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The involvement of the private sector in the government’s fight against fraud is welcome, but significant dangers—for both victims and the criminal justice system—lurk below the surface, warns Jonathan Fisher QC
The recommendations made by the Government’s Fraud Review in July 2006 were more radical than appreciated at the time. By calling for enhanced private sector involvement in the investigation as well as the prevention of fraud, the Review set a framework which will influence the legal response to fraud in the coming years. The development of a partnership between the State and the private sector is central to the government’s narrative and its Business Plan for 2009/10 published a few months ago. The newly established National Fraud Authority promised “to deliver a nation safe from the harm caused by fraud” through more intensive collaboration with the private sector.
Although those working in the financial services sector have already been recruited to act as unpaid government informers reporting suspicions of money laundering in 2003, in the context of fraud prevention the level of co-operation is likely to be much more far-reaching, requiring private sector participants to be proactive and not merely reactive, with a sting in the tail for participants if they seek to rebel. Foreshadowing an interesting model for fraud prevention, cl 5 of the Bribery Bill 2009 will, when enacted, penalise a private sector company where it acted negligently by failing to prevent one of its employees giving a bribe. In this way the government will obligate private sector companies to institute adequate anti-corruption and bribery procedures by the back door.
Whilst an enhanced commitment from the private sector towards fraud prevention is to be welcomed, significant dangers lurk beneath the surface. Leaving aside cynical thoughts that Government policy is driven more by considerations of economic expediency than the niceties of jurisprudential theory, if the demarcation line between the State and the private sector is not drawn tightly the interests of fraud victims and the efficacy of the criminal justice system will be seriously undermined. Worryingly, there is already evidence this has started to occur.
Observing that “an ounce of prevention is worth a pound of cure” (see para 16 of the Review), the Fraud Review made clear that the private sector has a pivotal role to play in the prevention of fraud by the establishment of effective anti-fraud procedures. Engaging also with the investigation process, the Fraud Review noted that “there is scope for more public/private partnership, including two-way secondments, collaboration on investigations, and the establishment of joint units to investigate certain types of fraud” (para 21).
The Fraud Review’s desire to involve the private sector in securing the reduction of fraud is to be applauded. Although there are no reliable estimates of the cost of fraud to the economy as a whole, and the under-reporting of fraud is perceived to be “a chronic problem” (para 2.16), the most commonly quoted figure for the cost of fraud is £14 billion a year. This equates to £231 for every person in the country. If fewer fraud cases came to court, there would be further substantial savings. The Fraud Review considered that these could amount to as much as £50 million a year” (para 34).
In May 2007, ten months after the Fraud Review was published, the Home Office sought views in a Consultation Document entitled “Asset Recovery Action Plan” as to whether the UK should replicate the US system permitting qui tam actions where an individual who becomes aware of fraud against the US government may launch a case on the government’s behalf. The government may then choose to intervene in the case. If successful, the whistle blower secures between 15 per cent and 25 per cent of the triple damages which may be recovered, or between 25 per cent and 30 per cent where the government declines to intervene. The Home Office remarked that these provisions have been “strikingly successful” and provided an incentive for whistleblowers (s 4.6).
Qui tam actions have become big business in the US. The Consultation Document records there have been over 5,000 actions leading to $11 billion being awarded in judgments, of which over $10 billion has come from cases where the government has intervened. Whistleblowers have received nearly $1.8 billion in awards, $1.7 billion of which has come from cases in which the government intervened. Whistleblowers are typically represented by law firms working on a contingency basis.
Whilst some of the proposals contained in the Consultation Document have been included in the Policing and Crime Bill 2009, there are no proposals for the introduction of qui tam actions at the present time. But the inclusion of the issue for consideration in the Consultation Document provides an insight into contemporary government thinking on the potential extent of private sector involvement. If adopted, qui tam actions would represent the high watermark of a public/private partnership in the fight against fraud. Interestingly, in November 2007 the Fraud Advisory Panel, in its response to the Consultation Document, welcomed the introduction of a qui tam action in principle, urging it to remove the public domain requirement so that it would apply more generally.
