Regulators Prepare for Corporate Crimewave
Posted by Michael Kiefer on Fri, Jul 10, 2009
Jonathan raises and excellent point with white collar crime growing exponentially and distrust amongst employees and out lookers growing equally as fast. As regulators create more agencies and start new investigations, I still wonder "Are we as executives monitoring the actions of employees enough?" One thing can be sure, we all need to reset, as a new dawn of regulation enters. My Grandmother used to say "If it looks like a duck, smells like a duck and walks like a duck, it's a duck." It's duck season! About time.
"Regulators Prepare for Corporate Crimewave"
Contributed by DLA Piper UK LLP
July 06 2009
The credit crunch has produced a climate in which financial crimes, such as fraud and bribery, are more likely to be uncovered. The most publicized example of this is hedge fund boss Bernard Madoff, who has not only been charged with a fraud worth $50 billion in the United States, but is also subject to a Serious Fraud Office (SFO) investigation into his UK activities. In May 2009 the City of London Police announced that it is investigating new frauds valued at £1 billion and is gathering intelligence on cases with potential losses of £500 million. It is strongly expected that there will be more high-profile cases to follow in the City.
Previous recessions indicate that desperate situations force managers to take desperate action which may result in civil or criminal penalties for the individual, as well as exposing their companies. At a time of increased pressure to improve turnover and meet financial targets, it is short sighted to ignore the importance of compliance or internal investigations into allegations of fraud, corruption or false accounting. Companies should be mindful that recessions can trigger greater tolerance of corporate crime among employees and managers. By way of stark example, a recent study indicated that one in seven employees at large UK companies feels that using cash bribes or personal gifts is an acceptable way to win business in a tough economy.
The consequences of prosecution for businesses and individuals can be catastrophic. For example, under the Fraud Act 2006 the maximum penalty upon conviction is 10 years in prison and an unlimited fine. Directors can be disqualified and companies can be barred from procurement contracts across Europe. The economic downturn has led to a crusade by the SFO and other regulators to ensure that unethical corporate practices are exposed and those responsible are punished. The SFO has already announced a 50% increase in investigations planned for 2009 and the Financial Services Authority and the City of London Police are keen to show that London is not soft on regulatory enforcement.
The director of the SFO, Richard Alderman, is responding to public opinion and has promised to pursue a more proactive approach to enforcement. In a speech at a legal conference on changes in fraud trials, Alderman warned that the SFO will increasingly look for and find cases, rather than waiting for them to be handed over by the police or regulators. He stressed that the SFO is becoming an intelligence-led organization, assessing where the fraud risks are likely to occur and working with other agencies to disrupt fraud as it happens. Alderman intends to use the full range of powers available to the SFO and, if appropriate, approach Parliament for further powers. Mike Bowron, the commissioner of the City of London Police, also recently announced a more aggressive approach. The force has appointed 50 new fraud specialists and has plans to introduce a National Fraud Intelligence Bureau in which police, banks and insurance companies will work together to strengthen investigation nationally.
Bowron has promised that law enforcement agencies will no longer ignore white collar crime. He recently stated in the press that:
"The notion is that it is a gentleman's crime, that the chances of getting caught are slim and that, if you are caught, you'll get two weeks in [an] open prison. Those days are gone. It's not white collar crime and I won't have that phrase mentioned in my force. It is organized crime."
Staff redundancies can open gaps in the financial and compliance controls of companies, causing unethical or illegal practices to be overlooked and leaving the company exposed to disgruntled former employees who may decide to blow the whistle to prosecution agencies or the media.
In the wake of the financial crisis, the SFO has appealed directly to accountants, lawyers and bankers, as well as those working within companies, for information about financial irregularities and bad practice. In order to encourage whistleblowers, it has set up an online form on its website to make it easier to report 'City frauds'.
Recent press reports on a survey into European fraud suggest that employees are concerned about the integrity of their own management and look to regulators, rather than management, to resolve concerns. There appears to be little tolerance of management failure, with 70% of respondents stating that they believe that directors should be held personally liable for frauds that occur on their watch.
These are worrying trends for management. Directors must be seen by their employees not only to be trustworthy and highly ethical, but also to be prepared to take allegations of fraud or corruption seriously. Companies should establish their own whistleblowing policies and confidential hotlines to encourage employees to report suspicions internally. If they do not, they run the risk of losing control of the situation as their employees go direct to the press or prosecution agencies.