Four internationally renowned business crime defence lawyers come together in this feature to discuss the key issues facing lawyers in this field today. Gary Lincenberg of Bird Marella Boxer Wolpert Nessim Drooks & Lincenberg, Gerallt Owen of Withers Singapore, David Stetler of Stetler Duffy & Robert Ltd and Harry Travers of BCL Burton Copeland talk about levels of activity, enforcement and competition in the legal market in their jurisdictions.
Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg
AREAS OF ACTIVITY
White-collar crime remains a priority for authorities. Has this led to an increase in activity for lawyers in your jurisdiction? Which crimes are the most common?
Gary Lincenberg: There has been an abundance of smaller and medium-sized white-collar criminal prosecutions in the Central District of California – ie, small to medium dollar-amount mortgage fraud, securities and health-care cases – along with a number of Ponzi scheme prosecutions. Our District has not been as active as some districts in FCPA, tax evasion, economic espionage, antitrust, and larger health-care and securities fraud cases.
David Stetler: Since the 1970s, in the Northern District of Illinois, the highest-profile cases have been in the area of public corruption. Year in, year out, our politicians seem to report to federal penitentiaries in droves. Like Los Angeles and virtually every other district, however, Chicago takes a back seat to the Southern District of New York in securities prosecutions and to Boston in the health-care arena. That said, there has been a pronounced increase in small to medium-sized health-care fraud investigations and prosecutions, particularly of smaller home health-care agencies, and in mortgage fraud cases. Few of these cases are independently significant, although there is no doubting their collective importance.
Harry Travers: There has been a rapid increase in activity for white-collar crime lawyers in the UK and, indeed, the past few years have seen new firms entering the marketplace focusing particularly on acting for corporates rather than individuals. In order to follow why this has happened, it needs to be understood that the criminal investigation and prosecution of corporates by the Serious Fraud Office (SFO) is a relatively new phenomenon in the last seven to eight years. Those who practised in this area in the 1990s will readily recognise that back then, few if any corporates were prosecuted by the Serious Fraud Office: it was generally assumed that the “identification principle” would preclude that. This of course was the principle that in essence a company can only be guilty of a criminal offence if individuals representing the directing mind of the company (and therefore necessarily at or near board level) are guilty of an offence. A number of high profile prosecutions failed at this hurdle. In the US, corporates have regularly been prosecuted by the DoJ over a longer period, and in large part the change of approach of the SFO has simply been caused by the fact that the US Authorities have been criminally investigating companies in respect of allegations of bribery which are caught by the wide jurisdictional reach of the Foreign Corrupt Practices Act, and referrals have been made to the SFO in the UK. Quite a few UK corporates have now been successfully prosecuted by the SFO, but in practically every case where that has happened, the corporate has entered into an agreement with the DoJ in the US, and therefore it was obviously attractive for the corporate to negotiate a global settlement with enforcement agencies in different jurisdictions. It has perhaps been unattractive for corporates to reach an agreement with the DoJ in the US while fighting the case in the UK on the basis of the identification principle. At the same time, there has been much discussion in the UK over the last few years about the UK’s new anti-bribery legislation which ultimately led to the coming into force of the Bribery Act 2010, coupled with a concerted attempt on the part of the Serious Fraud Office, beginning in earnest in July 2009, to encourage corporates to “self-report” in relation to overseas corruption. There has, however, been a recent change of attitude with the new director of the SFO, David Green QC, having withdrawn “the exclusive pledge that the SFO would not prosecute if you self-report” [Oral Evidence to the House of Commons Justice Committee on 13 November 2012 – uncorrected transcript].
Section 7 of The Bribery Act 2010 itself of course introduces a new offence, which is particularly relevant for corporates, of failing to prevent bribery, and therefore under this section, the SFO does not have to be concerned about the problems with the identification principle. Over the last decade, it seems that the culture of self reporting in the US, together with the huge disparity in the eventual outcomes of investigations – as between corporates that cooperate and those that do not (as regards level of fines, the possibility of a deferred prosecution agreement, avoiding disbarment from tendering for government work in the future, etc) – have led to a culture of compliance and self-reporting with law firms conducting extensive internal reports into their clients which can then be used as part of negotiating a favourable settlement with the US Authorities.
Enforcement of white-collar crime is sometimes hampered by the lack of resources. Have you seen an increase in the number of charges? Has the level of fines or length of sentences imposed altered? Are the authorities more willing to negotiate?