However, private sector involvement in the criminal justice system must be approached cautiously since the collaboration is more akin to a shotgun wedding than a marriage made in heaven. The purpose of the criminal justice system is to deliver justice for all, by convicting and punishing the guilty and helping them to stop offending (while protecting the innocent). In contrast, profit maximisation is the guiding principle of the private sector. Certainly profits are maximised where losses from fraud are reduced, but (by and large) this is the limit of corporate ambition.
One of the most striking illustrations of the problems posed by private sector involvement in the investigation process came to light in 2005 when it emerged that insurance companies had been paying police forces to investigate and prosecute fraud cases. In R v Hounsham [2005] EWCA Crim 1366, [2005] Crim LR 991 the Court of Appeal (Criminal Division) warned that the development was fraught with danger. As Lord Justice Gage explained:
“It may compromise the essential independence and objectivity of the police when carrying out a criminal investigation. It might lead to police officers being selective as to which crimes to investigate and which not to investigate. It might lead to victims persuading a police investigating team to act partially. It might also lead to investigating officers carrying out a more thorough preparation of the evidence in a case of a ‘paying’ victim; or a less careful preparation of the evidence in the case of a non-contributing victim. In short, it is a practice which, in our judgment, would soon lead to a loss of confidence in a police force’s ability to investigate crime objectively and impartially.”
Undeterred by these sentiments, the Home Office sought to inveigle victims into contributing to investigation costs on a much smaller scale in April 2007 when it approved a scheme requiring victims of car theft to pay for forensic examination after the vehicle had been recovered by the police. The situation is distinguishable from a victim financing the investigation of a serious fraud but none the less there are some features in common. Again this provides an interesting insight into the government’s current thinking.
There will also be occasions when the private sector’s financial contribution is less direct. Commercial sponsorship of police activity has been permitted since the Police and Magistrates Court Act 1994 was enacted. Kent Police, for example, offer partnership funding opportunities whereby, instead of financing a specific investigation, a private sector donor may pay for police publications, events and equipment. Durham Police encourage sponsors by affording them an opportunity to greatly enhance “the quality of service” it provides, and Lincolnshire Police has gone a step further, displaying on its website a photograph of a local firm advertising on one of its cars. But whether the financial contribution from the private sector is direct or indirect, the same issues will arise where the sponsor happens to be the loser in a criminal investigation.
There are broader concerns at play too. The Fraud Review’s articulation of the reason why the private sector should assist government is troublesome because of the implication that, to a large extent, the private sector has been the author of its own misfortune. As the Fraud Review explained (see para 2):
“Fraud is one is one of the easier crimes to prevent. Fraudsters mostly extract money by exploiting carelessness, ignorance or gullibility. Elementary caution and healthy skepticism about offers that look too good to be true would prevent most people becoming victims of fraud. Business and the public sector can protect themselves against fraud by putting in proper systems and controls, but they must make sure that they are implemented and not over ridden.”
The problem with this approach is that it stigmatizes the victim as responsible for his loss and treats the fraudster as little more than an opportunist bounder. Historically, victims of some frauds have elicited little sympathy from the police, but rightly the courts have deprecated this approach. In one advance fee fraud case, R v Boothe [2009] EWCA Crim 249, the Court of Appeal (Criminal Division) was at pains to explain that a victim’s greed did not diminish the criminality of the fraudster’s dishonest part in the activity.
Also, by increasing the involvement of the private sector in fraud investigations, the public may perceive the State to be differentiating fraud from other crimes. In this regard, the impact of fraud on victims is often under-estimated. Sixteen investors committed suicide as a result of their losses in the Barlow Clowes fraud in the 1980s, and more recently there have been suicides following the Enron and Madoff debacles.
Interestingly, these social concerns are echoed across the Atlantic with regard to qui tam actions. Academic literature abounds with examples of zealous over-enforcement by “private attorneys general” in joint public-private enforcement cases and commentators have affirmed the proposition that excessive and unsupervised private enforcement compromises important social goals (see Dayna Bowen Matthew, Colorado Law Legal Studies Research Paper 07-20, 2007).
