Serious Fraud Office

Tuesday 18th April 2017 Westminster Hall

12:59

[Kirsten Oswald (East Renfrewshire) (SNP)]

I beg to move,

That this House has considered the relationship between the Serious Fraud Office and other agencies.

It is a pleasure to serve under your chairmanship, Mr Paisley. I sought this debate because of concerns about investment losses suffered by my constituents, and because of my related work as chair of the all-party parliamentary group for the Connaught Income Fund. As a newer Member of the House, I am coming fresh to an issue that many longer-standing Members may have considered previously. I make no apology for that. I am also not a lawyer, so I do not intend to get into the legal principles underlying the work of the Serious Fraud Office. However, having participated in a debate in February on SFO funding, I was interested to hear talk of the need to make changes to the legal framework.

I thank the Library for its support. I found its summary hugely helpful in confirming that there is a problem—certainly of perception and possibly also with the balance of the law being wrong. The Library note states:

“The enforcement of law in the field of financial services is surprisingly complicated. It involves a matrix of law and rules overseen by different bodies, agencies or regulators. It often contradicts a ‘common sense view’ of what actually is a crime.”

In preparing for that February debate, I was amazed to learn of what I considered to be the under-resourcing of the Serious Fraud Office. Is £60 million the budget we should be devoting to tackling the most serious acts of fraud, or should there be a significant increase in SFO capacity? In a recent speech, Megan Butler of the Financial Conduct Authority identified that the banking sector alone estimates its financial crime compliance costs at some £5 billion a year. In that context, the annual cost of the SFO seems remarkably low and increasing it seems to be a worthwhile investment.

Some hon. Members here may have helped to put in place the legislative and organisational framework that appears to have so badly failed my constituents and others caught up in the Connaught and other financial services scandals. A debate on the relationship between the SFO and other agencies may help them to consider whether they view the current situation as satisfactory.

When we look at the matter in detail, we must look at issues in sequence. We must decide the balance we want to see between the criminal law and the regulatory framework. Only when that is clear can we allocate responsibility to the relevant agency. I would cite two examples of where the balance is perceived to be wrong.

First, despite the banking sector bringing the UK economy to the brink of collapse, very few individuals have faced sanctions, regulatory or criminal, following the 2008 financial crisis. Secondly, the manipulation of financial benchmarks such as LIBOR, on which billions of pounds depend, was not a specific offence until recently. By contrast, an inaccurate mortgage application has long been classified as mortgage fraud, and many applicants and their advisors have faced prosecution for such a crime. If law enforcement was similarly lax in response to any other explosion of what most of us regard as crime, there would be outrage. Instead, what we see is an increasing cynicism and a view that “There is one law for them, and another law for us.” We need to address that cynicism.

The late Tam Dalyell, former Father of the House, did not always see eye to eye with my party. However, he left a great legacy as a parliamentarian. During his campaign on the sinking of the Belgrano, he highlighted the principle that small inconsistencies tend to be part of larger inconsistencies and that seemingly small untruths are often part of larger untruths. Thinking about that issue, it struck me that if this House could not understand why such a fraudulent enterprise as Connaught was able to operate and the perpetrators able to go undetected for so long, we could have little confidence that the systems for regulating financial services in the UK are generally fit for purpose.

I make no pretence of having an answer. By holding this debate, I am providing the Minister with an opportunity to reassure the House that the Government think they understand—and that they propose to take steps to prevent a recurrence. An FCA investigation into the Connaught fund is under way and I look forward to the outcome. However, much information is already in the public domain.

Connaught was an investment vehicle launched in 2008 under the title “Guaranteed Low Risk Income Fund”. Members of a certain vintage, like myself, might recall the Wile E. Coyote cartoons, in which a hapless coyote bought devices from Acme Trading in a desperate effort to catch the elusive Road Runner. The devices inevitably misfired or backfired. Calling a fund that promised a high rate of return “guaranteed low risk” might raise suspicions that it was similar to the sort of product sold by Acme Trading. But the fund did not come from Acme Trading; the “guaranteed low risk” fund came fully signed-off with the Capita brand.

