Time to rethink the Serious Fraud Office?
Time to rethink the Serious Fraud Office?
Leading KC says low-level fraud is not even investigated, still less prosecuted
Clare Montgomery KC will not be applying for the top job at the Serious Fraud Office (SFO) when Lisa Osofsky completes her five-year term as director this summer.
“I don’t think it’s within the grasp of any mere mortal to turn around an institution that has so many structural and systemic problems,” the KC said last month. Instead, she believes the SFO should be merged into the Crown Prosecution Service, ceasing to operate as a stand-alone investigator and prosecutor of serious fraud.
There is no doubt that the job of running the SFO would be hers for the asking. So would a seat on the bench, leading rapidly to the highest levels of the judiciary.
But that doesn’t interest her either. Although Montgomery sits as a part-time judge, she loves representing her clients and enjoys the collegiality of life at the bar. As an advocate, she is utterly formidable. “The only way to describe her is one down from God,” says the latest legal directory superlative quoted on her chambers website. “She can do anything.”
“That just goes to show people will say anything in the directories,” she replied firmly when the line was quoted back to her. “None of it is true.”
Montgomery, 64, was in conversation with two colleagues at Matrix Chambers, Lord Macdonald of River Glaven KC and Tim Owen KC on their podcast Double Jeopardy:
Launched six months ago, the podcast has attracted guests who might not otherwise be willing to answer challenging questions for an hour. Montgomery’s revealing comments, based on front-line experience in the most demanding of fraud cases, are of great concern.
There has been a constant decline in the the level of interest in prosecuting fraud from about 1990 onwards, she told Macdonald and Owen. Other crimes had taken priority:
Fraud just isn’t that exciting and, insofar as it has excited any interest, it’s mainly at the margins — in areas like proceeds of crime in relation to sanctions; or in relation to occasionally providing assistance to foreign governments. All of that does get attention, and some sort of resources at the investigative level, but in terms of actually having police officers interested in fraud it has been subject to a decline now where I don’t believe they have any interest in prosecuting fraud anywhere.
The sort of localism that’s been introduced by crime commissioners directing activities by local forces has reinforced that. So that now, fraud is absolutely at the bottom of anyone’s agenda.
That applies at all levels, she explained. But the heaviest burden was borne by those least able to assert their rights. Wealthy victims of fraud can afford to sue for damages; they can also bring private prosecutions. “They don’t want [the case] dealt with as a criminal matter because that will just interfere with their ability to secure recovery and negotiate with the person who’s defrauded them.”
By contrast, low-level frauds — people losing their £10,000 life savings — were being largely ignored. “You get the occasional show trial in that area. But the reality is that 99% of fraud at that level is not even investigated, still less prosecuted.”
Surely the SFO has had some successes, both in securing convictions and obtaining deferred prosecution agreements under which potential defendants root out corporate corruption and agree to pay heavy fines?
“I’m not saying nothing is happening,” explained Montgomery:
My concern is that nothing of any substance is happening that would actually deter a professional fraudster or even… somebody willing to do dishonest things in the course of business — not necessarily because they’ve set out to be a criminal but because they’re sufficiently selfish and self-interested not to care about the rights of others.
I were inclined to live my business life in that way, I don’t think I’d be very scared of anything that’s available to bring me to book.
Owen asked Montgomery for her thoughts on an article in The Times about Elizabeth Holmes, a US entrepreneur facing 11 years in prison for defrauding investors with her Theranos blood testing start-up. “Her lengthy sentence shows the willingness of America to tackle corporate crimes in a way that other countries, including Britain, have struggled to emulate,” the article had said.
Did Montgomery agree? How did she think the UK compared with the US?
“We come second by quite a long way,” she replied. There were significant structural differences between the two jurisdictions:
Corporate responsibility is much easier to establish in the United States. All you effectively need is somebody acting on behalf of the company, whatever their standing in the company. That would be enough potentially to engage corporate liability. So companies have a much greater incentive to cooperate with the Department of Justice once their business is under scrutiny.
Secondly, by and large, the Department of Justice is evidence-led. They do not start with a grand case theory where they think: we have to get the company and the chief executive officer. They start with: well, what have we got? And normally it’s low-level people. But what they’re able to do is to structure much more attractive deals with those low-level people because the power lies in the Department of Justice to do so.