Gary Lincenberg: On the one hand, the large number of law enforcement agents assigned to national security poses a continuing hedge on the number of white-collar indictments. On the other hand, the government has stretched its resources by using corporate internal investigations and self-reporting to expand its reach.
Since the Sentencing Guidelines reverted to being advisory, white-collar sentences have become much more varied and often more individualised. For some judges the loss guidelines still drive the sentence. But others pay little heed to the advisory guidelines and, particularly for defendants who plead guilty, some judges are willing to sentence far below the guidelines.
David Stetler: I don’t see a lack of resources as a serious threat to the department’s approach to high-priority areas of prosecution. But Mr Lincenberg makes an excellent point about the government’s capitalisation on the use of the results of internal investigations. In significant corporate settings, the department demands it and the company’s lawyers are only too anxious to oblige. There are many, many former prosecutors in private practice who spend the majority of their time doing what they always did: investigating allegations of misconduct within the corporate setting. The only real differences seem to be that the employees who are questioned are frequently much more inclined to talk to lawyers for the company, for a variety of obvious and not-so-obvious reasons, and these “formers” are paid much more handsomely.
As for sentences, the practices and attitudes seem to vary from jurisdiction to jurisdiction, and even within jurisdictions. As we all know, the sentencing guidelines are now advisory. Yet this seems to be news to some judges, who routinely impose sentences strictly within the guidelines. Other judges seem to care less what the guidelines say, either high or low. What I do see, however, is a major effort in some US Attorney offices to dictate sentences within the Guidelines. In Chicago, for example, it is a rare case where the government agrees to a below Guidelines sentence for anything other than cooperation. Even then, most “deals” involve an agreement whereby the defendant must accept one-third or one-half off the lower end of the applicable Guidelines range, depending on the degree of cooperation. I have never once experienced a lack of resources as having any effect on plea negotiations. If there is an effect, it is in the matters that never get investigated, something that is nearly impossible to gauge.
Gerallt Owen: As governments look at cutting budgets in various departments as part of an austerity package we are seeing a change of approach by the Regulators. We are seeing a significant increase in requests from Regulators for companies to carry out an internal investigation and then hand over their findings to the Regulator. They are encouraged to do so on the basis that such assistance will be taken into account in determining whether there should be a prosecution.
In the UK we have seen significantly higher activity in the prosecution of cases by the Financial Services Authority.
Harry Travers: The Serious Fraud Office’s budget is notoriously low and that in itself led the previous director of the Serious Fraud Office, Richard Alderman, to direct effort in trying to encourage a culture of self reporting in the UK which it was felt would reduce the SFO’s own costs of investigating these cases, and to collaborate with firms specialising in this area. See for example the SFO’s publication “Serious Economic Crime – a Boardroom Guide to Prevention and Compliance” (available in full at seriouseconomiccrime.com and containing contributions to this debate from prosecutors/regulators and also a wide range of private law firms). In the Innospec case, in particular, the SFO was subject to considerable scrutiny and criticism in trying to negotiate a deal with the company which involved the SFO itself having a share of sums which had to be paid as part of the settlement by the corporate. The new director of the Serious Fraud Office, David Green, has been more inclined to seek special funding from the government in relation to particular cases, as he has done in relation to the LIBOR investigation.
Tax evasion has been a primary focus of governments and regulators worldwide in the past year. High net-worth individuals and large multinational companies have been investigated with several charged and countries have cooperated to share information on bank accounts. Has the increase in tax enforcement affected your practice? Do you expect to see a continued effort by authorities to tackle tax havens and tax evaders?
Gerallt Owen: We agree that tax evasion has been a primary focus of governments and regulators worldwide in the past year. We have seen many developments including FATCA, UK/Swiss Treaty, LDF, increased exchange of information, etc. High net-worth individuals and large multinational companies have been investigated with several charged and countries have cooperated to share information on bank accounts. Has the increase in tax enforcement affected our practice? Yes, we have seen an influx of such persons seeking advice about voluntary disclosure, ie, before the authorities come after them. Similarly, there has been an increase in persons being approached as a result of information gathered by the tax authorities. Do we expect to see a continued effort by authorities to tackle tax havens and tax evaders? Yes, without doubt.
