Serious Fraud Office

Lord Garnier Excerpts

Tuesday 7th February 2017 Westminster Hall

[Sir Edward Garnier (Harborough) (Con)]

I congratulate the right hon. Member for East Ham (Stephen Timms) on initiating the debate. I listened to him with great care and gratitude, because he spoke as a critical friend of the Serious Fraud Office. As he gently pointed out, when the current Prime Minister was Home Secretary, she was perhaps not a friend, even if she was critical, of the SFO. Possibly—who knows?—one reason I remained a Law Officer for two and a half years, but no longer, was because I fell out with the Home Secretary over the independence of the Serious Fraud Office.

There is a misunderstanding among politicians about the Roskill model and its value. However, before I go on further, I declare an interest—as must be obvious—in the SFO and all that it does. I also declare an interest in that, like my hon. Friend the Member for Cheltenham (Alex Chalk), the SFO instructs me from time to time as a member of the private Bar. One of the most recent cases that I have been instructed in was that of Rolls-Royce, which the right hon. Member for East Ham spoke about. Although I do not want to talk too much about my wonderful case load, I want to use the case of Rolls-Royce to illustrate the successful way in which the organisation deals with criminal activity at the corporate and most complex level.

It is a given, certainly among those who know anything about the Serious Fraud Office, that the Roskill model of having a joint investigating and prosecuting system in the organisation works. Although plenty of people criticise the SFO—as the right hon. Gentleman said fairly, it is not beyond criticism, and there are things to be said about the blockbuster system and so forth—it is remarkably successful, given the limited resources under which it has to operate.

When I was shadow Attorney General in the lead-up to the 2010 election, I made quite a study of the way in which the Serious Fraud Office operated, not least because it was one of the most important aspects of our prosecuting system that came under the supervision of the Attorney General and the Solicitor General. When I got into office in 2010, it was clear that the comprehensive spending review that the new Government introduced would have a pretty direct and possibly damaging effect on the SFO’s ability to carry out its important work. That persuaded me that we needed to find other pragmatic ways of allowing the SFO to get on and catch villains, both human and corporate. I was particularly concerned that we were underperforming on—that we were inhibiting—the prosecution and conviction of corporate crime.

Of course we were, and still are, beset by the Victorian identification principle: in order for a company to be convicted of a crime, a directing mind of sufficient seniority has to be able to be identified in order to fix criminal liability on the company. That was fine in the 1860s, 1870s or the 1880s, when companies had a board of two or three and operated within a town or a county—or possibly even within the country as a whole—but the vast international conglomerates that there are now, with offices in several jurisdictions and boards, sub-boards, national and international boards, make it extremely difficult for the Serious Fraud Office to attach criminal liability for a crime to the company. Individual financial directors, country directors, or country managing directors can be prosecuted, as the SFO has—we have seen that happen in a number of the cases that the right hon. Gentleman referred to—but that has proved difficult when dealing with international companies that misconduct themselves.

That is why—this is a slight diversion, but an important one—this House and the Government should develop the “failure to prevent” model. Under section 7 of the Bribery Act 2010, it is a criminal offence for a company to fail to prevent bribery by one of its associated people or bodies. The first deferred prosecution agreement—in which I appeared, as it happened—dealt with the failure of a bank to prevent bribery by one, or a number, of its staff in Dar es Salaam in Tanzania. Under the terms of the deferred prosecution agreement, that brought in from the errant bank about US$25 million in costs and penalties.

As the right hon. Gentleman correctly identified, the Rolls-Royce case brought in something in excess of half a billion pounds sterling, which will be paid by that company over the next five years. Beyond the penalty, it will have to pay interest on the delayed payment. More importantly, as far as funding the Serious Fraud Office is concerned, part of the deferred prosecution agreement is that the respondent company pays the SFO’s costs, which, at the time of the announcement of the agreement before the President of the Queen’s Bench division, Sir Brian Leveson, 10 or so days ago, amounted to about £13 million. Sadly, that £13 million did not go into the Edward Garnier special holiday fund; it went into reimbursing the Serious Fraud Office for what was essentially the biggest investigation that it had ever done since its inception. That investigation required huge international co-operation with the United States Department of Justice and with investigators and prosecutors in a number of other jurisdictions—the criminal allegations against Rolls-Royce covered the company’s activities within seven jurisdictions.

