The Serious Fraud Office was set up as a non-ministerial government department of the Government of the United Kingdom to address the most complex cases of fraud and bribery, but three decades on many believe it’s failed. Where does it go from here?
Back in the 80s, trust in the financial system was shaky. A right-wing government was cracking down on worker rights, mired in allegations of corruption and obsessing about Europe. How times change. The solution was the creation of the Serious Fraud Office (SFO), a new organisation which would handle the most serious cases of fraud.
Their remit was to bring greater cohesion to fraud investigations and restore faith in the system. Three decades on, opinion is divided about whether it has succeeded. Despite some high-profile successes, it faces many of the same criticisms as the system it replaced.
As it moves into a more complex financial world, driven by digital technology and innovation its future hangs in the balance. Some want it to be reformed, others to be consumed into other organisations such as the NCA, while others feel it simply needs better resources.
In this report, we’ll take a deep dive into the SFO’s history. We’ll look at its successes, its failures and where it goes from here.
Origins and Early days
The SFO grew out of recommendations from the Roskill Report (1986). Financial scandals through the 70s and 80s had undermined trust in the system. The collapse of a number of major fraud prosecutions convinced many that a new approach was needed.
In 1983 the government established the Independent Committee for fraud trials chaired by Lord Roskill. Its task was to consider the introduction of more effective measures to prosecute complex fraud in the UK.
Three years later it reported back with 112 recommendations. Only two were not implemented. One of the most important was the establishment of a new organisation to detect, investigate and prosecute serious fraud.
The organisational structure it proposed, in which investigators and prosecutors work together from the start of a case is called the Roskill model and forms the basis of the SFO’s work.
The report led to the Criminal Justice Act 1987 which, as an Act of the Parliament of the United Kingdom, put the recommendations into law. The act created the SFO and its primary investigative powers. The Attorney General for England and Wales was also established by the same act, and is the principle of the regulator.
These include the ability to search property, require people to answer questions and produce documents. Any time the SFO exercises these powers, often enforcing the Bribery Act 2010, it has to provide written notice.
These Section 2 notices oblige them to provide the information the SFO requests. These powers were updated in 2008 giving the SFO the ability to demand documents for an investigation into overseas corruption cases. Any person or organisation which does not comply or is found to have given false information may be prosecuted.
The SFO investigates many different types of fraud including:
- Boiler room fraud: This type of fraud was brought to wider attention in the Wolf of Wall Street. It involves cold calling people and using hard sale tactics to offload shares which ultimately prove worthless. A good example of this is the Vintage wines of St Albans fraud. Boiler room operators, calling from Estonia, targeted wealthy investors promising stellar returns from wine. In reality, they had purchased only a fraction of the wine they sold, and always at a much lower price than they moved it on for. The SFO investigated and secured jail time for the perpetrators.
- Ponzi or pyramid schemes: In which a single operator encourages investors to recruit other investors who will then benefit from adding investors. A good example is the KF Concept case in which a banker was convicted and imprisoned for ten years after defrauding investors to the tune of more than £17million.
- Asset stripping: Company directors strip a company of its funds or assets leaving behind nothing but debts.
- Fraudulent trading: A business carries out fraudulent trading for any reason. One of the highest profile prosecutions was against InterGB group which extracted more than £85 million from three financial institutions by submitting false invoices. The group’s chairman was jailed for seven years.
- Share ramping: Criminals ramp up the price of a company in order to take advantage of price fluctuations.
- Publishing false information: A company attempts to mislead investors with false information about its accounts so it can continue trading.
The regulator is also highly active in bribery cases where a company, person or official compromises their position for personal gain. In 2017 the SFO secured convictions against a number of executives from Innospec for bribing an Indonesian official. In 2020, the SFO completed one of its most high-profile cases with the conviction of Unaoil executives for international bribery. We cover this case in more detail later in this report.
The SFO started out under the directorship of John Wood who headed up the office until 1990. Since then, the SFO has had eight further directors:
- Barbara Mills: 1990 to 92
- George Staple: 1992 to 1997
- Rosalind Wright: 1997 to 2002
- Robert Wardle: 2002 to 2008
- Richard Alderman: 2008 to 2012
- David Green: 2012 to 2018
- Mark Thompson (interim): 2018
- Lisa Osofsky: 2018 to present.
