This article was originally published in the Young Fraud Lawyers Association (YFLA) Autumn 2022 Newsletter.
When Lisa Osofsky delivered the keynote speech at the 39th Cambridge International Symposium on Economic Crime on 5 September she was keen to emphasise the 'great progress' made during her tenure as Director of the SFO ('DSFO'), but made only passing mention to the mistakes that have been made during that time. Dismissing criticisms levied at the SFO by 'our more vocal and ill-informed detractors', Ms Osofsky stated that she remained 'ambitious for the SFO's future'. However, given that the mistakes referred to include the DSFO's own personal ill-judged behaviour, disclosure failings that led to the collapse of a trial (Serco) and multiple successful appeals against conviction (Unaoil), ultimately resulting in two separate independent reviews that are reported to have cost the tax payer £450,000, the importance of those mistakes was arguably underplayed.
Ms Osofsky pointed to the following key successes:
- The conviction of 21 individuals and 'numerous' companies, including the conviction of Petrofac and GPT in 2021 and Glencore in 2022;
- The continued use of DPAs, including for Airbus (€991 million) and Amec Foster Wheeler Energy Limited (£103 million), resulting in 'bringing back over £1 billion to the taxpayer';
- The recovery of £59.5 million via confiscation orders;
- Investment in technology; and
- Improved international collaboration, particularly with the US Department of Justice.
It was acknowledged that one of the key challenges for the SFO is disclosure. Whilst stating that work to improve processes, policies and procedures is ongoing, Ms Osofsky bemoaned the time consuming and labour intensive disclosure regime, which 'still demands manual review' of documents and 'runs a deep risk of human error'. Claiming that the current disclosure framework allows the defence to 'use a mistake, which is capable of correction, to mount technical challenges to our cases', Ms Osofksy stated that she aims to 'rebalance the system for victims and justice'. The SFO's 2022-2025 strategic plan sheds further light on Ms Osofsky's intentions. As Ms Osofsky considers the current requirements to expose the SFO to 'disproportionate operational risks' she 'would like to encourage consideration of how the disclosure regime could be brought up to date to support justice in cases of complex economic crime in the digital age'.
The Independent Reviews
In July 2022, independent reviews by Brian Altman KC (on the collapse of R v Woods and Marshall) and Sir David Calvert-Smith KC (following the successful appeal against conviction of Ziad Akle ) were published. Both reported systemic failures within the SFO, including the conduct of senior management, archaic and convoluted procedures and systems, and the allocation of insufficient resources.
Brian Altman KC Review
In summary, Mr Altman KC reported that a combination of factors led to the collapse of the case against Woods and Marshall, but that a key catalyst was the failure to disclose a document that was an essential part of both the defendants' defences despite the document having been reviewed by two experienced disclosure review counsel. The explanation provided by those individuals for their failure to mark the document as potentially disclosable was that they understood their role to be limited to the determination of relevance, which revealed '…serious systemic failures of communication, tasking, training, guidance and/or oversight and monitoring'.
The report also identified:
- A failure to review all material (the content of an entire bag of material was not reviewed);
- Descriptions of documents that failed to highlight significant content;
- A failure to carry out quality assurance reviews of document descriptions and disclosure determinations;
- An insufficiently robust quality assurance regime that was unfit for large and complex cases; and
- Appointment of an inexperienced disclosure officer who was required to learn on the job due to under-resourcing.
Sir David Calvert-Smith KC Review
Sir Calvert-Smith KC also found compliance with casework quality assurance and incomplete and inaccurate descriptions of documents. He further reported a number of cultural issues, namely:
- A sense that key and senior players considered themselves above the rules and 'far from complete or effective' compliance with policies in relation to record keeping;
- A lack of clarity regarding ownership and accountability;
- A prioritisation by senior management of reconstruction of relationships with the FBI and DOJ, which led to 'total and mutual distrust' between the case team and senior management;
- A perception that contact with an American fixer who was retained by an alleged co-conspirator the 'seal of approval' of the Director of the SFO; and
- A lack of available avenues to challenge this contact by the disapproving case team.
Quite apart from the clear impropriety of Ms Osofsky's contact with the fixer (the review concluded that she ought to have sought legal advice before having any contact, but noted that any concerns she may have had would have been allayed by the fact that the fixer also met with the Attorney General), it was noted that, the DSFO had failed to take notes of meetings and conversations and had used her personal mobile phone for some of the communications, despite a clear legal requirement to keep comprehensive records.
Although Sir Calvert-Smith KC did not go so far as to suggest that the disclosure failings were a deliberate cover up, the report emphasised the need to proceed in the public interest, rather than protect an employee, public servant or organisation from embarrassment.
The following key recommendations were made as a result of the reviews:
- Allocation of adequate resources;
- Improvement of training and simplification and rationalisation of internal guidance on disclosure;
- Improvement of communication to enable proper superintendence of the SFO;
- Effective performance reviews and management of staff;
- Creation of routes for staff to raise concerns;
- Improvement of relationships between investigatory and prosecutorial arms; and
- Improvements to record keeping.
Potential reforms to the disclosure regime
Ms Osofsky's apparent frustration with the English and Welsh system is perhaps unsurprising. Although qualified as a barrister in the UK, she had limited experience of the English and Welsh system prior to her appointment as DSFO, the vast majority of her experience having been accumulated in the US where she worked as a federal prosecutor and as Deputy General Counsel and Ethics Officer of the FBI.
With its emphasis on 'flipping' informants and a disclosure system in which the burden is on the defence to comb through material disclosed by the prosecution, the US system is – we argue - fundamentally different to the current English model. Any shift towards the former would serve to erode the responsibilities and duties that are rightly imposed on prosecution agencies to ensure fairness and to provide protection to defendants, particularly those that are publicly funded. Any change should, therefore, be considered with extreme caution. The US model has, in fact, been previously considered and roundly rejected by Gross LJ (as he then was) in his 2011 Review of Disclosure in Criminal Proceedings.
