SFO's Alderman shows serious survival power

Six months after it was scheduled for dissolution, the UK Serious Fraud Office is here to stay. Director Richard Alderman links the enforcer's survival to the new Bribery Act

In January the UK government indicated it was planning to merge the Serious Fraud Office (SFO) into a new National Crime Agency to create the Economic Crime Agency (ECA) with which to tackle white-collar crime. Six months later, and after a vigorous campaign by its director, Richard Alderman, the office seems set to survive the regulatory reforms in the UK. “The SFO is secure,” says Alderman. “We need to now get on and do our core job of fighting fraud and corruption – and also to help the government in its plans for this wider attack on economic crime, and setting up a National Crime Agency.”

Alderman’s campaign to save the SFO has mustered around the UK Bribery Act. This legislation is seen by some as an attempt to regain international respectability for the UK after its ill-fated attempts to prosecute arms manufacturer BAE Systems for corruption in its Saudi Arabian contracts. Its main innovation is that it makes a company liable for failing to prevent bribery committed by its own employees.

The bill passed into law last year, coming into force on July 1 this year – and has served Alderman in two separate ways. First, it has given him the opportunity to restructure the staffing of the SFO, and so transform the agency into a more flexible organisation. The SFO is struggling with a series of government cuts and its resources are severely limited. Second, it prepares the ground for Alderman to push for greater powers to offer deals to corporations. The success of the US Department of Justice in extracting large sums from corporations in exchange for plea agreements is attractive to Alderman and the government, but – at present – it is not an easily available option. Alderman says he wants to push for new powers to make these agreements legally enforceable.

Alderman is waging a campaign to show the government these powers will enable prosecutors to rake more money into the UK exchequer, and specifically into the SFO budget, from settlements of a monetary scale seen in the US. In the recent UK bribery case against specialist chemical company Innospec, Lord Justice Thomas observed that the Home Office would gain 50% of the proceeds confiscated from the company, while the SFO would retain 37.5%. Alderman’s demand for the power to offer deferred prosecution agreements to companies that make financial settlements is likely to be accepted by government, said one lawyer – at present, as Thomas noted, he has no power to enter agreements with other agencies on the size and division of fines imposed, “and no such arrangements should be made again”. He added: “A suggested agreed sentence is not only impermissible, it can raise false hopes. It is for the court to decide on the sentence.”

Alderman is pushing the government to overturn the situation described by Thomas. “I say to the government that it is time to look at the tools that are available to organisations such as the SFO for dealing with our type of top-level crime. As can be seen from the judiciary in our recent cases, the criminal justice system has not yet fully adapted to some of the changes of these big corporate cases, where there are other jurisdictions also investigating. The US has had about 20 years’ experience dealing with big corporate cases, and the judicial and criminal justice system there has developed greatly over that period. We need to catch up, and fast. I am particularly interested in deferred prosecutions, which are regarded as successful in the US. I am also looking for a way to do global settlements – because big corporations want finality at the international level. Our courts have been critical of us when we ventured into global settlements. But we have to find a way of doing it that satisfies the judiciary. Global settlements are going to continue. So it is an important priority for us.”

Settlements will become increasingly important for the SFO as it shifts towards a US model of funding through fines – eventually, 67% of the budget should come from fines and settlement payments rather than from central government, says Harriet Territt, a financial regulatory specialist at law firm Jones Day in London. “There will be huge pressure on the SFO to get a rolling programme of settlements going, because of the shift in funding,” she says. “While it says it will be going after the most egregious cases, there will be the temptation to go after high-profile companies with a media profile and try to get an early settlement instead.”

Early settlements are also attractive to government because they keep cases out of the courts. Government priorities are top of Alderman’s agenda, and he says he has no wish to engage court time any longer than necessary. “All of these cases are incredibly complicated. Money has been routed through vast numbers of jurisdictions and there is a raft of complicated offshore structures. So the question is: How do you dismantle them, where do you get your information from, what is it that you want to get before the criminal courts? I do not want a 12–15 months trial in front of a jury. I want the key criminality extracted, and a three- or four-month trial before a jury at most.”