So they can call in somebody who’s in middle management and give them the opportunity to be “queen for the day”. I’ve never really understood the root of the phrase but it means they can come in; they can say what it is they’d be able to say to help the Department of Justice; and the department can then decide whether they want to use it, without prejudice. So it’s a free hit for both sides to work out whether it’s in their interest to try and do a deal.
Critically, they are able to do that deal on their own, without need for any extravagant process around it. And the reason I picked that out as being a significant structural difference is that the Serious Organised Crime and Police Act 2005 — which set up a structure for either offering a deal which involves no plea of guilty or, alternatively, offering a deal where there is a plea of guilty but there’s a significant reduction in sentence — has created this incredibly bureaucratic structure in the UK, which is hopeless for serious fraud.
Its effect has been that the best the SFO can offer a middle manager who wants to cooperate is that he has to plead guilty and take his chance that the judge will send him to prison — because normally he’s pleaded guilty to quite a serious offence, even if his role in it is relatively minor.
And I can’t think of any circumstances in which I would advise a person to take that sort of personal risk, for the uncertainty it will engender and the period of time it’ll take. These people have to wait, typically, for the trial of whoever they’ve implicated to take place — or for there to be a decision that won’t be a trial. So their lives are on hold for two, three, four years. They are completely uncertain as to what the outcome is going to be. And the whole process is designed to put off anyone who had any inclination to cooperate. And I think it is utterly counterproductive.
Montgomery pointed out that these arrangements had been designed for supergrasses — informers like Bertie Smalls who shopped gangs of armed robbers to the police and “turned out to be making up half of it”. But she said the SFO’s inability to offer a deal that might prove attractive in a serious fraud case was “catastrophic”.
The final structural difference she mentioned was that prosecutors in the US were in a position to make a deal that they could generally deliver. Defendants were not left to worry about what sentence the court would pass:
In the end you are able to reach a deal and the Department of Justice are willing to be pragmatic and commercial about it — whereas the SFO, rightly or wrongly, are bound by the Code for Crown Prosecutors. There are a set of principles, considerations they have to go through. They cannot bind the judge. And so the whole thing must go to the judge, whether it’s on a deferred prosecution agreement where the scrutiny may be less or whether it’s on a plea of guilty where the scrutiny may be more.
That meant prosecutors in the UK had no opportunity to winnow down the cases they were going to bring, as they would in the United States.
Macdonald, a former director of public prosecutions, challenged Montgomery at this point. “We have always felt that people should be making free, unfettered choices when it comes to pleading guilty or not guilty,” he said. “We have always had a worry that innocent people will feel bullied and that will lead to unjust outcomes.”
“That’s a fair criticism,” she acknowledged. But such rights had to be paid for. “If you’re going to have a system which places such significance on control of the power of prosecutor and protection of individual freedoms, then you’re going to have to resource it appropriately. And the problem is we don’t do that.”
The Crown Prosecution Service was launched in 1986 following a decision that the police should no longer bring their own prosecutions as well as conducting investigations. By contrast, the Serious Fraud Office was launched in 1988 as a unified organisation that would detect, investigate and prosecute complex fraud. That followed the recommendations of a committee chaired by Lord Roskill, a former judge.
Montgomery told Macdonald and Owen that she had initially approved of the way the Serious Fraud Office was set up:
I used to be a strong supporter of the idea that the SFO was essential and the structure was good and effective. And I have to say gradually, over a lifetime’s work watching them, I’m not not convinced by that — not because I don’t think there is virtue in the Roskill model of having investigators and lawyers sitting in the same room: I think there is. But I think having it in a separate structure has led to cases falling in the gaps.
I know they shouldn’t because it should be clear what’s in SFO territory, what’s in Crown Prosecution Service territory and what’s in Financial Conduct Authority territory — and all the other possible players who might prosecute a case. But the reality is that there is a reluctance to take on a case which another agency has rejected.
Often, if a case goes to the SFO and they say “no, we’re not interested”, the Crown Prosecution Service are not going to be interested either. And the Financial Conduct Authority will say, “well, that’s not for us really; it’s not really our thing”. And you end up with quite a few cases that fall between the cracks.
I dont see any need for there to be cracks. I would rather it all went back to the Crown Prosecution Service and [they] were given the section 2 powers in a specialist fraud unit.
Montgomery stressed that her plan was not aimed at abolishing the SFO — merely recreating it without the gaps.
