Fraud industry: latest news and legal decisions - October 2016

10 minute read
13 October 2016


Gowling WLG's fraud and asset recovery experts bring you the latest news and legal decisions affecting the fraud industry.

SFO charges Tesco management over accounting scandal

The Serious Fraud Office has charged three former Tesco directors in relation to the accounting scandal that hit the supermarket in 2014 (see further: SFO charges Tesco management over accounting scandal).

Former UK finance director Carl Rogberg, former UK managing director Christopher Bush and former food commercial director John Scouler have been charged with one count of fraud by abuse of position and one count of false accounting, the SFO said in a statement. The alleged activity occurred between February 2014 and September 2014. The SFO has confirmed that the investigation into Tesco remained ongoing with the possibility that further individuals could also face action.

The three appeared before Westminster Magistrates Court on September 22 and Judge Vanessa Baraitser referred the case to Southwark Crown Court where they will next have to appear on 20 October 2016.

The supermarket giant was engulfed in scandal in October 2014 when a whistleblower revealed that Tesco had overstated its half-year profits by £250m. In the aftermath, Tesco suspended four senior members of staff and called in Deloitte to investigate.

The subsequent investigation confirmed that Tesco had artificially inflated an estimate of first-half profits given in August 2014 and similar practices had been in place in earlier reporting periods.

Tesco have released the following statement in respect of the SFO decision to bring these charges as follows:

"We note the decision of the SFO to bring a prosecution against former colleagues in relation to historic issues and acknowledge the investigation into the Company is ongoing. Tesco continues to cooperate with the SFO's investigation.

The last two years have seen an extensive programme of change at Tesco, but given this is an ongoing legal matter, we are unable to provide any further comment at this time."

Last month the Financial Reporting Council (FRC) ended its investigation into the conduct of former Tesco CFO Laurie McIlwee. The FRC subsequently released a statement advising that the executive counsel to the FRC has concluded that 'there is no realistic prospect that a tribunal would make an adverse finding in relation to the conduct of Mr Laurie McIlwee.'

New Criminal Finance Bill could make employers liable for corporate crimes committed by employees

Reports suggest that Government will introduce a new Criminal Finance Bill which is currently being discussed by ministers.

Under the proposals, employers could be held liable for crimes committed by staff such as money-laundering, false accounting and fraud.

The reports come after a recent speech by the Attorney General, Jeremy Wright KC, addressed to the Cambridge Symposium on Economic Crime on August 5, in which Mr Wright said:

"When considering the question 'where does the buck stop?' and who is responsible for economic crime, it is clear that the answer is to be found at every level, from the boardroom down. Both corporations and individuals are responsible.

The intention of the Government actions I have described is not only to prosecute and to fine for breaches of the law, but to promote a culture of corporate responsibility so that we are addressing the threat earlier on and not just reacting to it through investigation and prosecution.

A change in culture is something that will take time but the results, as we are already starting to see, will be worth the effort."

Currently, a UK company can only be found liable for fraud and other economic crimes if it can be proved that those at board level i.e. the "directing mind" of the company were complicit in the criminality.

The Director of the Serious Fraud Office, David Green CB KC, highlighted the difficulties with the current regime in a 2014 speech when he called for the introduction of a corporate offence of failing to prevent economic crime, to mirror the provisions of the Bribery Act.

SFO successfully defends judicial review application in respect of investigation into Soma Oil & Gas Holdings Ltd

On 31 July 2015, the SFO confirmed it had opened an investigation into Soma Oil & Gas Holdings Ltd. The investigation related to allegations of corruption in Somalia and possible illegal payments to Somali officials.

The judicial review application brought by Soma Oil & Gas Holdings Ltd was expedited because the company claimed that it faced insolvency if it was unable to enter into a number of contracts by 25 August 2016. The company claimed that these contracts could not be entered into whilst the SFO investigation was ongoing.

The company argued that the SFO's investigations had taken too long and that the SFO should discontinue the investigation, or part of it, and also disclose to the company what new lines of investigation were being followed by the SFO.

The SFO argued that the investigation was lawful and that the SFO had been as sensitive as possible to the company's concerns. Counsel for the SFO stated "what is being sought by the claimant is that the court intervenes to terminate a proper, criminal investigation. The SFO do not accept that they would be responsible for any loss of contracts."

The court refused the application on the basis that the judge did not see any "prospect of success".

In case you missed it….

Fraud threat to SMEs

The Times has recently published an article on fraud affecting small and medium-sized enterprises (SMEs), in which Gowling WLG's Alex Jay was quoted. The article itself draws on research from SAS and the Centre for Economics and Business, which has shown that efficiencies gained by businesses through the use of improved fraud detection tools could total £290 million from 2015 to 2020.

According to Gerry Carr, chief marketing officer at anti-fraud start-up Ravelin, the majority of SMEs do not have their own fraud prevention systems in place and instead they rely solely on the fraud detection provided by their payment gateway. Mr Carr said "The main job of a payment gateway is to validate your customer's credit card details securely, and make sure the funds are available for the payment and you get paid. As they only typically see the payment page activity, because they simply need to approve or decline a transaction, they are not able to see all the events in the customer journey, thus limiting their ability to provide end-to-end fraud protection".

Aside from the financial risk posed by fraud, the consequences are potentially much greater. "In the case of an SME that itself is implicated in a fraud, perhaps bribery to secure a contract, it could find itself the subject of an SFO (Serious Fraud Office) or other regulatory investigation," says Alex Jay, partner at Gowling WLG, counter-fraud specialist and a member of the independent Fraud Advisory Panel.

The costs of responding to and addressing such an investigation, both financially and reputationally, can be detrimental. Mr Jay says: "For company directors or senior management personnel, failing to implement anti-fraud measures or control such risks could also give rise to criticism or even claims against them in severe cases."

Training is crucial, but Mr Jay says: "Any training programme should be considered with input from a variety of areas of the business and preferably with the assistance of anti-fraud professionals to ensure it is fit for purpose. An SME should look to have regular fraud risk assessments, and seek to develop an anti-fraud culture and policies within the business. A focus on increasing the perception that fraud will be investigated, detected and not tolerated is a good place to start."

Suspicion of fraud does not prevent unravelling a settlement

The Supreme Court has confirmed that a settlement can be set aside if evidence later comes to light to prove a fraud has been perpetrated. Suspicion of fraud, without hard evidence to prove it at the time of settlement, will not preclude a defendant from subsequently seeking to set aside a settlement and claim damages for deceit.

See our insurance experts' detailed analysis of the case for more information.

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