Each have sought to develop the regulator’s mission in the face of a chancing financial environment. They have seen the regulator’s staff grow from just 100 people in 1988 to 500 people today.
How the SFO Decides on cases
The SFO adopts a strict policy when deciding which cases to open. When deciding whether to bring a case, they will not normally name the individual or company involved. This is to avoid causing reputational damage to parties who may be innocent.
When it announces an investigation, it will not always go public unless the company itself makes it public, doing so would be in the public interest or there is a clear operational reason such as issuing a public call for witnesses or share value implications.
Each investigation follows evidence and may change scope depending on where the evidence takes it. The organisation will then make an announcement if and when it reaches a decision to charge individuals.
This approach is intended to be fair to all parties. However, it can lead to a lack of transparency with some cases continuing for many years with few updates. Criticism often follows especially when lengthy investigations result in no prosecution.
No sooner had it launched than the SFO became involved in one of its biggest cases: the Guinness Four.
Guinness’ former chief executive Ernest Saunders was found to have manipulated the stock market along with businessmen Gerald Ronson, Jack Lyons and Anthony Parnes. Their goal was to inflate the share price for Guinness to help its £4bn takeover bid for the Scottish drinks company Distillers.
The case was uncovered after testimony from stock trader Ivan Boesky as part of a plea bargain. He has received investment of US$100 million from Saunders to invest in shares. The fee for managing this amount was said to be his reward for inflating the Guinness share price.
They claimed that the practice was unusual, but not illegal. However, they were found guilty, charged with large fines and, with the exception of Lyons who pleaded ill health, all served prison time.
In 2014 they secured the longest sentence handed out in a British fraud case when Pakistani Shipping Magnate Abbas Gokal received a 14-year sentence for his part in the BCCI Bank Scandal. The bank collapsed in 1992. After auditors discovered the bank had been running at a loss for many years a sordid tale emerged involving drug trafficking, money laundering and phony loans.
One of those loans went to Abbas Gokal who received a $1.2bn unsecured loan from the bank. When it collapsed, he escaped to Pakistan. There he felt out of reach from the authorities as Pakistan had no extradition treaty with the UK, but while making a trip to America in 1994 his plane stopped for refuelling in Frankfurt. German police arrested him and extradited him to the UK.
That same year an investigation into hotelier Robert Feld resulted in an eight-year sentence for making false statements and using forged documents during a £20 million rights issue in 1992.
Feld had built up a hotel chain of 50 properties mainly through rights issues which attracted a total of £50million from shareholders. He used forged documents to mislead Coopers and Merchant bankers Barclays de Zoete Wedd about the companies projected profits and debt levels.
The SFO investigated alongside the Sussex Police Fraud Squad and charged him with 14 counts of fraud in 1994.
However, despite many successes the SFO has faced criticism throughout its life, with repeated calls for its reform or dissolution. In the 90s the organisation was derided for high profile failures. The decision to sentence Robert Levitt to community service after his conviction for fraud sparked howls of outrage.
His company was described in court as being ‘riddled with fraud’. It was, said prosecutors an ‘empty shell’ which only survived because he secretly injected £22million into it to keep things going.
The acquittal of Kevin and Ian Maxwell after £20 million of public money had been sunk into the investigation caused more anger. The pair had been charged with defrauding the Maxwell Group pension fund but walked free after being found not guilty on all charges.
The government at the time initiated a review into the organisation. Although this resulted in a recommendation to keep the regulator in its current form, the SFO has lived scrutiny ever since. It is often on the back foot, forced to justify its existence in the face of failure.
The most recent threat came in the run up to the 2017 election when Theresa May revived her long-standing aim to bring the SFO more closely under her control. As Home Secretary she had proposed merging the regulator with the National Crime Agency, citing the SFO’s failures.
She tried twice as Home Secretary to fold the SFO into the NCA - once in 2011. When May received substantial resistance from fraud lawyers, white-collar crime experts and was then blocked by Attorney-General Grieve, she backed down. He second attempt in 2014 also failed.