While the Rolls-Royce matter was being brought to an end a fortnight or so ago in this country, it was also being brought to an end in the United States and in Brazil, where the company had to pay the authorities about $176 million and $25 million respectively. That illustrates how the Serious Fraud Office can be pragmatic, efficient and effective now that it has the deferred prosecution agreement model and can use its money wisely to bring international companies to book for international criminal conduct.

[Alex Chalk]

Now that the SFO has more tools at its disposal, including the DPA model, does my right hon. and learned Friend believe that its workload will increase? Does that make the case for a larger underlying capacity, as the right hon. Member for East Ham indicated?

[Sir Edward Garnier]

Yes. The DPA system is a new tool—there have been three DPA cases—but if the Serious Fraud Office is to carry out its international investigative work at the highest and most complex level, it will need a bigger budget. That was clear to me when I became Solicitor General in 2010 and it remains clear to me now. In 2010, as I understood it, the revenue budget was about £40 million and was set to go down over the course of the Parliament, under the comprehensive spending review, to something like £29 million.

When I went to the United States to discuss international corporate crime and learn from American prosecutors about the system for prosecuting corporate crime there, one of the federal prosecutors in Manhattan asked me how much our budget was. I said, “It’s about £40 million, going down to just under £30 million.” He laughed and said, “Is that just for one office?” I said, “No, it’s for the entire jurisdiction: England and Wales, and Northern Ireland”—unusually for a prosecuting agency in this country, the Serious Fraud Office covers England, Wales and Northern Ireland, but not Scotland. The American prosecutor found it unbelievable that one of the centres of the financial world had a serious fraud office that ran on that amount of money. He went on to joke that he spent more than that on flowers at home; I do not think that that was quite true, but I would not be at all surprised if he lived pretty well. Good luck to him.

What I want the House to understand is that there is no perfect way to sort this out. The right hon. Member for East Ham is entirely right to say that there are uncertainties and, to some extent, an absence of transparency—or at least prospective transparency—in how the blockbuster system works. There is retrospective transparency, because the Justice Committee, Parliament, the National Audit Office and non-governmental organisations such as Transparency International—to pick one organisation at random—can delve into the SFO’s financial workings. I accept that although the blockbuster system works up to a point, it is not ideal, but the best is often the enemy of the good; I would rather the SFO could apply to the Treasury for blockbuster funding than its being constantly in danger of having its budget slashed and slashed again. The SFO is unusual and not very well known and therefore not terribly politically popular. Obviously its work is often private, because if its investigations are not conducted in privacy, the villains get away—I take the right hon. Gentleman’s point about that.

To assist the SFO in its complicated and difficult work, we need to think hard about how to nail corporate misconduct. Will we be brave enough to move to the American system of vicarious corporate liability, so that when an employee commits in the course of their work a crime that has a benefit for their company, the company should be liable in criminal law—just as it would be in civil law for the negligence of one of its drivers, for instance? If not, we will have to extend the failure-to-prevent model. The Criminal Finances Bill that is going through the House at the moment will enact a failure-to-prevent tax offence; I have tabled some amendments that would extend the list of failure-to-prevent offences to a far wider collection of financial crimes. My amendments will not be agreed to, but Parliament needs to debate the issue. I look forward to co-operating with the right hon. Gentleman, who not only has experience as a Treasury Minister but can no doubt see the City of London across the road from his constituency office. I hope that the question of developing the criminal law to meet the increased sophistication with which business is done internationally will be cross-party and non-partisan.