David Stetler: Here in the States, primarily in the Manhattan US Attorney’s office, there has been a series of high-profile multimillion-dollar tax prosecutions of primarily accountants and tax lawyers who marketed, structured and executed allegedly unlawful tax schemes. These prosecutions have been met with mixed success. Some were dismissed early on due to questionable investigative tactics (to put it tactfully). Others resulted in convictions with significant jail sentences. Due to the complexity of the transactions and tax theory at play, representing any one defendant was a major engagement by defence counsel. Regardless of the immediate result, these prosecutions – win or lose – may well have had the long-term effect the government intended: deterrence of other tax professionals who may have been tempted to go too far to test the limits of the tax laws. I believe that, primarily due to this dynamic, cases such as this tend to run in cycles, with the Department of Justice and the Internal Revenue Service reacting to what they believe are particular abusive practices, rather than a more systemic manipulation of the tax laws. So I do expect to see a change in focus in the types of major tax investigations we are likely to see in the years ahead. But are innovative, potentially fraudulent, tax schemes likely to go away, together with the authorities? Of course not.
Gary Lincenberg: My sense is that the DoJ could bring more straight tax evasion cases. Over the past 20 years, an ever-increasing portion of IRS special agent time is spent supporting other agencies such as DEA and the FBI. This can result in a piling of charges unnecessary to obtain a conviction. If that same agency time is used to investigate straight tax cases, the DoJ can broaden its reach.
The IRS has made great strides in going after offshore income by effectively combining a carrot (voluntary disclosure benefits) with a stick (criminal prosecution for in the larger cases or for those who forego the voluntary disclosure process).
Harry Travers: HM Revenue & Customs (HMRC) in the UK does not generally prosecute corporates and to do so would be very difficult given the identification principle that I refer to above. Nonetheless, a campaign apparently started by The Times in the summer of 2012 has led to a near-feverish atmosphere in the UK where lawful tax avoidance (as opposed to unlawful tax evasion) is seen as immoral, and HMRC are encouraged by the press and public opinion to seek to characterise what might be regarded as lawful organised tax avoidance as criminal. HMRC is a selective criminal investigator and yet huge resources have been put into criminally investigating what may otherwise be described as aggressive tax avoidance – not evasion – schemes. There are many of these ongoing at the moment and some have so far led to conviction – most notably the Vantis scheme. No doubt HMRC would see the very threat of criminal investigation as a deterrent to those engaged in lawful tax avoidance schemes – needless to say, that would not in fact be a proper reason to start a criminal investigation.
At the same time, HMRC has been criticised for not criminally investigating enough cases, and the figures relating to numbers of prosecutions have been inflated by HMRC seeking to target criminally a number of softer/smaller targets – arguably subverting their published criminal investigation policy which provides that only the most serious cases should be subject to criminal investigation with a view to prosecution. This has led to criticism. After all, it is fair enough for a body such as HMRC to have a selective criminal investigation policy, but the criteria of selectivity should be fair. On the face of it, it is right that only the most serious cases should be criminally investigated, and I am dubious as to whether any other criterion of selectivity is fair.
COMPETITION IN THE MARKETPLACE
A theme that arose in our research was the growth of business crime defence practices in international firms as their corporate clients become more aware of the importance of having a robust compliance scheme. How has this affected the legal market in your jurisdiction? Is there room for international firms and boutiques? Does the service they offer clients differ? Is this line of work transforming from a disputes service to a service offering pre-emptive defence?
Gerallt Owen: The US market has a very established white-collar Bar which consists of both international firms and boutiques. In the US it has long been the case that lawyers often return to private practice following some time working for a Prosecution Agency. Until recently, that was rarely the case in the UK, but over the past two years there have been a number of individuals who have been recruited from an UK regulator or prosecution agency into private practice. It is interesting to note that the majority of such recruits have gone into US firms. There has been a marked increase in hiring of white-collar lawyers in the UK – many international firms have recruited in London, hoping that the UK Bribery Act will bring investigation and compliance work of the volume previously seen in the US by the FCPA.
In South East Asia we are also seeing a marked increase in white-collar lawyer recruitment, particularly for US and UK qualified lawyers. Many international law firms now recognise the need to have a team of lawyers based in the region as they see an increase in the number of corruption investigations in the region.
