high profile failures such as Tesco Bank a judge instructed the jury to dismisses charges against John Souler, formerly Tesco UK’s food commercial director and Chris Bush, the firm’s former managing director.

In making the decision the Judge, Sir John Royce described the SFO’s cases as being “so weak that it should not be left for a jury’s consideration”. Their cases against a third former employee Carl Rogberg, Tesco’s former finance director also collapsed when the regulator offered no evidence.

The case raised questions not only about the SFO, but their use of the deferred prosecution agreements of which Osofsky feels so proud. In 2017, Tesco had entered into a DPA which included

£129 million and paid £3 million in costs. However, was publicly scathing about the conduct of the individuals who, a year later, were found to have been not guilty of any wrongdoing.

The SFO’s decision to name the individuals and publish the DPA means that despite their acquittal the individuals involved still face immense financial and reputational damage as a result of the case.

The acquittal of three former Barclays executives added more embarrassment to the regulator. After seven years, and £12 million of public funds, invested, the jury wasted little time in acquitting all three bankers.

Prosecutors had claimed the executives tried to secure Qatari investment to avoid a damaging Government bail out in the wake of the 2008 financial crisis. However, the trial collapsed with the regulator accused of a series of poor judgements throughout the investigation.

“This is a vast amount of taxpayers' cash spent on a case which ultimately came to nothing,” said Tory MP John Howell, a member of the House of Commons Justice Select Committee. “The SFO were told all along that they were on thin ice.”

Failed investigations also put the regulator in the line for potentially damaging legal action. Mining group ENRC is currently pursuing a £70 million lawsuit against the regulator for the way in which it conducted an investigation into wrongdoing at the firm. 

ENRC alleges that Neil Gerrard, the co-head of white-collar crime at law firm Dechert, passed privileged and confidential information over to officials at the SFO with whom he was friendly. The firm dropped out of the FTSE Index as a result of the allegations. 

In documents filed at the High Court, ENRC described the SFO’s conduct as “arbitrary and oppressive”. They claim the SFO [turned a] “blind-eye to evidence of collusion including by way of destruction or suppression of relevant documents”.

They claim Gerrard had a close friendship with Richard Alderman who was director of the SFO between 2008 and 2012 as well as other officials. They allege he had ‘improper telephone and other contact in connection with ENRC’. Gerrard and Dechert strenuously deny all the allegations made against them. Gerrard recently announced that he will retire from the firm at the end of this year.

If ENRC are successful, and once legal costs are taken into consideration, the case could end up eating more than £100 million of the SFO’s budget. However, the SFO have safeguarded some of this risk, with Dechert agreeing to ‘insure’ some of the costs, should the case not go their way. 

A spokesperson for ENRC expressed their frustration that after nine years of investigation, one of the longest-running by the SFO, no charges have yet been brought. 

These failures raise questions about shortcomings from the regulator and wider government to enforce demands for a more ethical and sustainable corporate environment. The lack of support given to regulators means that they always risk embarrassment or worse, substantial, and costly failures, when going up against the biggest corporations and most serious wrongdoers.

 

Asleep at the wheel?

As a result, the SFO has been extremely quiet under Osofsky’s reign. The Financial Times reports that two years after she took the job no case started under her tenure, has resulted in charges and there are no bribery or corruption cases listed in the courts.

The result is a watchdog which often appears to be asleep at the wheel. It creates an environment in which corporations are effectively given a green light to behave in any way they want, safe in the knowledge that the regulator may shy away from taking real action and, even when found guilty, they will be able to negotiate their way to a smaller penalty.

There is a real case to ask about whether the SFO has the teeth to truly do its job, so much so that already, talk of the proposed merger of the SFO into the National Crime Agency, to create a British version of the FBI, is starting to bubble back to the surface. The idea was initially floated by Theresa May and formed part of the 2017 Tory manifesto. However, after she lost her majority, the plan was put into mothballs and has been lurking in the background ever since.

Osofsky has fought to keep her agency separate since she took the job, but the perception of wasted public funds, a lack of prosecutions and unwillingness to enforce truly punitive measures could persuade many that a change is needed.

 

(Written by Tom Cropper, edit by Michael O'Sullivan)

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