She revived the idea as Prime Minister. However, after the Conservatives lost their majority, this and other controversial policies in the manifesto were dropped. Even so the agency has been looking over its shoulder ever since.
At the time, the Independent newspaper reported some support for the plan:
“The SFO has not been without its critics. Regularly pilloried in Private Eye as the Serious Farce Office, its reputation for fighting corruption and for achieving success was until recently not altogether stellar. Under its previous Director, Richard Alderman, companies were given quiet slaps on the wrist in secretive civil recovery orders. Or as in the case of BAE Systems, which faced allegations of widespread global corruption, allowed off with a minor accounting charge.”
New head, same problems
2018 saw the arrival of a new face at the SFO who many hoped would bring fresh impetus into the flagging agency. Osofsky had built up a tough reputation as a Federal prosecutor in the States and hopes were high that a new broom would bring fresh energy.
Two years in and some of that enthusiasm is beginning to wane. Once again, the regulator has been mired in costly, delayed and failed cases. The SFO was directly criticised in the collapse of trial against Barclays Bank. The SFO had charged Barclays with two counts of conspiracy to commit fraud alleging it had conspired with senior executives to pay ‘disguised commission’ to certain investors.
The former executives Roger Jenkins, Richard Boath and Thomas Kalaris were acquitted and their legal teams were quick to twist the knife. Peter FitzGerald, of counsel at Peters & Peters – the fraud firm instructed by Boath – was damning in his criticism.
“Their entire approach was flawed from the start,’ he said. ‘We got the impression they approached the case with the assumption that something criminal had occurred and they interpreted everything in that light.”
Peters & Peters partner Michael O Kane said there needs to be a top to bottom review of the SFO for ‘waste and incompetence’.
There was more criticism in a case against former Tesco Bank executive. Once again, the case collapsed and once again the SFO found itself in the firing line. Three former executives were found not guilty of fraud even though they had been named in the deferred prosecution arrangement Tesco reached with Tesco in which it admitted dishonestly overstating its profits and paid a £129 million fine.
The case proved to be a harrowing one for the SFO. In the first case against Tesco’s former managing director Chris Bush and John Scouler, UK commercial food director the case was found to be ‘so weak it should not be left to a jury’s consideration’. In the case of Roberg, the former finance boss for the UK, the SFO offered no evidence.
Unaoil and Review
Osofsky herself came in for personal criticism for her handling of an international bribery case. On the face of things this was a success for the regulator. Three former Unaoil were convicted for their part in an international bribery scandal. Executives were found to have bribed Iraqi officials to clinch a $1.7bn worth of oil contracts in Iraq. Basil Al Jarah Unaoil’s former Iraq country manager admitted paying £17 million in bribes to secure the pipelines. Ziad Akle and Stephen Whiteley were also later convicted of making payments.
However, the case against Akle almost collapsed thanks to the behaviour of Osofsky. The judge accused her of acting like a teenager over flattering text messages sent by Private investigator David Tinsley who was acting for Akle. In the texts Tinsley tried to persuade Osofsky to take a more lenient approach with his clients while she leant on him to push them towards pleading guilty.
The defendants attempted to use the contact which had happened behind the backs of their legal representatives, as a way to have the case thrown out. Judge Martin Beddoe disagreed but did criticise the contact as being inappropriate. In response to the case, the SFO said it will conduct an internal review to identify learnings.
Deferred prosecution arrangements
One major impact of Osofsky’s tenure has been the use of Deferred Prosecution Arrangements (DPA). These allow firms to admit wrongdoing, pay a fine and avoid criminal prosecution if they commit to making changes.
It has already been used in number of high-profile investigations, most notably with Airbus. The company entered into a €991million DPA with the SFO over allegations it had used its consultants to bribe customers to buy its civilian and military aircraft. In total their fines came to $3.6bn around the world.
Osofsky has hailed DPAs as one of the organisation’s greatest successes. They were first used in her native US and she brought them with her to the UK. They are seen as a way to expedite cases, save money and to force firms to commit to changing their culture. They also accelerate the flow of money into government coffers.