The resource issue is pressing for his own organisation, which has had to take some heavy budgetary cuts over the past year. It has been reported that the SFO’s current budget has been cut by 26% to £39.5 million compared with 2009. It is due to be further cut by another 25%, to £30.5 million, by 2014–15. These cuts have taken place even though the agency has a growing number of cases in court and investigations under way. For Alderman, these restraints are more of a challenge than a threat. “Nobody is ever going to say, ‘I have enough resources’. But realistically, in the current economic conditions, the onus is on each of us to get the most from our resources. And sometimes that means linking up. If we can get savings by working more closely with other organisations, working together, we should do that. That is why I want to work more closely with the City of London Police and the City authorities.”

The SFO’s structure has been streamlined under Alderman, with many departments cut out and jobs lost, but he is unapologetic. “We aim to do more for less. We aim to provide more cases for the ever-decreasing resources we are allocated. There is no point complaining about it – this is the position we are in as a country. Our position is not to resist the cuts, but to say they are there, so how do we get more results. What we found, no surprises, is that you have to get a lot sharper about what you have to do. You have to cut out unnecessary stuff. We have to decide what the key things are, and forget what is peripheral. We have to be disciplined about it.”

The SFO’s resources remain an issue however – one lawyer comments that morale within the organisation has suffered badly. “There is a desperate lack of resources. There is a deadening atmosphere at the SFO, it has no life, pulse, pace, energy, vitality. You’ve got to have a system where people are ambitious and able. There is an issue of morale, quality of people... Alderman has done the best he can in the circumstances.”

However, despite the straitened budget, Alderman has added a department to the SFO’s structure to deal with the fight against corruption. The SFO is the country’s lead agency in the investigation and prosecution of offences under the Bribery Act, and a significant (but unspecified) part of the SFO budget is now designated to that campaign. One lawyer commented: “The SFO lives or dies by the way it handles the Bribery Act. It is that crucial.”
The amount of publicity effort Alderman has put into promoting the Act to the City and government has impressed many. “He has a new tool at his disposal, and he can pursue things in a rather more weighty fashion,” observes one consultant. “He is better armed; [formerly he had] only small arms – now he has some artillery. He has already won a few battles, but now that he has artillery he needs to win some wars.”

The SFO’s enforcement of the Bribery Act will be closely watched by lawyers and other agencies in the criminal justice system. Alderman is aware that the actions taken by the SFO to police the Act must match the rhetoric. “I have made no secret of the fact that one of my priorities is going after the foreign companies within our jurisdiction that are doing their best to do down ethical UK companies,” he says. “That is difficult. We are not looking for low-hanging fruit. We are looking for the difficult cases. We don’t want people to think, ‘Oh, those were the easy cases’. Or that we just knocked off a few small companies because they were easy. That is not what we want to do. We want to go for the difficult cases, the most difficult to bring before the criminal courts of this country. When people see them, we want them to think: ‘Yes, this is exactly the sort of cases we want the SFO to bring before the courts.’”

One of the most alarming aspects of the Bribery Act for many companies is its stand on facilitation payments. Anti-corruption laws elsewhere, such as the US Foreign Corrupt Practices Act, acknowledge they are an inevitable part of doing business – clearing customs, renting property, obtaining permits – in many countries around the world, and simply direct companies to record and report the payments. The UK Bribery Act, by contrast, bans them outright, with “duress” – a threat to life, limb or liberty – the only plausible defence, Territt says.

Alderman, however, offers some comfort to UK companies that might fall victim to this part of the law. “If we brought a handful of small companies to court over facilitation payments, people would think: ‘What on earth are they up to?’ That is not what we want to do. We want to [rather] go for the big bribes paid by the really corrupt companies. Now finding that is difficult, but that is what we want to do. It means we can support the UK companies – because if a UK company has lost out [to a corrupt firm], and has had to lay off employees in these difficult economic circumstances, it will make a big impact on families and communities. If we bring a case like that to the criminal courts, the jury will think, ‘Yes, this is the sort of case we expect to see from the SFO.’

