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© KPMG LLP, reproduced from The Forensic Accountant by kind permission
This year's KPMG Forensic lecture was given by the Attorney General, Lord Goldsmith. Among his many responsibilities, Lord Goldsmith is the Minister accountable to Parliament for the Serious Fraud Office (SFO). He shared his views on the problem of fraud in the 21st century, and in particular the part to be played by the SFO.
Fraud - still an issue?
Frauds on a huge scale, such as Guinness, Blue Arrow and BCCI, were dominating the headlines a decade ago. Such "blockbuster" frauds still come to light, but other issues, such as street crime, have recently been the primary focus of media attention.
Fraud, however, is as much of an issue as ever. It is sometimes seen as a victimless crime, but fraud damages the economy and can devastate the individuals caught up in it - it is said that 16 people committed suicide as a result of the losses incurred over the Barlow Clowes fraud. In financial terms, the impact is huge. The most recent comprehensive study, by the Fraud Advisory Panel, put the annual economic cost of fraud in the UK at £14bn per year; its authors believe even this to be an under-estimate. It is known that a significant amount of commercial fraud goes unreported because the companies concerned fear its effect on their reputation.
Fraud also corrodes the confidence of investors. In his speech, Lord Goldsmith pointed out the negative economic effects of fraud, in particular the way it undermines confidence and the standing of our financial services industry and our global reputation as a place where clean business can be done. He went on to highlight the risk that if investors lose confidence in our ability to police our markets, they may well take their business elsewhere. Tackling fraud effectively is therefore critical to maintaining the reputation of UK markets.
Focus on the SFO
The UK already has a sophisticated set of mechanisms for regulating markets and tackling fraud. The Financial Services Authority and the Department of Trade and Industry have between them an impressive array of powers, from the ability to impose fines and publicly censure firms and individuals, to the power to withdraw authorisation to trade, or even to apply for the winding up of a company.
Lord Goldsmith explained that, whilst no-one should doubt the effectiveness of such sanctions, there is a range of cases where these alone are not sufficient, and where the public rightly expects criminal convictions to be obtained. He said that this was particularly the case where individuals abuse their privilege and trusted position to carry out a fraud, relying upon their previously impeccable character to mask their wrong-doing. In such cases, a prison sentence will often be appropriate. Indeed, the courts may consider that certain frauds, such as insurance frauds, deserve a custodial sentence for the very reason that they are so difficult to discover, and involve detailed and carefully planned dishonesty.
The SFO was established in 1988, pursuant to the Criminal Justice Act of 1987, to investigate serious and complex fraud. Lord Goldsmith was keen to stress that, despite a mixed press, the SFO has an impressive record. In its 14 years of operation, the SFO has prosecuted 237 cases involving 516 defendants, and secured 366 convictions (representing a success rate of 71 percent). Its work has been shown to have a very significant deterrent effect: convicted defendants do not re-offend. It is currently investigating over 80 cases, but on very limited resources - an average of only two staff per case.
A team approach
A key feature of SFO investigations is their multi-disciplinary approach. Each case will have a case-controller, often a lawyer, who will draw in police officers, other investigation lawyers, IT specialists and forensic accountants on a case-by-case basis. Often Counsel will also be involved from a very early stage, which is not common elsewhere in the field of criminal prosecutions. The role of the financial investigation team is crucial, in analysing financial data, supervising the search of offices and, most importantly, tracing misappropriated assets. Forensic accountants play a vital role in supporting SFO investigations.
Lord Goldsmith commented that the thoroughness of the work undertaken by forensic accountants may tip the balance in cases and that they made compelling witnesses because of their ability to distil the facts down to their lowest sensible level and show the "whole" picture in clear and simple terms. He added that it is now rare for their work to be challenged, because of the painstaking and methodical approach that they take. Forensic IT specialists can also play an important part in investigations, particularly in recovering, deciphering and analysing data from computer systems.
As well as using external specialists, SFO investigations benefit from a wide range of internal resources, including a good IT infrastructure and an excellent document control system. Another key benefit of cases being referred to the SFO is that the involvement of legal advisers from the outset allows decisions to be taken early in the process which can lead to the streamlining of a prosecution case.
The way ahead
The SFO is currently facing a number of significant challenges. Lord Goldsmith expressed concern that the dwindling level of police support for SFO cases has had an adverse effect on the investigation of fraud. Since 1997, the number of officers per case has fallen from four to around one. To meet this shortfall, the SFO is having to become increasingly self-sufficient. Its budget has fallen from £19.6m in 1994/5 to £19.1m last year, yet in that time its case load has risen by two-thirds, and its conviction rate has gone up from 61 percent to 71 percent.
In order to maintain its current success in obtaining convictions, the SFO will need to adopt an ever more responsive, flexible approach to the investigation of fraud, and it appears likely that one of the consequences will be an increased reliance on civilian investigators.
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