Investigating And Prosecuting Fraud & Corruption In The International Business Environment - Part 1

Article by Monty Raphael, Joint Head of the

Fraud and Regulatory Department.

1. INTRODUCTION

In this new economic climate, white collar crime is no longer

seen as victimless. It is seem as symptomatic of the failures of a

global banking and regulatory system and countries are cracking

down on perpetrators. The most important issue for the public in

the UK, EU and international community is not, therefore, the

naming and shaming of companies, the deterrent effect of

investigation or the financial sanctions imposed on those who have

committed such offences. What matters is whether fraudsters and

perpetrators of corruption are prosecuted in a court of law.

Fraud and Corruption are global crimes. These are offences that

cross borders, political regimes and legal jurisdictions. The

developing world, in particular, is becoming a hot spot for the

perpetration of white collar crime. Endemic corruption within the

criminal justice and political systems mean that there is little

interest to investigate and prosecute fraud cases.

Currently in the news are the internet scams originating in

Nigeria and ending in Brighton (of which our Anti Corruption

Champion and Justice Secretary, Jack Straw, recently found himself

on the receiving end). There is also increased interest in

unregulated hawala banking systems within certain communities that

operate the transfer of money between the UK and any number of

countries including Pakistan, Bangladesh and India. The question

is, how does an international business community deal with the

potential for financial crime and the countries in which financial

crime is overlooked and ignored.

In the last two decades, states, the UK included, have built a

huge edifice of interlocking agencies, instruments, treaties and

pathways, all designed to confront, if not defeat, the ever

mutating virus of fraud.

In Britain, fraud rates show no sign of abating. According to

KPMG Forensic's Fraud Barometer1, more than

£1.1billion of fraud came to UK courts in 2008, the highest

level recorded since 1995 and the second highest in the twenty-one

year history of the survey. Fraud by professional gangs remained at

the extremely high levels seen in previous years (£800million

in 2008), but there was a marked increase in fraud by individuals.

Taken together, company managers, employees and customers were

tried for some £300million of fraud last year, three times

the value seen in 2007.

KPMG warns that the worst is yet to come. The bulk of the fraud

committed since the credit crunch began in August 2007 is unlikely

to come into the public courts in the near future. The Fraud

Barometer's records show that in the last recession of the

early nineties the full peak of fraud in the courts was not reached

until 1995.

The corporate sector, in particular, suffered during 2008. There

was a five-fold increase in fraud losses, up from £24million

(45 cases) in 2007 to £125million (54 cases) in 2008. For

corporates, the financial sector and public sector, the fraud

threat grew both internally and externally. Managers accounted for

£128million (£54million in 2007) and employees for

£100million (£27million), while customers inflicted

£65million (£25million).

Perpetrators of fraud in the corporate sector ranged across the

spectrum of seniority. By way of example, Bernard Madoff has pled

guilty to a ponzi scheme that is estimated to have lost $50billion.

At the other end of the spectrum, a junior PA carried out frauds at

three employers in a row, spending on company credit cards, cashing

cheques and setting up personal direct debits from business

accounts. Despite being sacked by her first two employers for

committing fraud, she was still able to find work and carry out her

scams again. She gained £200,000 before she was finally

prosecuted.

To cope with the increasing volume of white collar crime, the

international community has developed new investigative powers to

assist countries and individuals to take action and recover lost

funds. When criminal proceedings are brought against white collar

criminals, information can be gathered through mutual legal

assistance and various information exchanging treaties. When civil

proceedings are instigated, there are various international orders

that can be made to freeze assets and search premises.

There have a number of high profile cases recently uncovered by

the United States Department of Justice. The two most news worthy

examples are the cases against Bernard Madoff and Allen Stanford.

The US DOJ is investigating the allegations against Stanford and

has brought criminal proceedings against Madoff. The US operates a

plea bargaining system in the hope that the accused will cooperate

in which case they can avoid the expensive, costly and complex

investigations to uncover the lost funds. Madoff refused the plea

bargain offered to him and pled guilty which may raise concerns

about how far the investigation can go and whether the stolen

assets will be recovered and returned to those who have lost their

savings?

In the UK, we are witnessing a changing of the tide towards the

use of civil sanctions and investigative powers in cases of both

corruption and fraud with the priority appearing to be the return

of funds rather than the imprisonment of perpetrators. However,

there is disparity between how the UK prosecutors bring proceedings

for white collar offences such as fraud and prosecutions for

corruption. Fraud is an offence under the Fraud Act 2006 whereas

there is no conclusive anti bribery legislation in the UK. The Law

Commission introduced its Draft Corruption Bill in November 2008

which is currently being considered by government. It is not yet

known whether the UK will implement the Bill but under increased

criticism from the OECD, Transparency International and various

factions of the international community, it must show progress.