Capita describes itself as the UK’s leading customer, business and professional support services organisation. Indeed, a few years ago, the Ministry of Justice brought Capita in to operate a contract after concerns were raised about the original operators. Capita is known to sit close to the heart—if such a thing exists—of the UK’s financial services sector. Investors would rightly expect officers authorising use of the brand to have a high aversion to reputational risk. They would not expect the name to be allied with an obvious scam.

Unfortunately for investors, the supposedly “guaranteed low risk” fund proved no better a performer than an Acme Trading rocket and it careered right out of control from day one. Four years later, the fund, now rebranded as the Connaught Income Fund, hit the wall, taking the savings of more than 1,000 investors with it, with losses of more than £100 million pounds—less than a third of which has ever been recovered.

We know the Connaught fund careered out of control from day one, because one of the participants said so in the case of Connaught Income Fund, Series 1 v. Hewetts Solicitors. Mark Cawson QC, sitting as a Deputy Judge of the High Court, stated that in his view passages within the fund’s information memorandum

“were suggestive of an intention that the Fund would lend directly to the ultimate borrower requiring the bridging loan.”

However, the evidence given in court by Michael Davies, who had been at the centre of the fund throughout its life, was that that was never the intention,

“however the IM might have been expressed.”

From the start, the funds went to a single group of companies—Tiuta plc and its subsidiaries. Immediately, Tiuta used some of the funds to replace the group’s past dodgy investments. I hope that the origin of that dysfunctional fund as the product of a highly regulated financial services firm is central to the FCA inquiry. I believe it should also be of interest to the Serious Fraud Office. If it is not, there must be something seriously wrong with the body of law underpinning the financial services sector. Without Capita acting as an operator that boosted the fund’s credibility, it may, like an Acme Trading rocket, never have got off the ground—saving a lot of people a great deal of money and distress.

We know a lot about the operation of Tiuta because of a whistleblower, George Patellis. In early 2011, shortly after becoming its chief executive, he approached the FSA with what he called clear evidence of Tiuta defrauding the Connaught fund. In a recent finding, the Complaints Commissioner expressed doubt about whether at the time the FSA seriously considered whether fraud had occurred. Indeed, the FSA delayed acting on or sharing Mr Patellis’s allegations for approximately 18 months, allowing Connaught to rake in millions of pounds more from investors and to pass them to Tiuta to disappear. The companies in the Tiuta Group entered administration in 2012 and then went into insolvent liquidation.

When the information given by Mr Patellis was finally passed on, despite the scale of the losses identified by that time, it was not passed to the SFO—it was passed to the City of London Police. It seems that the FSA was very reluctant to do anything that flagged up the case as one of fraud, especially as it had been allowed to continue for so long on its watch. It is now six years since Mr Patellis made his report to the FSA. In those circumstances, the likelihood of any court action against participants in the Connaught scandal being challenged on the grounds of delay must be very high.

When I looked for the detail of the agreements between the SFO and the FCA to cover such circumstances, I was very disappointed at what I found. The SFO website contains a range of codes and protocols with other agencies governing its responsibilities. An agreement with the FCA is not listed. The FCA’s own enforcement information guide makes no reference to fraud or to a relationship with the SFO.

In 2014, two of the directors of Connaught were disqualified for a combined total of 16 years. The Insolvency Service cited their failure to manage Connaught’s relationship with Tiuta as the key factor in the failure of the fund. I am not sure what conclusion one can draw other than that the nature of that relationship, which was fundamental to the Connaught and Tiuta operation and had functioned for nearly four years, was not an accident. Again, there appears to be no published agreement between the Insolvency Service and the SFO—at least, there is not one on either agency’s website. There is a reference in the Insolvency Service’s guidance to the possibility that, if an offence has been committed, it may result in a report to the appropriate investigating or prosecuting authority.