Finally, her colleagues wanted to know whether she supported having juries in fraud cases. In 1986, the Roskill committee had recommended — controversially and by a majority — that juries in fraud trials should be replaced by two assessors.
It said:
We have no doubt that most ordinary jurors experience grave difficulties in following the arguments and retaining in their minds all the essential points at issue, particularly in a long hearing of a complex character. This creates the serious risk either that the jury will acquit a defendant because they have not understood the evidence or will convict him because they mistakenly think they have understood it when they have in fact done little more than apply the maxim “there’s no smoke without fire”.
That recommendation was rejected. Montgomery believes it was the right decision:
I have always been a supporter of juries for complex fraud cases. I think [jury trial] has many virtues.
Firstly, particularly in the area of fraud at a level of political or corporate influence, it provides reassurance that the judgement is being rendered by ordinary people and not by the peers of the supposed offender who might otherwise want to protect them.
Secondly, I think that it requires prosecutors to concentrate on the really important points in the case and not to overload the evidential picture in a way that is positively beneficial for the interests of justice generally. And so I think it produces more coherent, better-shaped cases, perforce because the jury have to be able to understand what’s being said…
And then, thirdly, I think there is an issue about commercial honesty. There are many things that happen in the commercial world that commercial peers might think is okay but the jury will have a different view on. Because dishonesty is quintessentially a matter that has to be judged at a core level, not with specialist knowledge, it’s really vital that we have that barometer of where morality lies being decided by those people who are best placed to decide it — rather than some special pleading as to what is or isn’t acceptable in the market for x or y…
Most people recognise that, by and large, the jury gets it right in even in incredibly complex cases.
You can listen to the full interview with Clare Montgomery KC here — together with other podcasts in the series.
Time to rethink the Serious Fraud Office?
Rather than just looking at SFO and CPS, there's a need for a wider review taking in territorial police forces, financial and other regulators. Anthony Stansfield (former PCC for Thames Valley) was highly exercised about fraud issues, feeling that individuals, businesses and taxpayers were losing out on huge sums of money because too little was done in practice, as accountability was dispersed or non-existent.
Clare's reflections on tackling fraud and the SFO in particular evoked a combination of admiration and sadness. Admiration for the clarity of her analysis; and sadness because it confirmed that 35 years on we are still chasing the same Holy Grail as in 1987.
I declare interest because I then lead on criminal work in the Law Officers' Department (now the Attorney general's Office) and was central to establishment of both the Crown Prosecution Service and the Serious Fraud Office. The latter was inspired by Roskill but flowed more directly from a Working Group of which I was a member chaired by the then Chief Secretary to the Treasury, David Mellor. HM Treasury had the lead because it was responsible for financial sector regulation and a series of cases such as the Lloyds Insurance scandal and the collapse of Johnson Matthey Bank had demonstrated just how ineffective the criminal justice system was in the face of sophisticated fraud. I vividly remember his quest for 'a seamless robe' that brought together investigation and prosecution. The dichotomy between that and the Philips principle underpinning the creation of the CPS was not lost on him because, as a Home Office Minister, he had piloted the Prosecution of Offences Bill through the House of Commons. Nonetheless, he was convinced that fraud was a special case. The only solution was to combine in one organisation thorough investigation with direction by experienced fraud lawyers to build up focused and manageable cases and to equip that organisation with special powers that would not be acceptable across criminal investigation generally. The logic was sound but could not overcome the organisational and cultural problems. Consequently the SFO was NEVER a single or united investigation and prosecution unit. and its authority always rested on a hotchpotch of borrowed police powers and its own limited section 2 powers.
The police service was adamant from the outset that any outside direction of investigations was incompatible with the operational independence of the police. Nor would they contemplate the sharing of such investigative powers as they enjoyed - this was pre-PACE - with other bodies. The best that could be achieved was an agreement that the police service (mainly the City of London police) would second some officers to the SFO on a rotating basis but they would remain under the operational direction of their police commanders and the exercise of their powers of arrest etc would be through the police processes. So the early SFO was in fact two organisations loosely joined. It was remarkable that it was made to work at all. But gradually the police enthusiasm waned and successive Attorneys General received Cries de Coeur from successive Directors that the investigative resources were simply inadequate. Moreover, the rotating of investigators in and out, together with the propensity for them to return to their forces whenever other priorities or promotion opportunities arose, could take them away from major cases at crucial stages. The emphasis may have shifted from reliance on police to inhouse staff for inquiry work but the fundamental problem has not been successfully addressed.