While it is accurate to say that the disclosure regime was designed at a time when the volume of data that the SFO now routinely deals with was not envisaged, Ms Osofsky's desire to overhaul the legislation may demonstrate a concerning reluctance to truly grapple with the systemic issues that have been identified within the SFO. With less than a year remaining in her contract as DSFO, the extent to which Ms Osofsky will be able shape legislation is in doubt. It might be thought that her efforts as a leader should, therefore, be focused on improving internal compliance with existing requirements and seeking to implement the recommendations made in the independent reviews.
Implementing the Recommendations
It is notable that the government has reportedly asked the SFO to model redundancies of up to 40%, which would leave case teams even more severely under resourced than the reviews found them to be. It is undeniable that if the SFO is to successfully prosecute the most serious and complex financial crimes it must be placed on a more even footing, when it comes to resources, with the companies and individuals it investigates. To be effective, the SFO needs to be able to recruit and retain high calibre employees, and to devote the necessary time and resources necessary to conduct effective investigations and prosecutions. What the figures quoted in Ms Osofsky's speech show is that the investigation and prosecution of financial crime is a good investment; the sums recouped by the state are significant.
Some commentators have advocated for a return to an incentivisation scheme, such as the SFO was party to under the Asset Recovery Incentivisation Scheme ('ARIS'), following its introduction in 2006. The difficulties with this proposition are twofold; (i) it does not provide a steady funding stream, and (ii) it creates a conflict of interest.
Until 2014 the SFO received a proportion of the money recovered from confiscation orders and civil recovery under ARIS, but the infrequency of payments and unpredictable sums received made this difficult to manage. The SFO now has an arrangement made with HM Treasury to receive a fixed sum towards its core funding. We suggest that a return to a direct incentivisation scheme is not advisable due to the risk that, motivated by potentially huge financial returns, investigators may not pursue lines of enquiry that tend against their case theory and prosecutors may be disinclined to disclose documents that undermine their cases.
It is to be hoped that, as an experienced criminal barrister, the new Attorney General Michael Ellis KC MP, will be able to effectively hold the SFO to account in the role of superintendent. His ability to oversee the SFO is, however, reliant on the quality of the information provided to him.
Improvement of relationships
This is not the first time that the SFO's culture has been criticised. Under Richard Alderman, the DSFO between 2008 and 2012, in particular, there were serious concerns about the agency's ethos. The Public Accounts Committee ('PAC') found that a 'catalogue of errors and poor judgment' on Mr Alderman's part had undermined the SFO's reputation and damaged staff morale. The PAC also found that Mr Alderman had created a culture of secrecy, where external advice and scrutiny were avoided. That culture of secrecy has been highlighted once again recently, in the case of ENRC -v- Dechert & SFO  EWHC 1138 (Comm) in which Mr Alderman and other senior SFO officers were found to have engaged in repeated secret meetings with ENRC's then lawyers, without ENRC's knowledge or permission.
In 2019, HM Crown Prosecution Service Inspectorate provided an assessment of staff engagement within the SFO, and found that the ‘sharp focus’ on casework delivery had ‘in many instances, led to tolerance of neglectful approaches to management or, in some cases, of unacceptable behaviours’. It therefore appears that these are legacy issues that are deeply embedded within the organisation, and that Ms Osofsky will need to prioritise the organisation's response to these issues and encourage transparency, both within the organisation and externally.
The SFO was specifically set up as an organisation that would undertake both the investigation and prosecution of serious fraud following the Roskill Committee on Fraud Trials in 1986, however there have been repeated calls for the separation of the functions arguing that the SFO is no longer fulfilling its statutory purpose as envisaged by Roskill. Today, the Financial Conduct Authority is the only other organisation still operating under this model, and the Crown Prosecution Service continues to gradually absorb the prosecuting arms of other agencies whose departments had also included investigators. Critics argue that so long as the SFO is firmly focused on securing DPAs with companies, its willingness to effectively investigate and prosecute employees of such companies is diminished leaving investigators lacking the necessary experience resulting in the blunders that were seen in the Serco and Unaoil cases. There are also suggestions that, as long as the SFO is carrying out both functions, there is insufficient separation between investigators and prosecutors for the purposes of ensuring effective check and challenge, an essential part of ensuring the level of rigour that is required, particularly around disclosure.
What would the alternative look like?
For many years it has been suggested that the investigation and prosecution arms of the SFO could be absorbed by the NCA and CPS, respectively. Other such mergers, for example the merger of the Revenue and Customs Prosecution Office ('RCPO') with the CPS in 2010, have been declared by the Ministry of Justice to have been successful. It is, however, difficult to assess whether there has been an impact on cost effectiveness or success rates, due to a lack of publicly available data.
A merger would inevitably have considerable financial cost, and it is doubtful that in the current economic climate there would be any political appetite for the significant expenditure that would be required. We suggest that any additional funding would, in fact, be better spent on implementing the reforms recommended in the independent reviews and ensuring that case teams have sufficient resources to conduct thorough investigations and prosecute without compromising the integrity of the process. Economic crime in the UK is estimated to run to billions of pounds each year. With increasingly frequent media reporting on London as a laundromat for corrupt money, and the integrity of the UK as a place of doing business at stake, this does not seem the time to scrimp on investment into the fight against financial crime.
Written by: Elliott Kenton (Senior Associate), Natasha Hattab (Associate), Verity Quaite (Associate) and Alexandra Basford (Trainee) - Commercial Crime Team at Fieldfisher
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