One of the key events in the life of the Connaught fund came in September 2009—a year after it was opened. Capita stepped down as operator and was replaced by Blue Gate Capital. Surprisingly, the change triggered no requirement for due diligence, and no warranty or indemnity in respect of the operation of the fund to that date. The departure of the fund from its information memorandum and the conflicts of interest on the Tiuta side of the operation must have been well known by that time, because one of Blue Gate’s early acts was to issue a new information memorandum, which apparently brought the terms of the fund’s information memorandum and its operation into closer alignment. One might have expected that the discovery of that discrepancy would have resulted in some action, other than for Blue Gate to seek to align the paperwork with the practice it had inherited.

I note that, in some areas of financial services, a system of suspicious activity reports has been established. In 2014-15, more than 300,000 reports were submitted. That volume of reporting is underpinned by the clear identification that it is a criminal offence to fail to report knowledge or concerns about money laundering or that someone may be gathering money to fund terrorism.

It seems that the Connaught operation became practised in using investors’ funds to meet running costs, and elements of the Tiuta group accounts were falsified to overstate the value of assets underpinning the fund. As chief executive, Mr Patellis initiated a process of reviewing the group, including whether it should declare insolvency. In his report to the FSA, he highlights that the directors continued to draw high salaries and benefits, and that consultants established regular fee lines, despite the fact that they were all aware that new funds were being attracted and consumed with no plan in place for returning the group to financial stability.

Surely, given the FSA’s principles of business, the participants in that process should have been obliged to report their knowledge and concerns. By departing so markedly from the information memorandum, they had collectively fallen into the way of publishing false information. I can think of no reason why the people who were aware of that fraud should not have been under an obligation to report to the FCA or the SFO that investors’ funds were being handled in a way that did not match up with the prospectus or the information memorandum. Rather than being met with confusion, as Mr Patellis’ report was, the introduction of a formal mechanism, such as an SAR, may provide the clarity the system needs.

If an ordinary citizen had committed a comparable level of dishonesty in completing a mortgage application, they would immediately face investigation with a view to a criminal prosecution. Is it right that those embedded in our financial services sector should be protected from such investigations? Should we ensure earlier involvement of the SFO or the police when an apparently rogue fund is uncovered?

In previous debates, I have heard the senior managers regime cited as a solution to many of the problems in the sector over recent years. Having looked at some of the consultation materials issued as part of putting the senior managers regime in place, I have doubts if that will be the case. The consultation paper on duty of responsibility for senior managers appears to contain no reference to fraud or to the SFO. If I have missed it, or if it is buried in some other paper, I would be happy if that were highlighted to me. If I have not missed it and it is not there, that strikes me as an omission that must be corrected.

I found the discussion paper on the legal function even more concerning, because it opens the prospect of excluding the firms’ heads of legal function from the SMR. In terms of issues such as the design of investment opportunities and their operation, regulated entities should not have any closed books from the regulatory and enforcement agencies.

It strikes me that we still have some way to go to properly embed a fraud-aware approach into the regulatory framework of the financial services sector. Two ways in which that can be done—I would love to hear the Minister’s opinion on this—are to properly resource the SFO and to create much stronger links between the FCA’s staff and the SFO’s work. I look forward to hearing the Minister’s comments on all those points.

13:15

[The Solicitor General (Robert Buckland)]

It is a pleasure to serve under your chairmanship, Mr Paisley. I congratulate the hon. Member for East Renfrewshire (Kirsten Oswald) on securing this debate. I noted the remarks she made in a debate on an associated issue relating to the SFO in February. I pay tribute to her and to colleagues on the all-party parliamentary group for raising this undoubtedly very serious issue, which has caused real loss for those who invested in the Connaught scheme.

The hon. Lady outlined her concerns clearly, and said that she has already raised them with the FCA. She will appreciate that the Financial Conduct Authority is a separate, independent body, and I am not empowered to comment on its investigation, which is still ongoing and is extremely complex. The fact that many investors are still out of pocket is fully appreciated, and it is understood that certainty is needed about whether they can expect to receive compensation. The FCA will update them as soon as it can, and it is encouraging investors to consider what they can do in the meantime to protect their position.