So, Clare is right that the time is right to rethink the Serious Fraud Office. But I do not think her solution of simply passing it to the CPS is viable. The CPS is NOT an investigative body and, even if SFO section 2 powers were transferred, there would be almost total reliance on the police with results no better than at present. Action Fraud is a complete misnomer that absolves individual forces (and therefore Police and Crime Commissioners) from responsibility and signals impunity to fraudsters. There may be greater willingness now by the police service to seek and (usually) accept advice from prosecutors in certain types of cases but prosecutors in England & Wales cannot direct or instruct police. Nor would organisational change necessarily increase the investigative or prosecutorial resources.
The sort of rethink we need is one that addresses the underlying and cultural issues and gets us closer to the seamless robe sought by David Mellor and at least some of the robustness of the US approach despite its imperfections.
Resources are key but also cultural change. Lord Goldsmith appreciated that when, as Attorney General in 2007, he appointed Jessica de Grazia , then a District Attorney in New York to undertake a review of the Serious Fraud Office. What struck me most when her report came across my desk was how far it failed to appreciate the cultural differences between the jurisdictions and how culturally unacceptable its recommendations were likely to be. Plea bargaining or deferred prosecutions is a case in point. Like the police service, the judiciary has long guarded its independence jealously, and rightly so - but that surely needs to take account of other players who also have responsibilities to discharge. My mind digresses to the experience of Graham Boal QC (who died a few days ago) when he was instructed to act for the Crown in relation to the appeals of the Birmingham Six. He and the Crown started from the position that recent developments had undermined the prosecution position and the convictions could not be defended. However, such concessions was deemed to be outwith the gift of the Crown since only the courts could quash a conviction. So he was required to present the case in a way that left the decision to the Court of Appeal - and in return found himself unjustly pilloried for allegedly having tried to sustain indefensible convictions. He found himself defending his reputation almost to the day he died simply because he did not have clear authority to do the right thing and overtly concede the case.
Likewise, it is so important and in the public interest that prosecutors and investigators should have the authority and discretion to come to suitable arrangements that enable effective prosecutions of key players. All too often in the modern world, ordinary members of the public do not have the confidence and/or trust to support the police and such evidence as there may be is held by individuals who have had involvement in the criminality. The time has surely come to revisit the issue on a more realistic basis. If risk of oppression is the justification for resistance, that casts an unwarranted slur on the cohorts of highly experienced defence practitioners who are routinely involved in the sorts of cases where deferred prosecution may be in issue.
It was clear from Jessica de Grazia's report that disclosure is also handled very differently in the US. Their approach may be unduly robust but there must surely be a way of streamlining the process in sophisticated fraud cases (where the defendants are likely to know much more than the investigators about the systems and documentation) and achieve a more proportionate approach that allows prosecutors to concentrate on building focused cases rather than fighting collateral battles.
As to resources, the CPS already struggles with its caseload. Moving the deck chairs will not change that. Nor is it clear that transplanting the the more robust US approach to this jurisdiction would achieve the Holy Grail. Some figures from the Grazia report are illuminating.
According to De Grazia, in 2007 SFO employed 56 staff lawyers and spent an
additional £4,227,000 on external counsel ranging from newly qualified
barristers to Queen’s Counsel. During the five-year period for years 2003-2007,
the SFO prosecuted to conclusion a total of 166 defendants.
In sharp contrast to this, the Manhattan District Attorneys Office Frauds
Bureau which is staffed by only 19 lawyers (slightly less than a third of the
SFO’s permanent legal staff) and does not contract out any aspect of its work to
the external bar, concluded the prosecution of 124 defendants in the same
period.
So I strongly support the idea of a rethink. But it needs to be more than organisational tinkering. it needs to get back to the core of the problem and take account of the huge increase in the prevalence and variety of fraud as well as the ease with which it is now perpetrated on a global basis including through the internet. Nothing short of a reinvigorated and enlarged specialist organisation with adequate powers will suffice. The expansion of fraudulent activity is a threat to the whle of society which, if not addressed, is capable of doing serious economic and societal damage.
I apologise to Joshua and Clare for the length of this response. But thank you for starting a debate which hopefully will continue.