24 Nov 2023

Why the SFO needs friends abroad

The new Serious Fraud Office director is not only undertaking one of the UK’s most difficult and criticised roles but is unused to the international nature of the work. Jessica Parker discusses the legal framework for cooperation across borders and best approaches in this Fraud Intelligence article.

At the end of September [2023] there was a change of leadership at the Serious Fraud
Office as Nick Ephgrave, a former police officer and most recently assistant commissioner
for Frontline Policing at the Metropolitan Police, began his term as director. Mr Ephgrave
– the first non-lawyer to take on the role – is not familiar to the white-collar community
and little is yet known about his priorities (although that has not stemmed speculation).
One aspect of his new job that will be a step change from his previous line of work is the
international nature of the SFO’s mandate. The SFO’s statutory role is the investigation
and prosecution of serious and complex fraud, and its published ‘mission’ is to protect the United Kingdom’s reputation as a safe place to do business. To date, that has meant that the SFO has investigated large-scale international corruption as well as fraud by or at entities with a global presence. Investigating large multinational businesses is unlikely to be something that Mr Ephgrave has experienced regularly, if at all, in his policing career. He will be working alongside other UK financial crime enforcement agencies such as the Financial Conduct Authority (FCA), His Majesty’s Revenue and Customs (HMRC), the Competition and Markets Authority (CMA), and a range of similar law enforcement agencies outside the UK.

As investigations become increasingly global and law enforcement agencies seek to push the limits of their investigative jurisdictional authority, this article considers the various ways in which Mr Ephgrave can seek to investigate cases with an international dimension. The SFO has access to formal systems for obtaining Mutual Legal Assistance (MLA), but there are other less obvious mechanisms, both formal and informal, relying on territorial and extraterritorial powers that may also enable the SFO to obtain the evidence it needs.

Mutual Legal Assistance

The SFO, and all criminal investigators in the UK (police included), can seek assistance from overseas investigators via the formal process of MLA. The UK has ratified, or is signatory to, a range of MLA conventions and treaties. [1] Those international agreements are implemented in the UK through statute, the Crime (International Co-Operation) Act 2003 (CICA). Section 7 of CICA provides that only a judicial or prosecuting authority can make a request for MLA. The police are not a prosecuting authority and so, in his former career, Mr Ephgrave would have had to rely on the assistance of the Crown Prosecution Service, the independent body responsible for prosecuting the majority of criminal activity in the UK, to prepare and submit MLA requests overseas on the police’s behalf. In his new role as director of the SFO, he, and any designated member of the agency, [2] may issue an MLA request themselves. Notwithstanding that Mr Ephgrave and his colleagues can draft their own MLA requests, the process remains bureaucratic and slow, particularly given the loss of the European Investigation Order as a result of the UK’s departure from the European Union; requests will only be processed at the pace of the relevant institutions of the state to which the request is sent.

MLA is not the only mechanism available to the SFO to obtain evidence from overseas. Where a person in the UK is asked to provide material, there are circumstances where they may be required to obtain that material from abroad. For example, where a person in the UK is subject to a Production Order, [3] if they are said to control material held in another jurisdiction, be that hardcopy documents in an office or electronic material on a server, they must produce that material. Police officers must apply to court for a Production Order, but the director does not have to make such an application; his power is vested in section 2 of the Criminal Justice Act 1987 that permits him (or any designated member of the Serious Fraud Office) to issue a notice requiring a person to produce any documents that relate to his investigation. A person within the UK who is served with a section 2 notice relating to material held overseas will be required to produce it. [4]

A previous SFO director, David Green KC (or an investigator in his team), sought to test the ambit of this power by issuing a section 2 notice to an officer of a company that was incorporated overseas, namely KBR Inc. KBR Inc was established in the United States, with no presence in the UK. In order to issue the section 2 notice, the SFO had arranged a meeting with and invited a KBR Inc executive to the UK. At that meeting in London the executive was served with a section 2 notice requiring her to provide documents held by KBR Inc in the US. The Supreme Court, in a unanimous judgment, determined that there were no grounds for displacing the presumption against extraterritorial effect. In other words, the terms of section 2 of the 1987 Act should not be read so as to require a person overseas to produce documents to the SFO. The judgment is not inconsistent with the principle described above – that a person in the UK can be required to provide material that they control overseas – because that person is within the territorial jurisdiction and therefore the section 2 notice operates on them here.

The Supreme Court answered the questions posed in KBR by narrowly limiting itself to the very specific circumstances of an overseas company without a UK presence. Similar sounding provisions found in other legislation relating to different law enforcement authorities may produce a different result however, depending on the specific wording of the legislation, the intention behind it and the regulatory context. By way of example, in R (Jiminez) v First Tier Tribunal (Tax Chamber) [5] the Court of Appeal held that a notice under paragraph 1 of Schedule 36 of the Finance Act 2008 could be sent to a UK taxpayer resident outside the UK, requiring them to provide information to HMRC. The person was not in the UK but they were required to pay tax here; the notice could be sent to a person overseas and therefore had exterritorial effect because of the public policy objective – ensuring that the correct UK tax was paid. In contrast, the CMA’s powers under section 26 of the Competition Act 1998, requiring a person to provide material to the CMA in the context of a competition investigation, were held not to apply to a person overseas in BMW AG v CMA. [6] The CMA’s claim that the power applied to an undertaking (a person with economic impact in the jurisdiction) was misconceived because an undertaking was an economic rather than a legal concept.