The hon. Lady raised wider issues about, first, the status and funding of the SFO, and, secondly, its relationship with other agencies that help to police economic crime, misconduct and the sort of activity that, frankly, damages the reputation of financial services not only in the City of London but in the whole of the United Kingdom. I assure her that the Government take this matter extremely seriously, because it pertains not just to economic reputation but to our national security. That is why it was welcome that the Home Secretary announced last year that wider work will be carried out through the Cabinet Office to examine our response to economic crime more broadly. As part of that examination, we will look at the effectiveness of our organisational framework, and the capabilities, resources and powers available to the organisations that tackle economic crime, so it embraces fundamental questions of the type that the hon. Lady asked.

The SFO does vital work in tackling the most serious instances of fraud, bribery and corruption. It is an important part of the UK’s enforcement regime. It is right that questions continue to be asked about the adequacy of the way in which we deal with economic crime and how we can improve it. The hon. Lady was right to ask questions about LIBOR and the sort of activity that took place at the time of the economic crash in 2008. Although it is welcome that a number of people who were involved in manipulating the LIBOR regime have been prosecuted and, indeed, convicted, I agree that more needs to be done. It is acutely incumbent on the Government and the enforcement agencies to ask those questions at all times.

The hon. Lady rightly raised the issue of funding, about which we had a debate in this House not long ago. I assure her that the director of the Serious Fraud Office, David Green, who has been doing excellent work since his appointment in 2012, is satisfied that the funding his office receives is sufficient to carry out investigations and prosecutions. Let us not forget that the blockbuster funding allowed by the Treasury gives the SFO the flexibility and fleetness of foot it needs to mount special and unexpected investigations—it is, of course, very much a demand-led office.

I am glad to report that, in recent months, the SFO has yielded hundreds of millions of pounds for the Treasury in the form of new deferred prosecution agreements—most notably with Rolls-Royce and most recently with Tesco, to name but two. I am impressed by and pleased with the progress of the SFO since the appointment of David Green and with how it has focused on the criteria that it has to apply under the governing statute that set it up some 30 years ago.

Briefly, to remind ourselves, the SFO is a relatively small, specialised department that is allowed by law to investigate and, where appropriate, to prosecute cases of serious or complex fraud, which includes cases of domestic or overseas bribery and corruption. Such fraud calls for a multidisciplinary approach and recourse to the legislative powers available to the SFO.

The criteria for case acceptance are strict. The SFO will consider all the circumstances of a case, which include: cases that undermine the United Kingdom’s commercial or financial reputation in general, and the City of London’s in particular; cases in which the actual or potential loss involved is high; cases in which the actual or potential harm is significant; cases with a very significant public interest element; and, finally, new species of fraud. All frauds are serious, causing real detriment to those who fall victim to them, but the criteria rightly set a high threshold that has to be applied by the SFO.

On the way in which the SFO works with other agencies, I reassure the hon. Lady that it has constructive strategic and working relationships with all its law enforcement and regulatory partners. It engages with other agencies whenever relevant throughout the life of a case, right from the development of that case through to its investigation, prosecution and recovery of the proceeds of crime.

Those relationships are supported continually through attendance at various cross-Government working groups and regular bilateral liaison meetings, whether at the senior or operational level, and they are underpinned by memorandums of understanding or operational protocols where necessary. Such structures have evolved over time and in particular since the establishment in 2013 of the National Crime Agency’s economic crime command. The NCA plays a co-ordinating role in a structure of governance that applies across all areas of economic crime, and the SFO plays its part in all the relevant groups to form that collective response.

There are agreed roles and responsibilities, and the SFO investigates a particular species of serious fraud, bribery and corruption cases. At all stages of the assessment, however, reports of economic crime received by the SFO are under review to establish whether the matter falls within its jurisdiction and remit. If the matter is deemed not to reach that high threshold, it is closed and, if appropriate, consideration is given as to whether another law enforcement or regulatory partner may be better placed to develop the information.

