Fraud in the firm

We look at how the Serious Fraud Office use Section 2 of the Criminal Justice Act 1987 and what it means for individuals and company directors.

As many directors will no doubt be aware, fraud is a serious business risk. The Serious Fraud Office (SFO) is an independent government department responsible for investigating and prosecuting cases of serious or complex fraud and corruption in England, Wales and Northern Ireland. If a company is successfully prosecuted by the SFO the consequences can be catastrophic. In the reporting year 2013-14 the SFO had 8 prosecutions of 18 defendants either concluded or in progress. 85% of defendants were convicted.

Fraud is a type of criminal activity, defined as an: 'abuse of position, or false representation, or prejudicing someone's rights for personal gain'. Fraud occurring within an organisation is known as corporate fraud and involves deliberate dishonesty to deceive the public, investors or lending companies, usually resulting in financial gain to the criminals or organisation.

SFO powers of investigation

The SFO has extensive investigation powers by virtue of Section 2 of the Criminal Justice Act 1987 (S.2 powers). These powers allow the Director of the SFO to serve a notice in writing requiring any individual whom he has reason to believe has relevant information, or a person under investigation to:

  • Answer questions or otherwise furnish information.
  • Produce documents to any matter relevant to an SFO investigation at a specified place or at a specified time.
  • Apply to Court for a warrant  (which gives the police power to enter and search premises and take possession of documents)

These powers can only be used if the Director of the SFO has reasonable ground to suspect an offence has been committed involving serious or complex fraud or corruption. The powers are available to the SFO right up until a case is fully investigated, even after charge.

A failure to comply with the notice is a criminal offence which may result in prosecution.3

Directors and individuals subject to a S.2 notice should be mindful of the following:

  1. Do not make excuses. These powers are designed to be draconian. Unsurprisingly a marital relationship will not be a reasonable excuse not to give information/evidence.  Any person who, without reasonable excuse, fails to comply with a requirement that is imposed on him will be guilty of an offence and may be liable to a term of imprisonment and/or a fine.
  2. Do not give false or misleading information.  A person who knowingly or recklessly makes a false or misleading statement in response to a notice is also guilty of an offence and may be liable to a term of imprisonment and/or a fine.
  3. Do not destroy, conceal, falsify or dispose of relevant documents. Any person who knows or suspects that the police or the SFO are conducting or may conduct an investigation into allegations of serious or complex fraud and who destroys, conceals, falsifies, or otherwise disposes of relevant documents (or causes the same), is guilty of an offence and may be liable to a term of imprisonment or a fine or both.
  4. Explanation of documents. “Documents” includes information recorded in any form, for example, information on a computer or other electronic storage medium. The SFO may ask the person producing the documents to explain the documents and this is an obligation that flows from the notice.  If there are complex commercial documents to be produced, the SFO Director may consider it appropriate to go through them with the person producing them, before they are copied. If requested documents are not produced, the SFO Director may require the person who was required to produce them to state, to the best of his/her knowledge and belief, where they are.
  5. Legal professional privilege. Be aware that a S.2 notice cannot be used to obtain legally privileged information from a lawyer or his client.
  6. Remain calm and co-operative.  It is important to keep in mind that S.2 notices are designed to obtain information during an investigation. The fact that a notice is sent to an individual or company does not mean that person is suspected of an offence. It can be beneficial to try and build a good relationship through your solicitor with the representative at the SFO and co-operate when appropriate.
  7. Warrants.  S.2 powers do not give SFO representatives an automatic right to enter premises. If appropriate, make sure you check that a lawful warrant was obtained.
  8. Advance disclosure. The SFO is NOT required to provide questions or documents in advance of a meeting.
  9. No right to silence. There is no “right to silence” when S2 powers are used.

The SFO has stated in their Annual Report for 2013/2014 that they have expanded their analytical and intelligence capability, and currently have significant pre-investigation projects in development. The SFO are undertaking fewer but much larger and more complex investigations which are likely to continue to reach the headline news. For example, in July 2014, the SFO Director opened a criminal investigation into allegations of fraudulent conduct in the foreign exchange market and will cooperate with the FCA and the US Department of Justice during this investigation.  In May 2014 the SFO opened a criminal investigation into the commercial practices of GlaxoSmithKline plc and its subsidiaries and made a point of stating that whistleblowers are a valuable source of information to the SFO in its cases.

Reasons a S.2 notice can be served

If you are served with a S.2 notice(s) be aware that it must be issued only for the following reasons:

  • The purposes of the investigation.
  • If the information or documents required by the notice will be important to the investigation; and
  • Only if it appears that there is good reason for the purpose of investigating the affairs, or any aspect of the affairs, of any person.

Remember that any action taken by the SFO should in all cases be: necessary, reasonable and proportionate.

If you require any specialist advice concerning financial regulatory investigations and enforcement issues contact us. The Financial Services Regulatory Team at DWF has wide experience and offers a full range of support to banks, other financial services entities as well as individual director clients.

Author: Ursula Mulvaney

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.