This paper will consider whether the international community is

doing enough to confront fraud and corruption worldwide or even in

their own back yards?

2. INTERNATIONAL FRAMEWORK FOR WHITE COLLAR CRIME INVESTIGATION

AND PROSECUTION

Anti-Corruption Codes And Protocols

There are a number of global and targeted codes and protocols to

assist States in the fight against corruption as follows :

Global

United Nations Convention Against Corruption

(UNCAC)

Adopted: 31 October 2003 by the UN General Assembly

Signatories: 140 (as of 1 November 2007).

Ratifications/Accessions: 125 (as of 29 September

2008)

Entry into force: 14 December 2005

United Nations Convention Against Transnational

Organized Crime (UNTOC)

Adopted: 15 November 2000 by the General Assembly of the

United Nations

Signatories: 147 (as of 7 October 2005) Opened for

signature on 12 December 2000

Parties: 146 (as of 29 September 2008)

Entry into force: 29 September 2003

OECD Convention On The Bribery Of Foreign Public

Officials In International Business Transactions (OECD

Convention)

Adopted: 21 November 1997 by the Negotiating

Conference

Signatories: 37 (as of 1 November 2007)

Ratifications: 37 (as of 1 November 2007)

Entry into force: 15 February 1999

Revised Recommendation Of The Council Of The OECD On

Combating Bribery In International Business Transactions

The 1997 Revised Recommendation adds strength to the

effects of the OECD Anti-Bribery Convention by focusing

on areas the Convention does not cover in depth: accounting,

auditing and public procurement; international co-operation; the

non tax deductibility of bribes; and measures to deter, prevent and

combat bribery.

Africa

African Union Convention on Preventing and Combating

Corruption (AU Convention)

Adopted: 11 July 2003

Signatories: 43 (as of 29 September 2008)

Ratifications: 27 (29 September 2008)

Entry into force: 5 August 2006

Southern African Development Community Protocol Against

Corruption (SADC Protocol)

Adopted: 11 July 2003

Signatories: 43 (as of 29 September 2008)

Ratifications: 27 (29 September 2008)

Entry into force: 5 August 2006

Economic Community Of West African States Protocol On

The Fight against Corruption (ECOWAS Protocol)

Adopted: 21 December 2001

Ratifications: 1

Entry into force: Upon ratification by at least 9

signatory states

Americas

Inter-American Convention Against Corruption (OAS

Convention)

Adopted: 29 March 1996

Signatories: 34 (as of 1 October 2007)

Parties: 33 (as of 1 October 2007)

Entry into force: 3 June 1997

Asia And Pacific Region

ADB-OECD Action Plan For Asia-Pacific (Action

Plan)

Established: November 2001

Endorsing Countries: 28 countries,17 initial

endorsements and 11 subsequent endorsements (as of 1 November

2007)

Europe

Council Of Europe Criminal Law Convention

Adopted: 4 November, 1998, by the Council of

Ministers

Opened for signature: Strasbourg, 27 January

1999

Signatories: 49 (as of 1 November 2007) Consisting

of 45 member states and 3 non-member states

Ratifications and accessions: 41 (as of 29

September 2008)

Entry into force: 1 July 2002

Open to: All 46 member states of the Council of

Europe and 5 non-member states (Belarus, Canada, Holy See, Japan,

Mexico, USA). Also, EU and other states can be invited to

join.

Council Of Europe Civil Law Convention

Adopted: 4 November 1999

Signatories: 42 (as of 1 November 2007)

Ratifications: 33 (as of 29 September 2008).

Including one non-member state: Belarus.

Entry into force: 1 November 2003

Open to: Council of Europe member states;

non-member states which took part in drawing it up; other

non-member states by invitation; and the European Community.

Resolution (99) 5 Of The Committee Of Ministers Of The

Council Of Europe: Agreement Establishing The Group Of States

Against Corruption

Resolution (97) 24 Of The Committee Of Ministers Of The

Council Of Europe: Twenty Guiding Principles For The Fight against

Corruption

European Union Convention On The Protection Of The

Communities' Financial Interests And The Fight Against

Corruption And Two Protocols

European Union Convention On The Fight Against

Corruption Involving Officials Of The...