Such decisions are made with a clear understanding of the remits of the other law enforcement agencies. The decisions are underpinned by frequent meetings between members of the SFO’s intelligence unit and their counterparts in the NCA, the Financial Conduct Authority and the other law enforcement and regulatory agencies. They meet in order to avoid the inevitable duplication or the conflict that might occur between reports. It will therefore be clear that only one agency is in the lead on any given issue.

We have to appreciate that many referrers—members of the public or others—will approach several agencies with the same matter, so each other’s expertise and capabilities are needed to make real progress with an investigation and to avoid, for want of a better phrase, reinvention of the wheel. That is essential if we are to make proper progress.

In particular, regular meetings are held between members of the foreign bribery clearing house—“foreign” means the involvement of other jurisdictions, which of course includes Scotland—to place potential investigations with the relevant authority. An SFO secondee therefore works with the NCA bribery and corruption intelligence unit, which helps with that process by providing direct access to the assets of the NCA and SFO.

Operation of the clearing house is governed by a memorandum of understanding that was agreed in 2014 and is published on the SFO website. Parties to the MOU are the City of London police, Scotland’s Crown Office and Procurator Fiscal Service, the Crown Prosecution Service of England and Wales, the Financial Conduct Authority, the Ministry of Defence police, the National Crime Agency and the Serious Fraud Office. We need not end there, however, because the MOU is being looked at again and refreshed to ensure that it is as relevant as possible, bearing in mind current challenges.

Another MOU, between the SFO and the Scottish prosecuting authorities, sets out further rules for co-ordination and co-operation between the two bodies. The SFO does not have prosecutorial authority north of the border, but it has investigatory powers over frauds that could be prosecuted in England, Wales and Northern Ireland, so the co-operation with the Scottish authorities is vital.

Those MOUs set out the remit of each agency involved in tackling bribery, in accordance with the agreed roles and responsibilities grid that exists for bribery and corruption cases, and provide a framework for how the agencies will co-ordinate foreign bribery work. That ensures that all credible allegations of foreign bribery with a connection to the UK are properly assessed.

The SFO also takes part in other strategic delivery and working groups, including Project Bloom, which relates to pension fraud and is chaired by the Pensions Regulator, and the Panama papers taskforce announced by the then Prime Minister in April last year. The SFO is a founding member of the joint financial analysis centre, which is an important part of the Panama papers taskforce and was launched in July last year with the NCA, Her Majesty’s Revenue and Customs and the Financial Conduct Authority.

The SFO has invested a significant amount of its intelligence resources into that new joint analytical centre, which is complemented by a dedicated group of officers based within the SFO who manage and develop the resultant intelligence and contribute to the analytical process and the product of it generated by the JFAC.

The SFO also actively participates in a number of Panama papers forums, including the JFAC co-ordination and response group, which provides a platform to share efficiently information and intelligence, agree primacy and co-ordinate joint working. The SFO’s commitment to the principle of joint working has directly benefited numerous SFO investigations as well as an operation with HMRC, supported by the NCA, in relation to serious and complex fraud allegations. There is a referral mechanism; the SFO refers matters to the JFAC as well as being a part of that centre itself.

The SFO does not have its own powers under the Police and Criminal Evidence Act 1984. It carries out searches and arrests with the support of the NCA and police forces and it works with them collaboratively, where appropriate, throughout investigations. That symbiosis is very much a part of the way in which the SFO operates with other organisations.

I take on board what the hon. Lady said about the need further to refine and improve the process. I can assure her that with each year that passes, that is precisely what happens. If lessons can be learned from previous failures or omissions, they are learned and they are used to refine existing memorandums of understanding and existing partnership working to ensure as seamless a response as possible to economic crime. There is much to be done. Much has been achieved, but I accept the spirit of the hon. Lady’s motion: there is more to do.

Question put and agreed to.

13:29

Sitting suspended.