The ability of other law enforcement authorities to collect evidence from overseas is imperative to the work of Mr Ephgrave, because they may pass the product of their investigation to the SFO. Material and information collected by one authority may be provided to another under statutory gateways with very few checks and balances. [7] By way of example, recent investigations into Tesco and Barclays Bank commenced with the FCA before being passed on to the SFO.

Nonetheless, Mr Ephgrave should exercise caution where material is provided and used for a collateral purpose. The FCA had its fingers burnt earlier this year when it relied upon material collected for a criminal investigation in its regulatory proceedings in the case of FCA v Konstantinos Papadimitrakopoulos. [8] This case was different from KBR, Jiminez and BMW because it related to material obtained via MLA under CICA. The case turned on section 9 of CICA, which prohibits investigators using material obtained via MLA for an ancillary purpose. Smith J reviewed the authorities (including KBR), which emphasised the principles of mutual respect and comity on which the system of international cooperation is founded. An aspect of this is that a state receiving a request for MLA must know the use to which the requested material will be put.

This argument could be extended where MLA obtained under CICA has been sidestepped. Where an investigative power is extraterritorial, as in Jiminez, the principle of comity might enable a suspect to argue that the evidence should be excluded because the use of such material is unfair and prejudicial [9] or that such use is an abuse of process. Such argument has, to the author’s knowledge, not yet been tested.

Continuing the theme of relying on material from other enforcement agencies, some agencies do not need to issue notices or demands to obtain the material they need. For example, where a regulated entity is under investigation by the FCA, that entity is required to deal with the FCA in an open and cooperative way. Where there are no client confidentiality considerations, material should be volunteered in the spirit of that open and transparent relationship. In these circumstances, where material has been volunteered and then passed on to the SFO, it may be relied upon without the risk of arguments about abuse of power or prejudice discussed above.

Which brings us full circle. By far the easiest way to obtain information from outside the jurisdiction is for the suspect to volunteer it. It is not always possible for a multinational company to volunteer documents – blocking statutes, data protection or other confidentiality obligations may prohibit it from doing so. However, where a company could be in a position to volunteer documents, what does Mr Ephgrave need to do to persuade it to engage in such cooperation? The SFO has encouraged corporates to cooperate with its investigations in order to be considered for a deferred prosecution agreement. Anecdotally, white-collar criminal lawyers are more reluctant to self-report to the SFO, citing a lack of benefit to doing so: there have been so few prosecutions against corporates that the chance of action being taken against them if they do not make a report is slim. KBR Inc was only served with a section 2 notice because “a satisfactory response was not received as to [KBR Inc’s] willingness to provide the outstanding materials sought”. The investigation into KBR was discontinued in 2021 (this is not to say that there was a triable case against KBR Inc, but it is an example of a case that did not result in prosecution). In fact, in the past decade the SFO has only successfully prosecuted seven corporates. [10] Mr Ephgrave’s predecessors argued that this illustrates the need for reform to the law to make it easier to prosecute corporate entities. [11] In contrast, some may also point to simple inertia; there were 70 open published cases at the beginning of the last director’s tenure, compared to only 35 at the start of Mr Ephgrave’s stint at the SFO.

Last but not least, one of the most effective ways that Mr Ephgrave can obtain evidence from overseas is through joint investigations. The paragraph above is likely to resonate with lawyers in the US where the advantages of cooperation far outweigh the risks of being prosecuted. The system of plea bargaining, deferred and non-prosecution agreements is well developed and understood: if a suspect fails to ‘do a deal’, the penalties are swingeing. An analysis of whether the US Department of Justice has the power to compel documents from one territory or another is rendered moot because the incentive to cooperate with a DoJ investigation is so strong. A joint investigation alongside domestic investigators is also a solution in those territories where external investigations can be hindered by blocking statutes.

In conclusion, Mr Ephgrave has a range of formal and informal routes available to gather evidence from overseas for the detection and investigation of serious fraud and corruption. Those routes involving cooperation or teamwork may be faster, less susceptible to challenge and, therefore, more effective than the legal routes open to the SFO. Diplomatic skills may be more important than ever to Mr Ephgrave; perhaps it won’t be so different from policing after all.

This article was originally published in Fraud Intelligence on 18 November 2023.

 


Notes
  1. Principally the European Convention on Mutual Legal Assistance in Criminal Matters 1959 (UK ratified in 1991), US treaty (1994).
  2. Criminal Justice Act 1987 section 2(11): “Without prejudice to the power of the Director to assign functions to members of the Serious Fraud Office, the Director may authorise any competent investigator (other than a constable) who is not a member of that Office to exercise on his behalf all or any of the powers conferred by this section, but no such authority shall be granted except for the purpose of investigating the affairs, or any aspect of the affairs, of a person specified in the authority.”
  3. Police and Criminal Evidence Act 1984 Schedule 1, section 4.
  4. SOCA v Perry [2012] UKSC 35
  5. [2019] EWCA Civ 51
  6. [2023] CAT 7
  7. For example, see section 3 of the Criminal Justice Act 1987.
  8. [2022] EWHC 2792 (Ch)
  9. Police and Criminal Evidence Act 1984 section 78: “In any proceedings the court may refuse to allow evidence on which the prosecution proposes to rely to be given if it appears to the court that, having regard to all the circumstances, including the circumstances in which the evidence was obtained, the admission of the evidence would have such an adverse effect on the fairness of the proceedings that the court ought not to admit it.”
  10. Smith & Ouzman Ltd, Sweet Group plc, Alstom Power Ltd, Alstom Network UK Ltd, F H Bertling Ltd, Petrofac Ltd and GPT Special Project Management Ltd
  11. The Economic Crime and Corporate Transparency Act became law on 26 October 2023.
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