Jonathan Fisher QC is a practicing barrister at 23 Essex Street, a visiting professor (corporate and financial crime) at the London School of Economics and a trustee director of the Fraud Advisory Panel
The recommendations made by the Government’s Fraud Review in July 2006 were more radical than appreciated at the time. By calling for enhanced private sector involvement in the investigation as well as the prevention of fraud, the Review set a framework which will influence the legal response to fraud in the coming years. The development of a partnership between the State and the private sector is central to the government’s narrative and its Business Plan for 2009/10 published a few months ago. The newly established National Fraud Authority promised “to deliver a nation safe from the harm caused by fraud” through more intensive collaboration with the private sector.
Although those working in the financial services sector have already been recruited to act as unpaid government informers reporting suspicions of money laundering in 2003, in the context of fraud prevention the level of co-operation is likely to be much more far-reaching, requiring private sector participants to be proactive and not merely reactive, with a sting in the tail for participants if they seek to rebel. Foreshadowing an interesting model for fraud prevention, cl 5 of the Bribery Bill 2009 will, when enacted, penalise a private sector company where it acted negligently by failing to prevent one of its employees giving a bribe. In this way the government will obligate private sector companies to institute adequate anti-corruption and bribery procedures by the back door.
Whilst an enhanced commitment from the private sector towards fraud prevention is to be welcomed, significant dangers lurk beneath the surface. Leaving aside cynical thoughts that Government policy is driven more by considerations of economic expediency than the niceties of jurisprudential theory, if the demarcation line between the State and the private sector is not drawn tightly the interests of fraud victims and the efficacy of the criminal justice system will be seriously undermined. Worryingly, there is already evidence this has started to occur.
Observing that “an ounce of prevention is worth a pound of cure” (see para 16 of the Review), the Fraud Review made clear that the private sector has a pivotal role to play in the prevention of fraud by the establishment of effective anti-fraud procedures. Engaging also with the investigation process, the Fraud Review noted that “there is scope for more public/private partnership, including two-way secondments, collaboration on investigations, and the establishment of joint units to investigate certain types of fraud” (para 21).
The Fraud Review’s desire to involve the private sector in securing the reduction of fraud is to be applauded. Although there are no reliable estimates of the cost of fraud to the economy as a whole, and the under-reporting of fraud is perceived to be “a chronic problem” (para 2.16), the most commonly quoted figure for the cost of fraud is £14 billion a year. This equates to £231 for every person in the country. If fewer fraud cases came to court, there would be further substantial savings. The Fraud Review considered that these could amount to as much as £50 million a year” (para 34).
In May 2007, ten months after the Fraud Review was published, the Home Office sought views in a Consultation Document entitled “Asset Recovery Action Plan” as to whether the UK should replicate the US system permitting qui tam actions where an individual who becomes aware of fraud against the US government may launch a case on the government’s behalf. The government may then choose to intervene in the case. If successful, the whistle blower secures between 15 per cent and 25 per cent of the triple damages which may be recovered, or between 25 per cent and 30 per cent where the government declines to intervene. The Home Office remarked that these provisions have been “strikingly successful” and provided an incentive for whistleblowers (s 4.6).
Qui tam actions have become big business in the US. The Consultation Document records there have been over 5,000 actions leading to $11 billion being awarded in judgments, of which over $10 billion has come from cases where the government has intervened. Whistleblowers have received nearly $1.8 billion in awards, $1.7 billion of which has come from cases in which the government intervened. Whistleblowers are typically represented by law firms working on a contingency basis.
Whilst some of the proposals contained in the Consultation Document have been included in the Policing and Crime Bill 2009, there are no proposals for the introduction of qui tam actions at the present time. But the inclusion of the issue for consideration in the Consultation Document provides an insight into contemporary government thinking on the potential extent of private sector involvement. If adopted, qui tam actions would represent the high watermark of a public/private partnership in the fight against fraud. Interestingly, in November 2007 the Fraud Advisory Panel, in its response to the Consultation Document, welcomed the introduction of a qui tam action in principle, urging it to remove the public domain requirement so that it would apply more generally.