There will be a continued need for both international firms and boutiques in the business defence market. It is often the case that the larger international law firms often have to refuse instructions due to either legal and/or commercial conflicts of interest. The boutique firms are less affected by the conflicts issues due to their client base. The international law firms often have the advantage over the boutique firms in dealing with multi-jurisdictional investigations given where they have offices. The international law firms can also provide complimentary legal practices to those of business defence, such as employment law, data privacy, antitrust, financial services regulation and crisis and reputational damage.
Business defence lawyers, particularly those in international law firms are regularly being asked by their clients to give advice on how to avoid problems occuring in the first place, and are often brought in as part of a business’s risk-managment process to assist with the introduction of policies, procedures and training. There will also continue to be the need to advise businesses on how to deal with routine requests for disclosure or production of documentation by the regulators as well as of course advising suspects in investigations or carrying out investigations for their clients. The majority of the work for most practitioners continues to be defending criminal and regulatory proceedings.
Gary Lincenberg: Not only is there room for boutiques, there is a need for boutiques. With some notable exceptions, white-collar practice at the large firms has become largely a regulatory compliance practice. Consequently, white-collar practitioners often spend much of their careers doing internal investigations and compliance work. Some have never tried a criminal case from the defence side. This is the main reason I work for a boutique firm: I enjoy trying cases and know that, to stay sharp in the courtroom, one has to spend a lot of time in the courtroom. If a practitioner wants to do trial work, he or she is much more likely to find it at a boutique firm. Ergo, the corporate client looking for an attorney to handle a post-indictment matter, and who wants an attorney with extensive courtroom experience on the defence side, needs to look beyond their comfort zone and consider hiring attorneys at boutique white-collar litigation firms. Further, I would argue that even with regard to handling internal investigations, the attorney who has experience in the courtroom offers advantages because the experienced trial attorney knows how to pitch a case for declination or settlement.
David Stetler: I agree that there is a concrete need, let alone merely “room”, for both big firms and boutiques in the defence of major investigations and prosecutions. Indeed, these two different breeds most frequently perform entirely different functions. A big company rarely goes to trial, even if accused of a criminal offence. Among the factors at play is the simple fact that an entity frequently cannot afford to go through a long, expensive, public relations nightmare of a trial. Even more importantly, the collateral consequences of a conviction, even of comparatively minor allegations, can be disastrous. In short, and with rare exceptions, corporations just cannot take the risk of a conviction. As a result, big firm lawyers with corporate clients most frequently find themselves in cooperation mode, like it or not. It is for this reason, among others, that corporate counsel cannot give conflict-free advice to an employee or executive concerning the best response to a governmental request for cooperation from that person. After all, individuals have Fifth Amendment rights; corporations do not. For a corporation, a decision to make peace through a guilty plea, deferred prosecution agreement or civil resolution is, quite simply, a business decision. Shareholders do not often appreciate “matters of principle” when it comes to jeopardising their investments. Not so for an individual, whose reputation, career and self-respect are all on the line. As a matter of practice, lawyers at larger firms uniformly recognise that they frequently need to rely on boutiques with the resources and sophistication necessary to represent a top executive in a complex inquiry. Of course, lawyers from small firms occasionally do represent large international companies. And lawyers from big firms also represent individual targets with increasing frequency. Nevertheless, when it comes to trials, the boutique firm lawyers do more frequently have clients in a position to go to trial. I do not believe that is a function of who really wants to get into the courtroom, however, but rather simply the nature of the beast.
Harry Travers: The idea of a non-contentious area of fraud law is relatively new. As I stated above, the culture of self-reporting in the US has led to an increased awareness of compliance on both sides of the Atlantic. These changes in UK law and practice have encouraged City firms and US firms practising in London to assume that the culture will be similar in the UK. It is therefore this area of acting for corporates and doing internal reports which has led to the entrance of new firms in the white-collar crime marketplace – those that generally are not interested in acting for individuals but only corporates, and are particularly interested in conducting internal investigations into alleged corruption. It has to be said that some firms seem to hope that advising on non-contentious compliance will lead to an instruction to conduct an internal investigation, and indeed to act for the corporate in seeking a resolution with the law enforcement agencies. However, whether a firm can properly (ie, without there being a conflict of interest) in fact advise on compliance, but then act for the corporate in relation to a law enforcement investigation (perhaps where the compliance programme has failed to prevent the alleged criminality that is the subject of the investigation) is of course another matter. It may be that in such a case the internal investigation should be conducted by a firm other than the one that has advised on compliance.