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Serious blow for the “Seriously Flawed” Office

In a much-anticipated ruling, the Supreme Court recently handed down its judgement that the Serious Fraud Office (SFO) had overreached in its attempt to seek overseas documents from non-UK company KBR (US).

Over the years, the SFO has earned a reputation for systemic incompetence and inefficiency. This ruling has no doubt dealt another significant blow to its tattered reputation, restricting the scope of its powers as it seeks to extend its global reach.

The Supreme Court’s ruling is also likely to have significant implications for other UK enforcement agencies. But how far will the decision impact the SFO’s investigatory powers?

A long history of failure

In 1987, the SFO was introduced under the Criminal Justice Act (CJA) following recommendations made in the Roskill Report. Ultimately, it functions to tackle top-tier fraud, bribery and corruption cases. However, since its creation, it has established for itself a long history of failure and partial wins.

Many of the most well-known and expensive cases brought forward by the SFO largely ended in acquittal and collapse. The 1992 Blue Arrow case ended with all four City advisors cleared on appeal. The 1994 Brent Walker trial saw George Walker walk free after being cleared of all charges. Meanwhile, in 2011, Ian and Kevin Maxwell were cleared of all charges against them too.

Following a string of high-profile failures, the SFO earned the nickname the “Seriously Flawed Office”. Subsequently, in  2011 Theresa May, former Prime Minister, and then Home Secretary, proposed plans to split the SFO. She intended to send SFO investigators over to the National Crime Agency, and its prosecutors to the Crown Prosecution Service (CPS). Of course, these plans didn’t come into fruition and were later revived in 2014 and 2017 to no avail. Since then, the SFO has been under constant scrutiny.

The situation wasn’t helped when the SFO failed in its 2020 case against three Barclays bankers who were on trial for conspiracy to commit fraud at the height of the 2008 financial crisis. Roger Jenkins, Thomas Kalaris and Richard Boath were all acquitted following a seven-year case. The SFO later admitted that it had spent £12.2 million on the case. This included extra funding allocated by the Treasury and  £3 million more than SFO originally estimated. Following this failure to prosecute, the SFO was accused of repeated “poor judgment”. However, Lisa Osofsky, director of the SFO, has argued that the SFO’s low conviction rate is a result of the high evidential standards in fraud cases.

Yet, a 2019 report into staff engagement at the SFO found that its effectiveness was undermined by “unacceptable behaviours” and “neglectful management”. The Chief Inspector of the CPS, Kevin McGinty determined that the SFO needed to “build trust” rather than “cynicism in its commitment”.

That said, the SFO’s global reach has expanded in recent years. Its Rolls Royce investigation for example covered criminal conduct in seven jurisdictions: Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia. Speaking about this expansion at the Cambridge International Symposium on Economic Crime in 2018, SFO’s director said: “Our kinds of cases are becoming increasingly multijurisdictional and complex, so cooperation to achieve global settlements like Rolls-Royce are ever more important”.

SFO oversteps the mark

Back in 2017, the SFO opened up a bribery and corruption investigation into Kellogg Brown & Root Ltd (KBR UK), a British entity and subsidiary of KBR Inc, a USA-incorporated company. The SFO served KBR UK a Section 2(3) notice under the Criminal Justice Act 1987. This notice has the power to compel a person to, in this case, produce documents and failure to comply is a criminal offence.

KBR UK complied with the SFO’s initial s2 notice, while KBR Inc also voluntarily supplied the SFO with documents from outside the UK. However, later in July 2017, the SFO arranged a meeting that required KBR Inc representatives to attend. There, the SFO served KBR Inc an additional s2 notice. This was contested by the US engineering conglomerate, and it brought forward a judicial review accordingly. This was later dismissed by the Divisional Court.

However, KBR Inc proceeded to appeal this decision and took its case to the Supreme Court. Ultimately, KBR Inc argued that the s2 notice with which it was issued did not have extra-territorial effect and was therefore unlawful.

On 5 February 2021, the Supreme Court unanimously upheld KRB’s appeal. In its judgement, the Supreme Court found that KBR Inc had never conducted business in the UK and did not have a registered office in the UK. It also determined that Parliament had never intended for the legislation to have extra-territorial effect.

In his judgement, Lord Lloyd-Jones stated: “It is to my mind inherently improbable that parliament should have refined this machinery as it did, while intending to leave in place a parallel system for obtaining evidence from abroad which could operate on the unilateral demand of the SFO, without any recourse to the courts or authorities of the state where the evidence was located and without the protection of any of the safeguards put in place under the scheme of mutual legal assistance”.

The future of international fraud investigations

The Supreme Court’s February ruling raises interesting questions about the future of the SFO and its powers. The decision is also likely to impact other UK enforcement authorities such as HM Revenue & Customs and the Competition & Markets Authority, which both hold information-gathering powers.

Commenting on the implications of the ruling, Kyle Phillips, a director in the corporate and financial crime team at Fieldfisher dubbed the decision a “serious blow to SFO”. Further to this, he stated: “Without being able to use its Section 2 of the Criminal Justice Act 1987 overseas, the SFO finds itself in a peculiar position of having the power to prosecute overseas companies or individuals, but with limited powers to investigate them”.

He added: “When the Act was created in the 80s the world was a smaller place and as such the Supreme Court found that the section was not intended for use outside of the UK’s jurisdiction. We’re now likely to see the SFO lobbying for new powers.”

On the other hand, Natalie Sherborn partner at Pinsent Masons argued that the ruling will not necessarily leave the SFO powerless: “Whilst this ruling will be a disappointment to the SFO, it does not mean law enforcement agencies are now powerless to investigate companies based overseas. The SFO will still have available the existing mutual legal assistance routes to gather overseas documents from foreign entities and, with the recent introduction of Overseas Production Orders, where there is an international co-operation arrangement in place the SFO can compel overseas companies to produce electronic data.”

Elsewhere, Judith Seddon, a partner at Ropes & Gray, called the Supreme Court decision a: “Victory for principled statutory interpretation”. Meanwhile, Andrew Smith, partner at Corker Binning, said that the decision underlined the outdated nature of the legislation: “The 1987 statute which created the SFO’s powers may be ill-suited to modern age, when the SFO frequently investigates multinationals holding relevant documents overseas”.

He added: “But it is not the role of the courts to rewrite statutes merely to further the public interest in investigating crime. It will now be for parliament to decide whether the statutes, which date from over 30 years ago, can or should be updated”.

It remains to be seen what kind of impact this ruling will have on the SFO’s investigatory powers, but considering that it no longer has access to European Investigation Orders, future investigations could potentially be more difficult.

Article Created By Madaline Dunn

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