On the right hon. Gentleman’s point about staff, I agree that any form of threat to any organisation from the promise or threat of change is distracting and destabilising. Now that the SFO is doing good work and building on its record of success with LIBOR, with the three deferred prosecution agreements and with the cases against Barclays bank, GSK and others, the one thing that it does not need is to be subjected to further interference. That would be destabilising and cause the employment equivalent of planning blight. Imagine a bright young lawyer in a City firm who thinks that it might be good to go and work for the Serious Fraud Office for a while. It would be, and it is, but if they know that the Government want to pull up the pot plant every 20 minutes and have a look at the roots, the SFO is not going to seem like a very stable place to go and work.

I want to see people from the private sector—the big City firms that have expertise in dealing with corporate crime, mergers and acquisitions and the highly complicated banking law that is sometimes involved—coming to work for the SFO for two or three years. I also want permanent members of the SFO staff to go into the City firms and other banking organisations, so that there is proper cross-fertilisation. What I do not want is for the current Whitehall fascination with sticking things with nice initials into great pots of alphabet soup to destroy David Green’s valuable work or distract him from it. I am proud to say that he is a personal friend of mine; he and his organisation have a proud record of demonstrating to the Government that it is worth every penny it gets and that it ought to get yet more money, so that it can catch more and more villains.

The reputation of our country is to a large extent built upon our financial services industry. Our corporations that sustain that industry—be they banks, be they insurance companies, be they whatever—and the people who work in it need to know that if they step beyond the line of honesty and acceptable behaviour, there is an investigating prosecuting authority that will not only come and get them but will make sure that they are convicted. That is what our constituents want. They want a vibrant financial services industry, but they also want an honest one, which attracts business, taxation and employment to our constituencies, whether they are in East Ham or Harborough.

Mr Owen, thank you for your patience. I hope that my hon. and learned Friend the Solicitor General can give me the reassurance that the SFO is safe from interference and distraction, and that we can look forward to another period of success, and well-funded success, for this most impressive organisation.

--- Later in debate ---

[Mark Field]

My hon. Friend makes a fair point, although in the comparison he draws he also possibly makes a point about the expense of defence procurement.

Those of us of a certain age cannot help but be transported back in time when we learn of the SFO’s requests for so-called blockbuster funding to pay for major investigations. Some Members will know that I am a keen pop music fan, and it is exactly 44 years ago today that the glam rock anthem “Blockbuster” by The Sweet was at No. 1 in the UK charts. Now, I am not sure that the 17-year-old future right hon. Member for East Ham was a great glam rock fan, but I am sure that his hair was fashionably longer back in 1973.

The cost of funding the SFO’s blockbuster investigations now invariably takes the SFO well beyond the Treasury’s year-on-year allocation of funding, as we have heard from other Members. Last year, the SFO’s spending reached some £65 million, which was a 12% uplift on the 2015 figure. Blockbuster funding has been applied for, not on an exceptional basis but for four of the last five years, so presumably that form of funding is here to stay permanently, at least in the eyes of the Solicitor General. I would be interested to hear what he has to say about that.

As my right hon. and learned Friend the Member for Harborough (Sir Edward Garnier) has pointed out, at the end of last year the SFO successfully secured funding to pursue criminal investigations against the Monaco-based Unaoil, which stands accused of securing complex corrupt contracts for a range of multinationals, including Rolls-Royce. I understand that the ongoing investigations over Barclays in Qatar and a range of potential fraud cases involving foreign exchange may yet have to be subject to special blockbuster funding appeals. Although I accept the Government line that that sort of mechanism allows the SFO great flexibility in the allocation of work, I trust that, as large and complex investigations become the norm, a serious re-evaluation of the pros and cons of the funding system for the SFO will be carried out.

I have to say something else, which I know will lead to my parting company with my right hon. and learned Friend in his paean to how wonderful the SFO is: I deeply regret that the reform of the entire workings of the SFO is overdue, and I believe that was yet another missed opportunity for the coalition Administration who were in office between 2010 and 2015.

For my part, as long ago as the autumn of 2009 I wrote two essays for the ConservativeHome website in the immediate aftermath of the financial crisis, setting out what I regarded as a proposed blueprint for the SFO. Then as now, I contend that an effective financial enforcement system requires the promotion of deterrence and competition, in order to boost consumer protection. Even at that time, a year after the financial crisis began, it seemed clear that, despite grandstanding galore from politicians, there was—indeed, there remains—a growing unease at the paucity of substantial change in the aftermath of that crisis.

