Serious Fraud Office

Kirsten Oswald Excerpts

Tuesday 7th February 2017 Westminster Hall

[Kirsten Oswald (East Renfrewshire) (SNP)]

I thank the right hon. Member for East Ham (Stephen Timms) for securing the debate and for the very considered way in which he approached the topic. In fact, all the speeches we have heard have been considered and thoughtful on the question of how we should move things forward.

The right hon. Gentleman highlighted the complexity and depth of the work of the Serious Fraud Office, and I was pleased that he highlighted the prosecutions for LIBOR rigging. I was also interested in his comments and those of other Members on whether the funding mechanisms allow for the best recruitment of appropriate staff. The right hon. and learned Member for Harborough (Sir Edward Garnier) made a number of useful points relating to that, as did the hon. Member for Strangford (Jim Shannon) and the right hon. Member for Cities of London and Westminster (Mark Field), who made me smile by admitting to a love of glam rock. I entirely agree with him on that. I hope he will agree with me that the SFO has a vital role in prosecuting complex fraud and tackling corruption. I hope he will also join me and the Scottish National party in calling on the Government to increase funding to the SFO to show their commitment to fighting fraud and corruption—adding clout, as he would have it.

The UK Government have indicated that they seek to move towards more of a tax haven economic model, which rings serious alarm bells for combating fraud. The right hon. and learned Member for Harborough spoke about reputation, which is key here. The SNP calls on the UK Government to respond to the findings in the report by the Crown Prosecution Service inspectorate and ensure that future funding arrangements ensure that the SFO provides the very best value for money. As the right hon. and learned Gentleman pointed out, the Crown Office and Procurator Fiscal Service is Scotland’s sole prosecution service, so the SFO does not have jurisdiction to prosecute in Scotland, although its powers may be used to investigate serious or complex fraud that is prosecutable in England, Wales or Northern Ireland. The SFO works with Scottish authorities on UK-wide fraud. I am interested in this issue because it has relevance for some cases that I am dealing with.

As Members may be aware, I have recently taken on chairmanship of the all-party parliamentary group on the Connaught Income Fund. As happens with many cases of its kind, the Connaught case has disappeared into an extended limbo as investigations take place. To the astonishment of many, those investigations are being conducted by the Financial Conduct Authority and not by the SFO or even by the City of London police. When I read the subject of this debate, it set me wondering about what we should expect from the SFO as part of its core funding. Why was the Connaught case not quickly elevated to the SFO for investigation? Why has it been dealt with as a matter of regulation, rather than of potential criminality from the start?

The Connaught fund was set up in 2008 and collapsed in 2012. A related case, Connaught v. Hewetts, was heard in the High Court in July last year. Evidence in that case indicated that Connaught had all the hallmarks of being a dishonest enterprise from the start. Instead of gathering funds from a range of investors and lending them on to a wide range of borrowers, the fund made all its loans to a single group of companies, the Tiuta Group. Tiuta immediately started to use the Connaught loans to pay off existing loans and to bankroll dubious projects already sitting on its books. Early in 2011, a very clear allegation of fraudulent behaviour was made to the Financial Services Authority by George Patellis, the newly arrived chief executive of the Tiuta Group. Despite that, Connaught and Tiuta were allowed to continue their activities for many more months, before finally going into liquidation in 2012. It is not even clear if the case was raised with the SFO, which raises the question of just what we are funding the SFO for.

Since I arrived in the House, the Connaught case has been raised on a number of occasions, both in debate and in questions. Ministers and the Financial Conduct Authority have given assurances that the police have been informed of the activities around the fund, but to date there have been no prosecutions. I have written to the City of London police’s economic crime unit, seeking assurances that a police investigation is under way. I will let Members know the outcome of that correspondence when I receive a response.

The reason for raising the matter today is that when I looked at the briefing, I decided to return to the question of why the Serious Fraud Office was not at the heart of the Connaught inquiry. The director of the SFO has helpfully provided a statement of principles he uses when considering a case, and I have compared the Connaught case with the factors contained within that statement. If Connaught meets the criteria for cases that the SFO should look into, that suggests that the organisation’s core funding should cover at least exploratory investigations in this situation.