Alderman says he has some specific targets in the City for future investigations. For example, he envisages the possibility of bringing anti-money-laundering legislation to bear against shareholders of companies that are engaged in corruption. This may be used in cases where the UK Bribery Act is not relevant, but where the prosecutors can show investors were party to the criminal activity. The Proceeds of Crime Act used for money-laundering prosecutions allows prosecutors to order large confiscations. Alderman says: “Shareholders normally will not be criminally liable for bribery by a company about which they know nothing. Passive investors are not going to be the subject of criminal action under the Bribery Act. We will, however, want to see whether there was any money laundering, or whether or not you enjoyed, through dividends or whatever, any of the proceeds of crime. We might want to start tracing that. I tell people, especially major shareholders: Society expects you to do your bit in ensuring proper governance in the companies you are involved in. There might be more we can do in legal terms, and we might see more on that in the course of the year.”

Institutional investors that challenge companies about their level of compliance will help the SFO police the Bribery Act. “Bribery is something that could bring down a company,” Alderman warns. “So it seems perfectly right for investing institutions to ask the management: ‘What are you doing? Are you sure you have good procedures now, in terms of the Bribery Act?’ That is a perfectly legitimate question.” But, he says, this doesn’t mean a passive investor such as a pension fund is at risk of a bribery prosecution if one of its investments is in a corrupt company. “The private equity fund who has invested in a company where bribery takes place is not guilty of failing to prevent bribery, because the bribery is not carried out by an associated person – unless some of the private equity people are on the board, and are closely associated with what is going on. They might have a deep knowledge. So they might have to look carefully there. But in the normal type of case, the big pension funds or other institutional investors won’t be on the boards. They won’t be involved in running the companies.”

The Bribery Act uses the “associated person” definition, meaning companies are potentially culpable for bribery committed not only by their employees, but also by contractors and service providers. This should leave passive investors in the clear from the point of view of prosecution – though they will still be exposed to reputational risk. “I don’t think the employees in those cases are providing services to the pension fund,” he says. “There are questions that we will be asking about these money flows. I don’t think pension funds should be in a position where these questions are asked. Pensioners would be unhappy to find that their fund had gotten itself into this difficulty.”

Since the launch of the Bribery Act, foreign companies whose only link with the UK is a stock market listing have argued they were not subject to the Act, as it only applies to companies doing business in the UK. The government’s guidance document, published on March 30, upheld the concerns of the lobby and said companies with just a listing were exempt. However, Alderman warns foreign companies that the exemption might not be as comprehensive as they might have hoped.

He says, “There is some fine detail about some specialised circumstances where the Ministry of Justice has said this might have to go before the courts. In most cases those points are not likely to be relevant. If you have a company engaged with the UK, then they are within our jurisdiction. They recognise that. I say to these companies: Please don’t take a highly technical interpretation of the Bribery Act and persuade yourself you are not within UK jurisdiction, and that you are free to go on bribing. The only safe way is to assume that, if you have that exposure, you need to build up the anti-corruption culture. I question how often a company has no more than a stock exchange listing, because companies have to instruct bankers and lawyers; they have places of business here. That is not what the guidance says, that is, that they are not within our jurisdiction. The mere fact of a listing does not bring you within the jurisdiction; that is fine. But when you get more involved with bankers and lawyers in the UK, that takes you beyond a listing. My view is that you are then carrying on business in the UK.”

Alderman’s term in office has seen a radical change in the SFO and in the way it is regarded by the financial sector generally. When he moved into the job in April 2008, after a long career at Customs and Excise, the SFO, then as now the country’s lead investigative and prosecutorial agency for large-scale financial crime, was reeling from the failure of its BAE Systems investigation. The then director of the SFO, Robert Wardle, had been ordered by Lord Goldsmith, the then attorney-general, to close down its long-running investigation of alleged bribes to Saudi Arabia amid much high-profile political controversy. The office was at its lowest point. Over the subsequent three years, Alderman has managed to keep the SFO afloat through the choppy political waters of the UK’s coalition government, as well as securing its future in the face of an administration – and a Chancellor – determined to overhaul the whole structure of financial governance in the UK.

The implementation of the Bribery Act over the coming year will present Alderman with his toughest test. City lawyers expect the SFO to launch a series of cases – many are already thought to be under investigation – to show it means business. The size of the targets, the professionalism of the prosecution, and the shrewdness of the corruption charges levelled will be closely watched, to see if Alderman’s actions are as powerful as his words. However, such complex cases take a long time to investigate and prosecute. It is perfectly possible that none will have come to court by the time his contract ends next year – Alderman’s successor might end up reaping the benefits of Alderman’s efforts to save his agency.