Nowhere did that feeling resonate more than in the field of enforcement, where the prospect of adopting US-style powers to prosecute alleged wrongdoers in financial services has of course been dashed. Although over the past year or so the SFO has finally secured LIBOR convictions, it is in all honesty a body that I am afraid has long lacked clout and the respect of those who are most engaged in the financial industry.

As the right hon. Member for East Ham has said, the SFO has been operational since 1988 and the Roskill reforms. It is responsible for the detection, investigation and prosecution of serious fraud cases in England, Wales and Northern Ireland. Although it is operationally independent—as it should be—the SFO comes within the remit of the Attorney General and is given the power to bring criminal prosecutions directly. In contrast, the FCA is able to impose civil sanctions and launch criminal cases on matters such as market abuse, working in tandem with the City of London police and the Crown Prosecution Service.

There are some lawyers—perhaps those who are less close to the SFO’s workings—who continue to lament the difficulties associated with securing convictions for fraud, especially given the collapse of a number of highly complex jury trials. For that reason, many people feel that the introduction of a system of plea bargaining similar to that in the USA would not work. No one will risk blowing the whistle or turning themselves in when the likelihood of a successful prosecution being brought is—at least in recent years, as we have seen—so slim.

The SFO’s problems are not necessarily personnel problems; I agree with what was said earlier. However, having spoken to experts in this field, I have come to believe that one of the organisation’s main problems is in finding cases to investigate. Only when the police or the Attorney General have firm cause to believe that a criminal act has occurred is the SFO permitted to get involved. Moreover, when a case does get under way, its prosecutors routinely face months of battling defence lawyers before they can even get to trial. Of course, the defence has a strong incentive to engage in a war of attrition, in order to derail a prosecution on legal technicalities.

As a result, I think we have faced this task of reforming the financial services system and inculcating in the minds of its participants that sense of right and wrong, with an “umpire”—the SFO, in this case—that too often has lacked the tools or the respect from the market to do its job properly. I am not making any personal criticism of David Green, who, while at the helm, has developed a number of improvements to the SFO in the last three or four years.

Instinctively, I support a more robust economic crime policy, which would place 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 SFO, which would combine the SFO and the FCA’s enforcement division.

It is perhaps incongruous that the SFO stands under the jurisdiction of the Attorney General, although I very much appreciate that the right hon. Member for East Ham put that arrangement into some sort of historical perspective. Nevertheless, we should now look to place the SFO’s responsibilities within the remit of the Department for Business, Energy and Industrial Strategy, so that the SFO would work alongside the Competition and Markets Authority. By associating consumer protection with fraud and trust-busting, we would give competition its correct place as a central priority in the future commercial landscape.

[Sir Edward Garnier]

Is it not a problem to place the supervision of a prosecutor with a spending Ministry—a political Ministry? Obviously, the advantage of leaving the SFO and the CPS where they are—that is, under the supervision of the Attorney General—is that, in that respect, the Attorney General and the Solicitor General are not politicians, but protectors of the public interest. As soon as a Cabinet applies pressure upon a political Secretary of State, and we have seen this recently with the—

[Albert Owen (in the Chair)]

Order. Mark Field.

[Sir Edward Garnier]

I quite agree.

[Mark Field]

I very much take on board what my right hon. and learned Friend says, and I understand his concerns. He made a powerful point towards the end of his speech about the importance of there being public trust in the financial services sphere if it is to be the success we all hope it will be in the post-Brexit world.

To effect the necessary sea change in attitude and create a body with the powers of its US equivalent, we would need to be able to impose substantial fines on wrongdoers. Such fines could play a role in covering the costs of any new organisation. Clearly, there would be a need for some legislative changes, but measures would also need to be put in place to protect whistleblowers and offer genuine immunity to those who were aware of anti-competitive practice when they came forward.