However, private sector involvement in the criminal justice system must be approached cautiously since the collaboration is more akin to a shotgun wedding than a marriage made in heaven. The purpose of the criminal justice system is to deliver justice for all, by convicting and punishing the guilty and helping them to stop offending (while protecting the innocent). In contrast, profit maximisation is the guiding principle of the private sector. Certainly profits are maximised where losses from fraud are reduced, but (by and large) this is the limit of corporate ambition.
One of the most striking illustrations of the problems posed by private sector involvement in the investigation process came to light in 2005 when it emerged that insurance companies had been paying police forces to investigate and prosecute fraud cases. In R v Hounsham [2005] EWCA Crim 1366, [2005] Crim LR 991 the Court of Appeal (Criminal Division) warned that the development was fraught with danger. As Lord Justice Gage explained:
“It may compromise the essential independence and objectivity of the police when carrying out a criminal investigation. It might lead to police officers being selective as to which crimes to investigate and which not to investigate. It might lead to victims persuading a police investigating team to act partially. It might also lead to investigating officers carrying out a more thorough preparation of the evidence in a case of a ‘paying’ victim; or a less careful preparation of the evidence in the case of a non-contributing victim. In short, it is a practice which, in our judgment, would soon lead to a loss of confidence in a police force’s ability to investigate crime objectively and impartially.”
Undeterred by these sentiments, the Home Office sought to inveigle victims into contributing to investigation costs on a much smaller scale in April 2007 when it approved a scheme requiring victims of car theft to pay for forensic examination after the vehicle had been recovered by the police. The situation is distinguishable from a victim financing the investigation of a serious fraud but none the less there are some features in common. Again this provides an interesting insight into the government’s current thinking.
There will also be occasions when the private sector’s financial contribution is less direct. Commercial sponsorship of police activity has been permitted since the Police and Magistrates Court Act 1994 was enacted. Kent Police, for example, offer partnership funding opportunities whereby, instead of financing a specific investigation, a private sector donor may pay for police publications, events and equipment. Durham Police encourage sponsors by affording them an opportunity to greatly enhance “the quality of service” it provides, and Lincolnshire Police has gone a step further, displaying on its website a photograph of a local firm advertising on one of its cars. But whether the financial contribution from the private sector is direct or indirect, the same issues will arise where the sponsor happens to be the loser in a criminal investigation.
There are broader concerns at play too. The Fraud Review’s articulation of the reason why the private sector should assist government is troublesome because of the implication that, to a large extent, the private sector has been the author of its own misfortune. As the Fraud Review explained (see para 2):
“Fraud is one is one of the easier crimes to prevent. Fraudsters mostly extract money by exploiting carelessness, ignorance or gullibility. Elementary caution and healthy skepticism about offers that look too good to be true would prevent most people becoming victims of fraud. Business and the public sector can protect themselves against fraud by putting in proper systems and controls, but they must make sure that they are implemented and not over ridden.”
The problem with this approach is that it stigmatizes the victim as responsible for his loss and treats the fraudster as little more than an opportunist bounder. Historically, victims of some frauds have elicited little sympathy from the police, but rightly the courts have deprecated this approach. In one advance fee fraud case, R v Boothe [2009] EWCA Crim 249, the Court of Appeal (Criminal Division) was at pains to explain that a victim’s greed did not diminish the criminality of the fraudster’s dishonest part in the activity.
Also, by increasing the involvement of the private sector in fraud investigations, the public may perceive the State to be differentiating fraud from other crimes. In this regard, the impact of fraud on victims is often under-estimated. Sixteen investors committed suicide as a result of their losses in the Barlow Clowes fraud in the 1980s, and more recently there have been suicides following the Enron and Madoff debacles.
Interestingly, these social concerns are echoed across the Atlantic with regard to qui tam actions. Academic literature abounds with examples of zealous over-enforcement by “private attorneys general” in joint public-private enforcement cases and commentators have affirmed the proposition that excessive and unsupervised private enforcement compromises important social goals (see Dayna Bowen Matthew, Colorado Law Legal Studies Research Paper 07-20, 2007).
Jonathan Fisher QC is a practicing barrister at 23 Essex Street, a visiting professor (corporate and financial crime) at the London School of Economics and a trustee director of the Fraud Advisory Panel
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