Open competition is an absolute necessity as the ultimate consumer safeguard. Last month I concluded that government should give serious thought to adapting the role of the Serious Fraud Office and implementing a new, radically improved US-style system for the investigation and prosecution of financial crime. This would form one of a series of strong new pillars in a reformed and effective financial system. So how should the new fraud-busting agency operate?
The Opposition’s commitment is to disband the Financial Services Authority and return its supervisory function to a more powerful Bank of England. This poses two problems. First, the FSA is funded by the financial institutions it regulates. Wherever the FSA is absorbed, we will need to claim new resources at a time of highly constrained public spending. Second, what will happen to the FSA?s Enforcement Division, which is able to impose civil sanctions and launch criminal cases on matters such as market abuse in tandem with the City of London Police and Crown Prosecution Service? Should those important functions be taken on by an empowered, but potentially overstretched, Bank of England?
My proposal is the drawing up of a robust economic crime policy that places the promotion of commercial competition at the heart of a new code of enforcement designed to deter fraudulent, anti-competitive or criminal activity. Such a policy should centre upon a new agency in place of the Serious Fraud Office which would combine the SFO and the FSA?s Enforcement Division.
Incongruously the SFO currently lies under the jurisdiction of the Attorney General. I believe we should place the new investigative agency within the remit of the Department for Business, Innovation and Skills, working closely alongside the Office of Fair Trading. By associating consumer protection with fraud and trust-busting, we give competition its correct place as a central priority in the future commercial landscape.
To effect the necessary sea-change in attitude and create a body with the authority of its US equivalent, requires adopting new powers.
- It would need to be able to impose substantial fines on wrongdoers (such fines could, in turn, play a role in covering the costs of any new organisation).
- Legislative changes would be required to make British companies criminally liable for illegal acts of fraud and corruption by their employees in broader circumstances than now.
- Measures would be put in place to protect whistleblowers and offer immunity to those aware of anti-competitive practice when they come forward.
- The new agency would be endowed with greater leeway to investigate any potentially fraudulent activity before a formal inquiry is launched.
- Perhaps most importantly, a revamped Serious Fraud Office would enjoy a power of deferred prosecution.
A deferred prosecution enables proceedings in a criminal case to be delayed for a given period subject to certain conditions being met by the company in question. At the end of the set period, if all the agreed conditions have been met, charges can be dismissed and judgement of conviction is entered. Prosecution of the case will continue in the event that the defendant company fails to comply.
Over the past year or so, the SFO has pursued a more consumerist agenda and in view of the fallout from the global financial services crisis, there is great public appetite for the taking of an aggressive approach to fraud in an attempt to rebuild the organisation?s battered reputation. A process of deferred prosecution can be made to work in the US, with that pragmatic option reliant upon a willingness on the part of investigated companies to ?cut a deal?.
Ideally such a system would work along the following lines. A company would be able to approach the SFO to alert them to concerns about certain elements of their operation, for instance in merging with a company whose practices do not necessarily seem sound. Soon after the approach from the company, the SFO would try to establish whether its Board of Directors is committed to resolving the issue and changing their organisation?s culture. It would also determine whether they are prepared to work with the SFO on the scope and handling of any additional investigation.
Once both sides are satisfied with the self investigation, there would follow a without prejudice discussion as to whether further investigation was necessary. Wherever possible, this would be carried out at the company?s expense in cooperation with its professional advisers, whilst trying to control costs.
The SFO had been attempting to apply such a method to the BAE Systems case by trying to persuade the company to plead guilty, pay a fine and agree to independent monitoring of its behaviour instead of the embarrassing and lengthy process of a trial. So far BAE has resisted and the SFO is now seeking permission from the Attorney General to prosecute.
The SFO has also introduced the system in the recent Sports Direct/JJB case which was referred to the SFO from the OFT after JJB blew the whistle on alleged cartel activity in the sports retail market. In return for immunity, JJB must fully co-operate with their investigation, withdraw from the cartel and pledge not to act in bad faith. The OFT in its own right has had some recent successes in imposing substantial fines. Most recently it imposed a penalty of £39.27 million on six construction companies that had been engaged in anti-competitive behaviour. In that particular case, a deal had been cut as one of the cartel?s whistleblowers was granted an exemption for revealing the operation. The two bodies ? either working together or as one ? could prove an effective duo in the vigorous promotion of competition and fairness.
One of the biggest problems for the SFO in its current set up is the difficulty of actually finding cases to investigate. In a system of deferred prosecution, more companies would walk through the door. Though it could lead to an added layer of bureaucracy in fulfilling any new requirements to self-report, discussions with business and professional advisers so far suggest that there is a lot of interest in a system of self reporting. In return for openness and cooperation there would be effective and proportionate sanctions for any wrongdoing, the prospect of a civil rather than criminal outcome and the opportunity to manage issues and any subsequent publicity proactively.
In a system where no form of corruption is tolerated but a fair and proportionate approach is taken to those who try to reform (backed up by the threat of serious penalties if they do not) a new corporate culture would ideally emerge, creating behavioural changes within businesses and a fresh respect for any fraud-busting agency.
With the UK taxpayer propping up banks that are politically too big to fail and, as a consequence, providing cover for many commercial enterprises part-owned by part-nationalised banks, our economy has a worrying dearth of competition. With a Serious Fraud Office that currently has neither commercial nor industry respect, we lack too a serious, tough and effective body to deter companies from engaging in fraudulent or market-distorting activity. I contend that it is critical that we put the restoration and promotion of competition and fairness at the very heart of future economic policy.
The SFO (or any organisation that replaces it) requires teeth under the Party?s plan for sound banking alongside an all-powerful Bank of England. The public will loudly demand more rigorous enforcement of regulation across business, but particularly in the financial services sphere. Conservatives need to demonstrate seriousness of intent by outlining robust plans for a tough, not-to-be-messed with agency that values strong competition and clean business dealings as essential to the functioning of an effective financial system. Such an agency should be linked to ? or indeed merged with – the Office of Fair Trading and its work made a top priority of the Department for Business, Innovation and Skills rather than a minor one in a Treasury with its hands full. As a blueprint for our new regime, we need only turn to the United States whose system is imbued with a whistleblowing culture where deals can be cut if a business shows willingness to change, backed up with a tough prosecutorial threat.
The deterrents provided by healthy competition and stiff punishment must form the backbone to the brave new world of banking and business that lies ahead. Nothing less will restore confidence from market professionals and trust from the public at large.