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29 April 2020

Is the SFO able to meet the challenge of Covid-19?

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By Sangeeta Bedi

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The Economist recently published an article entitled “The economic crisis will expose a decade’s worth of corporate fraud”. Quoting from academics and investigators – and drawing on the experience of the dot com crash and the 2007-2009 financial crisis – the article argues that the economic meltdown precipitated by Covid-19 will expose a multitude of financial scams. According to its colourfully worded conclusion: The ebbing tide is likely to reveal plenty of corporate nudity. That will not stop some businesses from taking up naturism.”

History suggests that this thesis is correct. However, the more interesting question, for criminal lawyers at least, is whether the UK’s law enforcement agencies will be standing on solid ground as the sea recedes, lifebelts at the ready, poised to lasso the most dangerous naturists. Some lawyers have eagerly subscribed to this vision, speculating that, within two years, the SFO will be vigorously and predominantly investigating allegations arising from Covid-19, e.g. frauds against the NHS and other healthcare providers.

This is a rosy vision replete with wishful thinking. It not only assumes that the SFO still exists in 2022, but that it has the resources and skills successfully to investigate and prosecute such frauds. History is not on the side of these augurs. If anything, history suggests that, as the tide ebbs, the only flotsam the SFO will net will be not the sharks, let alone the whales, but the hapless beached minnows. The retreating larger fish – today’s equivalents of Madoff and Enron – are more likely to fall into the more sophisticated nets of overseas prosecutors, or simply swim far out to the safety of deep waters.

This is not to suggest that the SFO should pursue every criminal allegation emerging from the crisis. Much of the crime directly arising from Covid-19 is unlikely to fall within the SFO’s statutory remit of investigating serious or complex fraud. Smaller retail scams concerning, for example, small volumes of fake pharmaceuticals, PPE or testing kits will properly fall outside its remit. The public interest in investigating such scams should be met by other agencies, such as the police or the NCA (assuming they are properly resourced).

What about the bigger, more sophisticated frauds, and/or those frauds with an international element? This is where the SFO should step up and deliver. Will it be able to do so? One hopes the answer is yes, but the portents are not promising.

Take the largest healthcare fraud ever investigated by the SFO. Operation Holbein was a seven-year investigation of five pharmaceutical firms and nine individual defendants who were allegedly involved in the price fixing of medicines supplied to the NHS. It was, in 2008, the SFO’s largest investigation in its 20-year history, occupying a reported 150 police officers at its peak and costing an estimated £40m. The trial judge threw out the case in 2008; the charges were bad in law. The SFO would be wary about venturing again into the field of pharmaceutical pricing. (Whilst the CMA has set up a taskforce to investigate pricing of medicines during the Covid-19 crisis, it has not brought criminal prosecutions for many years, whether into price fixing or other forms of cartel behaviour).

If the SFO’s record in prosecuting healthcare fraud is discouraging, what about its record in prosecuting healthcare corruption? The sale of pharmaceuticals, particularly in parts of the developing world experiencing a public health emergency, is a fertile breeding ground for corruption. Corrupt behaviour arising from Covid-19, providing it had a UK nexus, should be comfortable terrain for the SFO. Again, however, the SFO’s record does not inspire confidence. The last major pharmaceuticals company the SFO investigated in relation to bribery offences was GlaxoSmithKline Plc. The SFO opened this investigation in 2014 and closed it five years later, without bringing charges against the company or any individual. Further back in time, the SFO was successful in convicting an individual (John Dougall) who had channelled bribes to Greek surgeons in his capacity as a senior marketing executive for a subsidiary of a medical products company. However, the DOJ took the lion’s share of the financial penalties levied against the company.

The SFO might argue that Mabey & Johnson is a more promising precedent. In this case, the company pleaded guilty in the UK to offences of bribery and violations of UN sanctions (in connection with the UN Oil for Food Programme). Three individuals were also convicted. The SFO might argue that this case proves that it can successfully prosecute UK companies (and their executives) where they are complicit in bribery in a developing country enduring a public health crisis. Whilst the primary purpose of the UN Oil for Food Programme was the provision of food, medicine and other humanitarian essentials to post-Gulf War 1 Iraq, the SFO prosecution did not concern pharmaceuticals and had no connection to the development of Iraq’s public health infrastructure (Mabey & Johnson supplied bridges to the Iraqi state). It is not therefore a true precedent for the possible future investigation of healthcare-based corruption perpetrated in the shadow of Covid-19.

The Economist argues (rightly) that the corporate nudity exposed by Covid-19 relates as much to past as to current or future offending. In other words, as borrowers default and/or financial institutions call in or scrutinise their investments, they will discover previously concealed crimes – for example, accounting frauds or investment scams. This should provide another rich seam of investigations perfectly suited to the SFO. But what did the SFO do with the debris it found on the beach in 2009, when the tide last went so far out? It pursued LIBOR with obsessive zeal but met with mixed success. It examined FOREX for a short while before closing its investigation, thereby allowing the DOJ to take centre stage. Its 2019/20 prosecution of the Qatar funding obtained by Barclays at the height of the financial crisis was a disaster on a scale equivalent to Holbein. No rational observer surveying this mediocre record would feel optimistic about the future.

The SFO faces problems unconnected to its history. As the UK emerges from lockdown, it has little hope of securing further, much-needed funding from a Government drained of resources and mired in debt. After the EU transition period ends in December, it is also likely to lose much of the assistance it currently enjoys from EU institutions and databases. The websites of Europol and Eurojust are replete with numerous stories about their work in coordinating the efforts of Member States to combat so-called Corona crimes. In contrast, the SFO’s website has published just one news item since the UK lockdown commenced, announcing the end of the DPA period in the Tesco case. Fighting fraud or corruption with an EU nexus will therefore likely become harder and more protracted.

It is hoped that the pessimism of this article is not vindicated. The SFO should play a game-changing role in investigating and prosecuting the types of serious, complex financial crime foreseen in the Economist article. To fail to do so would compound the damage already wreaked by Covid-19 – and prompt further questions as to whether the SFO should continue where it abjectly fails to fulfil its statutory remit in response to the greatest public health emergency since the Spanish flu in 1919. To meet this challenge, the SFO will need to overcome a number of obstacles – not the least of which is its own past.

 

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