The first criterion the SFO uses is whether the actual or potential financial loss involved is high. With more than £100 million lost by investors, the Connaught case clearly meets that threshold. Is it any surprise that investors are surprised that the Connaught case has languished for so long, instead of quickly being elevated to the SFO?

The second criterion used by the SFO is whether the actual or potential economic harm is significant. In this case, it is. Many Connaught investors were looking for an unexciting but steady rate of return on their capital, with no expectation of risk. Indeed, when the fund was launched, it was called the “Guaranteed Low Risk Income Fund”. Not surprisingly, many of the people attracted were looking for a low-risk income fund. Immense damage was caused to the life plans of many. If the core funding of the SFO is not intended to protect such investors, perhaps the Solicitor General can explain why.

The third criterion for SFO involvement is whether there is significant public interest in a case. Again, with Connaught, for many reasons there has been huge public interest and significant public sympathy for those who have lost money. There is also a great deal of interest in the failure of the regulatory system to prevent harm in response to the whistleblowing by Mr Patellis. The information he provided appears to have been simply ignored by the FSA for many months. In a recent report on a complaint by Mr Patellis, the Complaints Commissioner referred to an internal memo within the FSA, acknowledging that there was an opportunity here to prevent harm, rather than simply clear up afterwards. There is a great deal of public interest in why the FSA failed and whether its replacement, the FCA, is any more likely to succeed and if not, why not. Surely the SFO would not be so ineffective in its handling of this kind of complaint.

The last component of public interest is the role of Capita, which is one of the major players in the UK’s financial services sector and a supplier of services to many levels of Government. As the initial operators of the fund, Capita gave Connaught an aura of credibility that it clearly never deserved. People want to know who in Capita knew what and when about the Connaught fund. Is such post-financial disaster investigation not the role of the SFO?

As a prosecuting authority, the SFO clearly has the power to demand papers, but so do the FSA and the FCA. In at least one instance, Connaught’s auditors were asked for papers and responded that it was beyond their remit to produce them. Astonishingly, the regulator simply dropped the request. Would the SFO or the City of London police have reacted in the same way? If there are multiple agencies in the field, yet not one of them seems able to impose on those suspected of economic crimes the level of disclosure that is routine in other kinds of investigation, what are we funding all these agencies for?

The fourth criterion for SFO involvement is whether it is a new species of fraud. Well, I am no expert, but I gather that the rules regarding the promotion of unregulated collective investment schemes, such as Connaught, have been changed. That suggests that some new form of fraud was seen to emerge in this case, and steps were taken to cut it off.

The final criterion used in assessing SFO involvement is whether the apparent criminality undermines UK plc commercial or financial interests in general or the City of London in particular. Now, that is tricky. Many of those involved in the Connaught case are suspicious that the lack of action six years after Mr Patellis blew the whistle is because of the damage that full and early revelation of information in the course of a fraud trial might have done to the reputation of Capita and the wider financial services sector. My point in this debate is that after reviewing the rationale for the SFO’s work, I see Connaught as something that should have been accommodated in the agency’s core funding. I am told that an agreement is in place between the FCA and the police to prevent overlapping investigations. Having looked at the protocol between the Attorney General and the directors of the prosecuting departments, including the SFO, I was surprised to see no reference to that agreement, at least not explicitly, within the protocol.

Many are concerned that the delay in concluding the Connaught investigation will lead to any criminal charges that emerge being challenged on the grounds of delay. I am not sure whose interests are served by having such a wide number of agencies with apparently overlapping and sometimes clashing interests. It would certainly be in the interests of justice to ensure a great deal more clarity and security of funding for whichever agency is on the frontline of trying to protect the public from deceptions, frauds and scams—the kind of thing perpetrated on Connaught investors. I look forward to hearing from the Solicitor General about the issues of the SFO and, in particular, the Connaught fund.