Speaking at the virtual Cambridge Symposium on Economic Crime, Osofsky said the measures helped the SFO deliver a ‘substantial return on investment’ for HM government.
“I can’t pretend not to be pleased that such resolutions have meant the SFO making a significant return on investment,” she told the Financial Times. “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.”
Her statements were criticised by those who felt it signalled a belief that a regulator’s role was to raise revenue rather than to punish fraud.
The practice came under scrutiny again after Serco and G4S reached DPAs with the regulator after falsely charging the government for prison tagging services. An investigation found that the firms had continued to charge for inmates who had either been returned to prison, moved overseas or even died.
The DPA allowed the companies to pay a fine, promise not to do it again and, most importantly, avoid criminal prosecution. A criminal charge would have prevented the firms being handed government contracts once again. Both have since been hired by the government despite having openly admitted defrauding them in the past.
Eurasian Natural Resources Corporation (ENRC)
Failed investigations have put the SFO in the line for a potentially damaging legal action. Mining group ENRC is currently pursuing a £90 million lawsuit against the regulator for the way in which it conducted an investigation into wrongdoing at the firm. An extraordinarily complex case that will be heard in June 2021.
Privileged and sensitive documents belongings to the ENRC were allegedly leaked to the SFO via the press by Dechert head of white-collar crime, Neil Gerrard. The lawsuit centres on a period between 2010 and 2011 when Dechert was assisting the ENRC over self-reporting allegations. They claim that Gerrard leaked information to a reporter for the Sunday Times and that a subsequent report led the SFO to launch a formal investigation.
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”.
ENRC also 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 both strenuously deny all the allegations made against them.
This is a big threat to the SFO. Should they lose the lawsuit they could race a bill of up-to £100 million. The law firm Dechert has protected some of this expose by agreeing to insure a portion of the potential costs in the event of a loss.
Strained relations internationally
The SFO has also often had a difficult relationship with its counterparts in the US. In 2008 an official internal review of the SFO compared it unfavourably with two of its counterparts in New York, the offices of the United States Attorney for the Southern District of New York and the New York District Attorney. It found that prosecutors in America enjoyed higher conviction rates with fewer resources. The SFO also had lower conviction rates than elite divisions of the Crown Prosecution Services. The poor performance of the SFO, it found, was down to its failure to keep call court advocacy in house and assign lawyers who would take cases from the cradle to the grave.
It also found itself in direct conflict with the FBI over the Unaoil case. The SFO had wanted to prosecute the Ahsani family which owned the firm, but the FBI spirited him away and offered a plea deal.
Tensions became even more fractious after an altercation in a London pub in which an SFO investigator Tom Martin was said to have used an expletive against an FBI agent. Martin was fired after an investigation into the incident but has since launched a suit for wrongful dismissal against the SFO.
Ultimately, many of the problems for the SFO stem from its structural weaknesses. It struggles to attract the best people and often finds itself going up against vastly better resourced corporations. It’s an unequal playing field which often sees it having to cut corners or turn to compromises in order to bring cases to a successful conclusion.
Looking to the future, there are more big cases on the horizon. The SFO is currently probing the collapsed London Capital & Finance which took £236 million in investor cash. The probe will include an investigation into the FCA’s authorisation of the firm.
It is also investing heavily in technology. Osofsky has hailed its use of an e-discovery platform which harnessed big data to help it draw insights and support human operators. The technology proved useful in its case against Rolls Royce. The investigation focused on bribery and corruption to win business and resulted in a £497.25 million fine.
Moving forward, technology will continue to shape the SFO’s approach. However, the issues it faces are the same as they always have been. It must confront an increasingly complex and demanding landscape in which technology both complicates cases and offers more weapons to fight them. The SFO faces rising political pressure with scrutiny on its performances and the ongoing desire, in many quarters, to see it reformed or replaced.
The regulator, therefore, finds itself fighting a war on two fronts: firstly, against an increasingly sophisticated fraud landscape, and secondly for its very survival. How it reacts to these challenges will determine the shape and format of its operations in the future.